Prospect of government shutdown poses a new threat to U.S. economy

The looming federal shutdown poses a new threat to American households, whose budgets are already facing pressure from higher gas prices, imminent student loan payments and depleting pandemic savings.

Although any of those shocks on their own wouldn’t be enough to sink the economy, economists say a pileup of disruptions – including the ongoing autoworkers’ strike, rising borrowing costs and a drop-off in child care funding – is likely to strain family budgets at a time when things are already slowing.

Economists now expect growth to dip considerably in last three months of the year, as a confluence of challenges chip away at household and business spending.

“We’re approaching a period of uncertainty just at a time when it seemed like the economy was improving,” said Megan Way, an economics professor at Babson College in Massachusetts.

“Between the almost inevitable government shutdown, (autoworkers’) strike and student loan repayments, there is so much uncertainty out there, which means consumers are going to be hesitant to spend.”

Economic growth has defied expectations so far this year, with Americans shelling out for cars, international vacations and pricey concerts all summer long.

That spending, which makes up two-thirds of the U.S. economy, has helped propel growth and keep the country out a much-anticipated recession.

But experts, including the head of the Federal Reserve, have cited concerns about the latest wave of uncertainties, which could cause consumers to start pulling back even if the job market remains strong.

“Ultimately you’re coming into this with an economy that appears to have significant momentum, and that’s what we start with,” Fed Chair Jerome H. Powell said during a news conference Wednesday. “But we do have this collection of risks.”

Indeed, the triple whammy of student loans, shutdown and strikes could shave off more than 1% of annualized economic growth in the fourth quarter, though the hit could be even larger if the government closure or auto production stoppages drag on, according to economists at Goldman Sachs.

The shutdown, in particular, is expected to knock off 0.2% of annualized GDP growth per week – the majority of that from reduced federal spending, as well as from spillovers to businesses.

In its first week alone, the United Auto Workers strike is estimated to have resulted in more than $1.6 billion in economic losses, including $100 million in unpaid wages and more than $500 million in corporate losses, according to Anderson Economic Group in East Lansing, Michigan.

Experts say the strike could drag on for weeks or months, as union leaders negotiate with General Motors, Ford and Jeep-maker Stellantis.

The UAW on Friday announced it was expanding the strike from three plants to 38 warehouses across 20 states.

A government shutdown, meanwhile, could cost the U.S. economy $6 billion per week, much of that from reduced pay for federal workers and delays in government spending on goods and services, according to estimates from Gregory Daco, chief economist at EY-Parthenon.

And although some of those losses will be recouped once the government reopens – employees, for example, will be paid back for the time they worked – there are likely to be broad ripples that continue long after the shutdown ends.

“There are so many uncertainties and risks on the horizon, and added together, they are going to weigh down consumers’ ability to spend,” Daco said. “That could leave a visible mark on the economy.”

Christine, a federal worker in Boston, is already cutting back in anticipation of Oct. 1.

That’s when she’ll begin owing $800 a month in student loan payments again – and if the government shuts down, also the day she stops getting paid.

She’s been having flashbacks to 2018, when the 34-day government shutdown meant she was working without pay and “constantly watching the news” for updates on congressional negotiations.

This time around, she’s forgoing fresh fish and sunscreen until she knows she’ll have the money to cover basic expenses.

“I’m afraid to make any purchases or make any plans,” said Christine, who agreed to be quoted only if her last name were withheld because she fears losing her job.

“I don’t want to spend any money at all until I know what’s going to happen.”

Across the country, household budgets are already being pinched by higher prices for groceries, gas and housing.

Inflation has fallen dramatically from last summer’s high of 9.1% , but its decline hasn’t been as quick and forceful as policymakers had hoped.

Overall price growth has ticked up in the last two months, from 3% in June to 3.7% in August.

And although Americans saved up an astonishing $2.1 trillion during the pandemic, that stash is expected to run out by the end of this month, according to the San Francisco Fed, further adding to the strain.

At Farmers Restaurant Group – which oversees six eateries in and around Washington, D.C., including the popular downtown haunt Founding Farmers – executives say they’re already seeing a slowdown in demand.

A government shutdown would add further strain to hundreds of employees who rely on free-spending diners, and tips, for their livelihood.

During the last shutdown in 2018, sales tanked as much as 17% per restaurant, according to co-founder Dan Simons.

“A shutdown is the last thing we need right now,” he said. “Our staff is already worried: What if I can’t get my hours? What if I can’t earn enough to pay my bills? When someone doesn’t go out to dinner because they haven’t gotten paid, we can’t make up for that.”

Still, Americans are being buoyed by a strong labor market that has it made it possible for many to keep spending. The unemployment rate, at 3.8%, is near historic lows, and wage growth is finally outpacing inflation.

But there are also increasing signs of distress: People are taking on more debt to cover basic expenses, and delinquency rates are ticking up for car loans and credit cards.

The Federal Reserve has raised interest rates 11 times since last year, in hopes of slowing the economy enough to quash inflation.

Still, policymakers have acknowledged that looming uncertainties could complicate that effort, while stressing that the labor market has proved surprisingly resilient in recent months.

Beyond lost spending, a government shutdown could halt or delay the collection of key economic data, including on inflation and employment, that inform the Fed’s every move.

Without those metrics, the central bank would be “flying blind” at its next meeting, in November, further complicating its years-long battle against rising prices, Bank of America economists recently noted.

For many, the current tussle in Washington – with politicians sparring over the government’s budget for the next fiscal year – is reminiscent of this spring’s contentious debt ceiling battle.

A crisis was narrowly averted by a deal in early June, just days before the government was set to run out of cash to pay its bills.

Even though the worst didn’t materialize, many business owners, federal employees and Social Security recipients say the uncertainty over their finances left a lasting toll.

Fitch Ratings downgraded the United States’ credit rating for the first time, saying “repeated debt limit political standoffs and last-minute resolutions have eroded confidence in fiscal management.”

That dwindling confidence in the government’s inner workings can have effects far beyond Washington, especially for small businesses.

Simons, the restaurant owner, says a 15% knock on sales will have cascading impacts on his employees, as well as suppliers.

“Think about the farmers we buy from,” he said. “They’re small, independent family farmers, and now if I’m buying 15 percent less from them for an unknown period of time, that causes a lot of strain.”

In Norfolk, Rhena Hicks is preparing for a substantial blow to her family’s budget next week, when her husband’s student loans come due just as he could be forced to work without pay.

Her husband, who is in the Virginia Army National Guardon active-duty orders, probably won’t receive a paycheck or housing assistance while the government is shut down.

“It’s one of those things where he’ll be paid back eventually, but I don’t know a lot of people that can, in a day’s notice, put to the side a month, two months, three months of a mortgage without any new pay coming in,” said Hicks, 30, executive director of Freedom Virginia, a nonpartisan nonprofit that advocates for economic security policies. “It’s very stressful.”

Hicks’ husband has spent the past few years helping the government with a series of mounting crises: first, by manning coronavirus testing sites, then helping with mask fittings at factories.

In 2021, he was among the thousands of National Guard members deployed to help contain the Jan. 6 insurrection at the U.S. Capitol.

“It’s not a game to us – this is our income, our housing allowance, our stability and our ability to provide for our family,” Hicks said.

“It’s very upsetting given what the last few years have looked like for our family. It’s a slap in the face.”