If lawmakers don’t pass a budget or extend the deadline to do so, the government could shut down on Oct. 1, and it could hurt the economy in several ways, some of them not so obvious.
Key Takeaway
- The government will shut down Oct. 1 if Congress cannot pass a budget or a bill that will extend the deadline.
- A shut down would impact the economy: Workers will be furloughed, mortgages could be harder to come by and the Federal Reserve would have to fly blind.
- Each of these scenarios could be a tipping point for an economy that is already slowing down.
A government shutdown got more likely this week after the House of Representatives went home for a long weekend without passing either a proposal for a budget or for a continuing resolution that would kick the deadline back to later in the year. If Republicans, who control the House, don’t reach a deal with Democrats who control the Senate and the White House, some parts of the government will close down.
Much like past shutdowns like the 16-day closure in 2013, some federal offices would close, halting some services, while others, including Social Security and Medicare payments, and the military, would continue to function. Even with some vital services continuing though, economists are bracing for far-reaching effects.
At the core of the looming shutdown is a dispute over the federal budget. Republicans and Democrats both seek to restrain spending deficits, though disagree on how. Democrats favor taxing the wealthy and Republicans advocate cuts to spending programs that help the poor.
Federal Workers Will Curtail Spending
With large parts of the federal government closed, 900,000 workers would be furloughed, Nancy Vanden Houten, chief U.S. economist at Oxford Economics, estimated in a commentary.
Others, such as air traffic controllers, would work without pay. Typically, those workers are given back pay when the shutdown ends, but they would still likely curtail their discretionary spending, economists at Wells Fargo predicted in a research note.
This would cause a measurable, though small direct hit to the economy.
In 2013, the gross domestic product in the third quarter was reduced by 0.3 percentage points because of the shutdown, the Office of Management and Budget estimated in 2014, when 850,000 federal workers were furloughed. The Congressional Budget Office also found a similarly-sized hit in 2018-2019 during a partial government shutdown.
“The direct effects of both the 2013 and 2018-19 shutdowns on economic growth were relatively small and short-lived,” Michael Pugliese and Sarah House, economists at Wells Fargo Securities, wrote in an analysis.
Getting a Mortgage Could Get Harder
Life could get harder for homebuyers during a government shutdown. Buyers applying for a government-backed mortgage from the Federal Housing Administration would face processing delays, according to a shutdown contingency plan published by the Department of Housing and Urban Development.
Some economists think a shutdown could also cause mortgage rates to rise. Rates tend to move in the same direction as yields on 10-year Treasury notes issued by the government. A shutdown could cause credit rating agencies to further downgrade the U.S. credit rating, causing investors to lose faith in the government’s willingness to repay its debts, and sparking a selloff in government bonds that would cause yields to rise.
That could further damage a housing market that’s been in a deadlock because of high mortgage rates, with the exception of a booming business for home construction.
“The response of the bond market and a possible downgrade in the federal government’s bond rating could put further upward pressure on bond yields, adding to the impact of the large (and growing) federal budget deficit,” economic forecaster Robert Fry wrote in a research note. “Rising mortgage rates, which are tied to bond yields, could put an end to the recent rebound in home construction.”
The bond market reaction to a shutdown isn’t a sure thing, however, and a shutdown may already be priced into the market.
However, buyers could face other headaches. That would especially be true for buyers who need flood insurance since more than half of all policies are purchased through the National Flood Insurance Program, which would be unavailable during a shutdown.
“In the event of an actual shutdown, rates may not change all that much with nearly all bond market investors expecting to get eventually paid after the shutdown,” Lawrence Yun, chief economist at the National Association of Realtors wrote in an email. “However, what is critical is that FHA mortgages and appraisals processes can stop. Flood insurance will not be available and that would prevent closings.”
The Federal Reserve Would Be In The Dark
The shutdown could leave policymakers at the Federal Reserve without data at a crucial time for the nation’s monetary policy. The central bank sets its key interest rate—which influences rates on all kinds of loans—with the goal of discouraging borrowing and spending enough to curb inflation, but not so much that the economy dips into a recession.
To achieve this balancing act, Fed officials rely on government reports on inflation, consumer spending, the job market, and other indicators. For instance, this week, Fed officials paused their campaign of anti-inflation interest rate hikes, and Fed chair Jerome Powell said future decisions would depend on “the totality of the incoming data.”
That data won’t be so total if there’s a shutdown. The Bureau of Labor Statistics, which produces widely-watched reports on the Consumer Price Index, the number of job openings, and how many people employers hire or fire, will turn out the lights.
“In the event of a federal government shutdown, the Bureau of Labor Statistics (BLS) will suspend data collection, processing, and dissemination,” a spokesperson for the bureau said in an emailed statement.
The Census Bureau, which reports on retail sales and new home construction, and the Bureau of Economic Analysis, which publishes data on inflation, consumer spending, economic growth, and trade, did not immediately respond to an emailed request for comment.
“Determining the correct policy setting in real-time is never easy, and it would be made all the more difficult by a lack of timely economic data,” Pugliese and House wrote.
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