Having about 700,000 government workers furloughed hurt consumer spending. And a subset of them believed they might not have a job to return to amid the Trump administration’s efforts to permanently lay them off.
In fact, the University of Michigan’s monthly index of consumer confidence fell to a near-record low in November, a level not seen since the depths of the pandemic. Because lower consumer confidence is linked to reduced spending, that also has a short-term impact on retailers.
And because parks and monuments were closed during this period, tourist activity decreased, a decline that was undoubtedly worsened by the reduction in flights, forced due to the shortage of air traffic controllers.
The effect was particularly pronounced in places like Washington, DC, one of the most popular destinations for tourists, and Hawaii. This short-term effect will likely extend to non-core businesses, such as hotels. In fact, before the shutdown, the US Travel Association warned that such an event would cost the entire travel industry around $1 billion per week.
And the long-term impact of the government shutdown?
Estimates vary, but the nonpartisan Congressional Budget Office said the cost to the U.S. gross domestic product (GDP) in lost productivity is in the range of $7 billion to $14 billion, and that’s a cost of a self-inflicted wound that will never be recovered.
And from an international macroeconomic point of view, confidence in the United States was affected. Even before the shutdown, political dysfunction in Washington contributed to a downgrade in the United States’ credit rating, something that could result in higher borrowing costs.
The shutdown further erodes the United States’ position as a global leader of the free market and rules-based international order. Accompanied by China’s economic rise, this shutdown further erodes international investors’ impression that the United States is an arbiter and supplier of the established trade and financial system, and that can only damage Washington’s global economic position.
Read more: US government reopens but deep political divisions persist
Was the economic pain felt evenly?
Certainly not. A large number of Americans were affected, but the government shutdown affected regions and demographics differently.
Those at the lower end of the income distribution were hardest hit. This is largely due to the impact the shutdown had on the Supplemental Nutrition Assistance Program (SNAP), also known as food stamps. About 92% of SNAP benefits go to American households below the federal poverty line.
More than 42 million Americans rely on SNAP payments. And they were caught in the political maelstrom, not knowing if their SNAP payments would arrive, if they would be fully funded, and when they would appear.
There is also research showing that African Americans are more affected by closures than other racial groups. This is because Black workers have traditionally made up a higher percentage of the federal workforce than the private sector workforce.
Geographically, too, the impact of this closure has been uneven.
California, Washington DC and Virginia have the highest share of federal employees, meaning a larger share of workers in those regions were furloughed. Hawaii was also disproportionately affected due to the large number of military personnel there. An analysis found that with 5.6% of people in the state employed federally and another 12% in nonprofit jobs supported by federal funds, Hawaii was the second-hardest hit state during the shutdown.
How easy is it for the United States to recover from a government shutdown?
Because closures are always temporary, recovery depends on how long it lasted. Traditionally, the long-term economic trend is not severely affected by the short-term pain of closures.
But it may be slightly different this time. This government shutdown lasted longer than any other in American history.
Additionally, the nature of this closure raises some concerns. This was the first government shutdown in which a president said back pay was not a sure thing for all furloughed federal employees. And the uncertainty over those threatened with layoffs once again broke with past precedents. Both issues appeared to have been resolved with the agreement that ended the shutdown, but even so, the current uncertainty may have affected the spending patterns of many affected.
And we also don’t know what the economic impact of the reduction in domestic flights will be.
Did other economic factors exacerbate the effect of the shutdown?
While the shutdowns in the first Trump administration took place while tariffs were being used as an economic and foreign policy tool, this year is different.
Trump’s tariff war this time is widespread, hitting both adversaries and allies. As a result, the US economy has been more faltering, leading to greater uncertainty about inflation.
Related to that is rising grocery prices that have contributed to a rise in inflation.
All of this makes the Fed’s job more difficult when it is trying to adjust monetary policy to meet its dual mandates of full employment and price stability. Add to that the lack of government data for more than a month, and it means the Fed is clinging a bit in the dark when it comes to charting the US economy.
*Amitrajeet A. Batabyal is Distinguished Professor, Arthur J. Gosnell Professor of Economics, and Head of the Department of Sustainability at the Rochester Institute of Technology.
This text was originally published in The Conversation
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