From lost wages to canceled flights, the government shutdown will impact an already struggling economy

WASHINGTON (AP) — The longest federal government shutdown in U.S. history appears to be coming to an end, but not without leaving a mark on an already struggling economy.

About 1.25 million federal workers have not been paid since October 1. Thousands of flights have been canceled, a trend expected to continue this week even as Congress moves toward reopening the government. The pace of awarding government contracts has slowed, and some food aid beneficiaries have seen their benefits interrupted.

He watches: Tamara Keith and Amy Walter talk about the deal to end the government shutdown

Most of the lost economic activity will be recovered when the government reopens, as federal workers will receive back wages. But some canceled flights won’t be reinstated, missed restaurant meals won’t be reimbursed, and some deferred purchases will end up not happening at all.

“Short-term lockdowns are typically invisible in the data, but this will leave a lasting mark, whether because of its record length or growing disruptions to social welfare and travel programs,” said Gregory Daco, chief economist at accounting giant EY.

The Congressional Budget Office estimated that a six-week shutdown would reduce growth in the fourth quarter of this year by about 1.5 percentage points. This would cut growth by half compared to the third quarter. The Congressional Budget Office projected that reopening would boost first-quarter growth next year by 2.2 percentage points, but about $11 billion in economic activity would be permanently lost.

The previous longest government shutdown, in 2018-19, lasted 35 days, but only partially shut down the government because many agencies were fully funded. The Congressional Budget Office said at the time that this affected the economy only about 0.02% of GDP.

The current shutdown adds to existing economic challenges, which include sluggish hiring, stubbornly high inflation, and tariffs imposed by President Donald Trump, which have caused uncertainty for many businesses. However, few economists expect a recession.

About 650,000 federal workers did not work during the shutdown, which likely caused the unemployment rate to increase by about 0.4 percentage point in October, or to 4.7% from 4.3% in August, when the last report was released. These workers will then be counted as employees once the government reopens.

Here are the ways in which the government shutdown is affecting the economy:

Lost salaries

In total, federal workers will have lost about $16 billion in wages by mid-November, according to Congressional Budget Office estimates. That means less spending in stores and restaurants and potentially less holiday travel. Large purchases will likely be postponed, slowing the broader economy.

Trump had threatened during the closure period not to provide back wages, but the agreement reached in Congress will replace those lost wages once the government reopens.

The shutdown has added to economic woes in the Washington, D.C., area, where the unemployment rate was already 6% before the shutdown, after Trump’s cuts to the federal workforce this spring caused job losses. While the Washington, D.C., area — including nearby suburbs in Virginia and Maryland — has the highest concentration of federal workers, most live and work outside the nation’s capital.

Federal workers make up about 5.5% of Maryland’s workforce, according to the Bipartisan Policy Center. But they also make up 2.9% of workers in New Mexico, 2.6% of workers in Oklahoma, and 3.8% of workers in Alaska.

Then there are the federal contractors. Bernard Yaros, an economist at Oxford Economics, estimates that their total number could reach 5.2 million, and their wages are not guaranteed to be paid once the lockdown ends.

Flight disturbances

Airlines had canceled more than 2,000 flights by Monday evening after canceling 5,500 flights since Friday on orders from the Federal Aviation Administration, which is seeking to ease the burden on overworked air traffic controllers, who are now missing two paychecks.

Even before flights were cancelled, Tourism Economics, an economic consulting firm, estimated that the lockdown would cut travel spending by $63 million a day, meaning the six-week standoff would cost the travel industry $2.6 billion.

Read more: Air travelers are facing frustration and delays as the Federal Aviation Administration increases flight cuts during the government shutdown

Canceled flights also mean less business for hotels, restaurants and taxi drivers. Federal employees have already grounded incoming flights, depending on tourism economics, which may not be possible to reschedule even when the government reopens.

Consumer sentiment

The shutdown has worsened Americans’ expectations about the broader economy. Low consumer sentiment over time could reduce spending and slow growth, although in recent years Americans have continued to shop even when their outlook has turned bleak.

Consumer sentiment fell to a three-year low and close to the lowest point ever recorded in a University of Michigan poll on Friday, with pessimism about personal finances and expected business conditions weighing on Americans.

The November survey showed the Consumer Confidence Index at 50.4, down a staggering 6.2% from last month and down nearly 30% from a year ago.

Federal spending

While the shutdown did not halt all federal government spending, it reduced equipment purchases and halted the issuance of new contracts.

Yaros estimates that about $800 million in new contracts were at risk of not being awarded each day of the shutdown.

“The federal award spigot has stopped at the Department of Defense, NASA, and the Department of Homeland Security,” Yaros wrote.

Benefits of Snap

The shutdown delayed the payment of $8 billion in monthly SNAP food assistance to 42 million recipients in November, creating significant financial disruption for many households that likely led to reduced spending. Some states were able to pay full benefits this month, although the Trump administration is still fighting over the issue in court.

The deal currently under consideration in Congress to reopen the government includes full funding for SNAP benefits.

Interest rate cuts

The government shutdown has cut off the flow of economic data on unemployment, inflation and retail spending that the Federal Reserve relies on to monitor the health of the economy. Even as the government reopens, some of this data will still be lagging. As a result, the Fed may not deliver a third rate cut at its December meeting, which was widely expected before the shutdown.

“What do you do if you’re driving in fog? You slow down,” Federal Reserve Chairman Jerome Powell said in a news conference late last month.

Powell said the Federal Reserve’s rate-setting committee is closely divided on whether to cut its key interest rate, in part because the health of the economy is unusually cloudy at the moment. The government has not released two monthly jobs reports, and October inflation data, due to be published on Thursday, will likely not be released at all.

Powell said a December rate cut was not a “foregone conclusion” and added that a lack of data could contribute to the Fed’s decision to skip a rate cut at its next meeting on December 9-10. Smaller interest rate cuts could discourage borrowing and spending and put pressure on the economy in the coming months.