Shutdown to leave mark on US economy from lost paychecks, canceled flights

The longest federal government shutdown in U.S. history appears to be nearing an end, but its effects on the American economy will linger long after federal employees return to work. Since October 1, approximately 1.25 million federal workers have gone without paychecks, creating ripple effects throughout various sectors of an already challenged economic landscape.

The shutdown’s impact has been immediately visible in the nation’s airports, where more than 7,500 flights have been canceled since Friday. The Federal Aviation Administration ordered these cancellations to reduce pressure on air traffic controllers who have missed two consecutive paychecks. Industry experts expect these disruptions to continue even as Congress moves toward reopening the government.

“Short-lived shutdowns are usually invisible in the data, but this one will leave a lasting mark,” explains Gregory Daco, chief economist at accounting giant EY, “both because of its record length and the growing disruptions to welfare programs and travel.”

The Congressional Budget Office has estimated that the six-week shutdown will reduce fourth-quarter economic growth by approximately 1.5 percentage points, effectively cutting growth by half compared to the third quarter. While the reopening should boost first-quarter growth in 2024 by 2.2 percentage points, about $11 billion in economic activity will be permanently lost.

This shutdown differs significantly from the previous record-holder in 2018-2019, which lasted 35 days but only partially closed the government since many agencies had already secured full funding. That shutdown impacted the economy by just 0.02% of GDP, according to CBO estimates.

The current shutdown compounds several existing economic challenges, including sluggish hiring, persistent inflation, and uncertainty created by President Trump’s tariff policies. Despite these headwinds, most economists are not forecasting a recession.

Approximately 650,000 federal workers have been furloughed, which will likely push the unemployment rate up by 0.4 percentage points to 4.7% in October, compared to 4.3% in August when the last employment report was released. Once the government reopens, these workers will again be counted as employed.

The financial impact on federal workers has been substantial, with missed wages totaling approximately $16 billion by mid-November. While the deal being considered in Congress would provide back pay, the temporary loss of income has reduced consumer spending at retailers and restaurants and likely affected holiday travel plans.

The Washington D.C. metropolitan area has been particularly hard hit, as it was already struggling with a 6% unemployment rate before the shutdown due to previous federal workforce reductions. However, the impact extends well beyond the capital region. Federal workers constitute 5.5% of Maryland’s workforce, 2.9% of New Mexico’s, 2.6% of Oklahoma’s, and 3.8% of Alaska’s.

Federal contractors face even greater uncertainty. Bernard Yaros, an economist at Oxford Economics, estimates there could be as many as 5.2 million government contractors affected, and unlike federal employees, they typically do not receive back pay when shutdowns end.

The travel industry has suffered significant disruptions. Tourism Economics calculated that the shutdown has reduced travel spending by $63 million daily, potentially costing the industry $2.6 billion over the six-week period. Many canceled trips may not be rescheduled even after government operations resume.

Consumer sentiment has plummeted during the shutdown. The University of Michigan’s survey showed the index dropped to a three-year low of 50.4 in November, down 6.2% from October and nearly 30% from a year ago. This pessimism regarding personal finances and business conditions could eventually translate into reduced spending.

Federal procurement has also slowed dramatically. Yaros estimates that approximately $800 million in new contracts were at risk of not being awarded each day of the shutdown, noting that “the federal award spigot has all but turned off at the Department of Defense, NASA, and the Department of Homeland Security.”

Food assistance programs have been disrupted as well. The shutdown delayed $8 billion in monthly SNAP benefits to 42 million recipients in November, creating financial hardship for vulnerable households. While some states managed to provide full benefits, the Trump administration has been engaged in legal battles over the issue. The congressional deal to end the shutdown is expected to include full SNAP funding.

The shutdown has also complicated Federal Reserve decision-making by cutting off the flow of economic data on unemployment, inflation, and consumer spending. Even as the government reopens, some of this information will remain delayed, potentially preventing the Fed from delivering an anticipated third interest rate cut in December.

As Fed Chair Jerome Powell noted at a recent news conference: “What do you do if you’re driving in the fog? You slow down.” With two monthly jobs reports missed and October inflation data likely never to be released, Powell indicated that a December rate cut is not a “foregone conclusion,” which could further constrain economic activity.