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The impending federal shutdown presents a fresh challenge to American households, which are already dealing with the pressure of rising gas prices, upcoming student loan payments, and dwindling pandemic savings. While each of these individual issues may not be enough to cripple the economy, economists warn that a series of disruptions including the ongoing autoworkers’ strike, increasing borrowing costs, and reduced child-care funding will likely strain family budgets during an already sluggish period. Economists now predict a significant decline in growth during the last three months of the year as these various challenges chip away at household and business spending.
“Just as the economy appeared to be improving, we are entering a period of uncertainty,” explained Megan Way, an economics professor at Babson College in Massachusetts. “With the government shutdown, the autoworkers’ strike, and student loan repayments looming, consumers are likely to be hesitant to spend.”
U.S. braces for potentially costly government shutdown as deadline looms
Despite initial expectations, economic growth has exceeded predictions so far this year, with American consumers actively spending on items such as cars, international vacations, and expensive concerts throughout the summer. This level of spending, which accounts for two-thirds of the U.S. economy, has contributed to growth and prevented the much-feared recession. However, experts, including Federal Reserve Chair Jerome H. Powell, have expressed concerns about the current wave of uncertainties, which may cause consumers to cut back on spending, even if the job market remains strong.
“We have entered this period with an economy that appears to be gaining significant momentum,” remarked Powell during a recent news conference. “However, we are also facing a collection of risks.”
Indeed, the combined impact of student loans, government shutdown, and strikes could potentially reduce annualized economic growth by more than 1 percent in the fourth quarter. If the government closure or auto production stoppages drag on, the impact could be even greater, according to economists at Goldman Sachs. The shutdown is poised to result in a 0.2 percent decrease in annualized GDP growth per week, primarily due to reduced federal spending and resulting spillover effects on businesses.
UAW expands strike to include GM and Stellantis but not Ford
In just its first week, the United Auto Workers strike has already caused more than $1.6 billion in economic losses, including $100 million in unpaid wages and over $500 million in corporate losses, according to Anderson Economic Group in East Lansing, Michigan. Experts anticipate that the strike could persist for weeks or even months as union leaders negotiate with General Motors, Ford, and Stellantis. The UAW recently announced the expansion of the strike from three plants to 38 warehouses across 20 states.
Meanwhile, a government shutdown could cost the U.S. economy $6 billion per week, particularly due to reduced pay for federal workers and delays in government spending on goods and services, as estimated by Gregory Daco, chief economist at EY-Parthenon. While some of these losses will be recovered once the government reopens, there are likely to be lasting repercussions that continue even after the shutdown ends.
“With so many uncertainties and risks on the horizon, combined with a general sense of hesitation among consumers, the economy is likely to suffer,” warned Daco. “This could leave a lasting impact.”
Christine, a federal worker based in Boston, is already making cutbacks in anticipation of October 1st. On that day, she will be required to resume paying $800 per month towards her student loans, and if the government shuts down, it will also be the day she stops receiving a paycheck. She vividly remembers the 2018 government shutdown, when she worked without pay and anxiously followed the news for updates on congressional negotiations. This time, she’s decided to forgo certain purchases and plans until she knows for certain whether she’ll have the funds to cover basic expenses.
“I’m afraid to spend any money until I know what’s going to happen,” said Christine, who requested anonymity out of concern for her job security.
How to navigate a federal government shutdown’s impact on your paycheck
Household budgets across the country are already feeling the pinch from higher prices on groceries, gas, and housing. Inflation has significantly decreased from last year’s peak of 9.1 percent, but its decline hasn’t been as rapid as policymakers had hoped. Overall price growth has risen in the past two months, from 3 percent in June to 3.7 percent in August.
Additionally, Americans have already depleted a substantial portion of the $2.1 trillion saved during the pandemic, a reserve that is expected to run out by the end of this month, according to the San Francisco Federal Reserve. This further exacerbates the strain on households.
At Farmers Restaurant Group, which manages six eateries in and around Washington, D.C., including the popular downtown establishment Founding Farmers, executives are already witnessing a decline in demand. A government shutdown would add additional pressure on the hundreds of employees who rely on the patronage of customers and their tips to make a living. During the 2018 shutdown, sales at each restaurant plunged by as much as 17 percent, according to co-founder Dan Simons.
“A shutdown is the last thing we need right now,” Simons exclaimed. “Our staff is already worried – what if they can’t get enough hours? What if they can’t earn enough to cover their bills? When someone skips going out to dinner because they haven’t been paid, we can’t make up for that loss.”
Nevertheless, the strength of the labor market is still providing support to Americans and enabling many to continue spending. The unemployment rate is currently at 3.8 percent, nearing historic lows, and wage growth is finally outpacing inflation. However, there are also signs of distress, such as increased borrowing for basic expenses and rising delinquency rates for car loans and credit cards.
The Federal Reserve has raised interest rates 11 times since last year in an attempt to slow down the economy and curb inflation. However, policymakers have acknowledged that looming uncertainties could complicate their efforts. They emphasize that despite these challenges, the labor market has proven remarkably resilient in recent months.
The impact of a government shutdown on economic data gathering
Beyond diminished spending, a government shutdown could also disrupt or delay the collection of key economic data, including information on inflation and employment, which directly influence the Federal Reserve’s decision-making process. Without these crucial metrics, the central bank would essentially be “flying blind” at the next meeting in November, further complicating its ongoing battle against rising prices. Bank of America economists recently noted the potential challenges posed by this data blackout.
For many, the current situation in Washington, with politicians clashing over the government’s budget for the upcoming fiscal year, is reminiscent of the contentious debt ceiling battle earlier this year. A crisis was narrowly avoided with a last-minute deal in early June, just days before the government would have run out of funds to meet its financial obligations. Although the worst-case scenario was averted, the uncertainty surrounding finances had a lasting impact on business owners, federal employees, and Social Security recipients. Fitch Ratings even downgraded the United States’ credit rating for the first time, citing a lack of confidence in fiscal management due to repeated political standoffs over the debt limit.
The diminishing faith in the government’s decision-making process can have far-reaching effects beyond Washington, particularly for small businesses. Dan Simons, the restaurant owner, highlights that a 15 percent decline in sales would have cascading consequences for his employees and suppliers. “Consider the small, independent family farmers we source from,” he explained. “If we buy 15 percent less from them for an indefinite period, it places a significant strain on their operations.”
In Norfolk, Rhena Hicks is bracing for a considerable blow to her family’s budget next week when her husband’s student loans become due, just as he may be forced to work without pay. Hicks’ husband serves in the Virginia Army National Guard on active duty orders and is unlikely to receive a paycheck or housing assistance during a government shutdown.
“He’ll eventually get paid, but I don’t know…
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