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The looming federal shutdown poses a new threat to American households, whose budgets are already under pressure from higher gas prices, looming student loan payments and the depletion of pandemic savings.
While these shocks alone wouldn’t be enough to bring down the economy, economists say a range of disruptions – including the ongoing auto workers’ strike, rising borrowing costs and a decline in child care funding – are likely to weigh on family budgets a time when things are already slowing down. Economists now expect growth to slow significantly in the final three months of the year as a combination of challenges weigh on spending by households and businesses.
“We are 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’] With the strike and student loan repayments, there is so much uncertainty that consumers will be reluctant to purchase.”
The US is preparing for a costly government shutdown in just a few days
Economic growth has fallen short of expectations so far this year as Americans spend throughout the summer on cars, international vacations and expensive concerts. That spending, which accounts for two-thirds of the U.S. economy, has helped spur growth and save the country from the much-anticipated recession. But experts, including the head of the Federal Reserve, have raised concerns about the recent wave of uncertainty that could cause consumer spending to decline even as the job market remains strong.
“Ultimately, you come here with an economy that appears to have significant momentum, and that’s where we start,” Fed Chairman Jerome H. Powell said during a news conference Wednesday. “But we have this accumulation of risks.”
In fact, the triple whammy of student loans, shutdowns and strikes could shave more than 1 percent off annual economic growth in the fourth quarter, with the damage even greater if government shutdowns or auto production shutdowns drag on, Goldman economists said Sachs. The shutdown in particular is expected to hit 0.2 percent of annual GDP growth per week – the majority of which is due to reduced federal spending as well as spillover effects on companies.
UAW expands strike against GM and Stellantis, but not Ford
According to the Anderson Economic Group in East Lansing, Michigan, the United Auto Workers strike is estimated to have caused more than $1.6 billion in economic losses in the first week alone, including $100 million in unpaid wages and More than $500 million in company losses 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 announced Friday that it was expanding the strike from three plants to 38 warehouses in 20 states.
Meanwhile, Gregory Daco, chief economist at EY-Parthenon, estimates a government shutdown could cost the U.S. economy $6 billion a week, much of it in lower pay for federal workers and delays in government spending on goods and services. And while some of those losses will be recouped once the government reopens — employees will receive reimbursement for time they worked, for example — there will likely be broad impacts that will last long after the shutdown ends.
“There are so many uncertainties and risks looming that, taken together, they will impact consumers’ purchasing options,” Daco said. “That could leave a visible mark on the economy.”
Christine, a federal employee in Boston, is already cutting back in anticipation of October 1st. Then she’ll go back to owing $800 a month in student loans – and when the government shuts down, the day will come when she stops receiving payments.
She remembers in 2018, when the 35-day government shutdown left her working without pay and “constantly watching the news” for updates on congressional proceedings. This time she forgoes fresh fish and sunscreen until she knows she has the money to cover basic costs.
“I’m afraid to shop or make plans,” said Christine, who agreed only to give her last name for fear of losing her job. “I don’t want to spend any money at all until I know what’s going to happen.”
What to do if a federal government shutdown stops your paycheck?
Across the country, household budgets are already being strained by higher prices for food, gasoline and housing. Inflation has fallen dramatically since peaking at 9.1 percent last summer, but its decline has not been as rapid or powerful as policymakers had hoped. Overall price growth has increased over the past two months, from 3 percent in June to 3.7 percent in August.
And although Americans have saved a staggering $2.1 trillion during the pandemic, that stockpile is expected to run out by the end of this month, according to the San Francisco Fed, adding to the burden.
At Farmers Restaurant Group — which oversees six restaurants in and around Washington, D.C., including the popular Founding Farmers downtown — executives say they’re already seeing a decline in demand. A government shutdown would further increase the burden on hundreds of employees who rely on free guests and tips for their livelihood. According to co-founder Dan Simons, sales per restaurant fell by up to 17 percent during the last shutdown in 2018.
“A shutdown is the last thing we need right now,” he said. “Our employees are already worried: What if I can’t get my hours? What happens if I don’t earn enough to pay my bills? If someone doesn’t go to dinner because they didn’t get money, we can’t compensate.”
Still, Americans benefit from a strong job market that allows many to continue spending. The unemployment rate is near historic lows at 3.8 percent, and wage growth is finally outpacing inflation.
But there are also increasing signs of distress: People are taking on more debt to meet their basic needs, and default rates on auto loans and credit cards are rising.
The Federal Reserve has raised interest rates 11 times since last year, hoping to slow the economy enough to curb inflation. Still, policymakers have acknowledged that looming uncertainties could complicate those efforts, while emphasizing that the labor market has proven surprisingly resilient in recent months.
The shortest and longest government shutdown in US history
Aside from lost spending, a government shutdown could stop or delay the collection of key economic data, including on inflation and employment, which inform all Fed moves. Without these metrics, the central bank would be “flying blind” at its next meeting in November, further complicating its years-long battle against rising prices, economists at Bank of America recently noted.
For many, the current dispute in Washington – in which politicians are arguing over the government’s budget for the next fiscal year – is reminiscent of the controversial battle over the debt ceiling this spring. A crisis was narrowly averted with an agreement in early June, just days before the government would run out of money to pay its bills.
Even if the worst didn’t happen, many business owners, federal workers and Social Security recipients say the uncertainty about their finances has left a lasting toll. Fitch Ratings downgraded the United States’ credit rating for the first time, saying: “Repeated political stalemates over debt limits and last-minute solutions have undermined confidence in fiscal management.”
Small businesses begin to panic about a national bankruptcy
This declining trust in the inner workings of government can have implications far beyond Washington, particularly for small businesses. Simons, the restaurant owner, says a 15 percent drop in sales will have a cascading impact on his employees and suppliers. “Think about the farmers we buy from,” he said. “They are small, independent family farmers, and if I now buy 15 percent less from them for an unknown period of time, that will be a huge burden.”
In Norfolk next week, Rhena Hicks is preparing for a significant blow to her family’s budget when her husband’s student loans come due, precisely because he could be forced to work unpaid. Her husband, who is active duty in the Virginia Army National Guard, likely won’t receive a paycheck or housing assistance during the government shutdown.
“It’s one of those things where it will be paid back eventually, but I don’t know many people who can pay off a month, two months or three months of a mortgage with one day’s notice without paying it back.” “New wages are coming” said Hicks, 30, executive director of Freedom Virginia, a nonpartisan nonprofit that advocates for economic security policies. “It is very stressful.”
Hicks’ husband has helped the government through a series of mounting crises in recent years: first by staffing coronavirus testing sites and then by helping with mask fitting in factories. In 2021, he was among thousands of National Guard members deployed to contain the January 6 insurrection at the US Capitol.
“For us, it’s not a game – it’s about our income, our housing benefit, our stability and our ability to provide for our family,” Hicks said. “It is very disturbing considering what the last few years have looked like for our family. It’s a slap in the face.”
There is a threat of a government shutdown