CBO Pegs Shutdown Cost at $11 Billion in GDP Decline

Uncle Sam Federal spending Piggy bank

The Congressional Budget Office (CBO) today estimated the cost of the partial Federal government shutdown–which began Dec. 22 and ended Jan. 25–at $11 billion of reduced U.S. gross domestic product (GDP), although most of that amount will be recoverable in future periods.

The $11 billion figure includes $3 billion in reduced inflation-adjusted GDP for the fourth quarter of 2019, and an estimate $8 billion reduction in GDP for the first quarter of 2019. The latter figure includes the impact of the shutdown and the resumption in economic activity once government funding resumed.

The $3 billion reduction for the fourth quarter of 2018 represented about 0.1 percent of quarterly inflation-adjusted GDP, while the $8 billion reduce for the first quarter of 2019 accounts for an expected 0.2 percent of first quarter 2019 GDP. The impact on the annualized quarterly growth rates in both quarters will be larger, CBO said.

CBO said the five-week shutdown delayed about $18 billion in Federal discretionary spending for compensation and purchases of goods and services, along with suspending some Federal services.

The bright spot in CBO’s report is that most of the $11 billion in GDP decline “will eventually be recovered,” as in subsequent quarters “GDP will be temporarily higher than it would have been in the absence of a shutdown.”

But about $3 billion–accounting for 0.02 percent of U.S. GDP for 2019–of the $11 billion total will not be recoverable, CBO said.

The biggest losers in the shutdown, not surprisingly, include Federal workers “who faced delayed compensation and private-sector entities that lost business,” CBO said. While Federal workers will be paid back, “some of those private-sector entities will never recoup the lost income,” it said.

CBO also cautioned that “the estimated effects and their timing are subject to considerable uncertainty.”

“In particular, CBO is uncertain about how much discretionary spending was affected by the partial shutdown, how affected Federal employees and contractors adjusted their spending in response to delayed compensation, and how agencies will adjust their spending on goods and services now that funding has resumed,” it said.

CBO also said its estimates do not include more indirect negative impacts of the shutdown “which are more difficult to quantify but were probably becoming more significant as it continued.”

“For example, some businesses could not obtain Federal permits and certifications, and others faced reduced access to loans provided by the Federal government. Such factors were probably beginning to lead firms to postpone investment and hiring decisions. In addition, risks to the economy were becoming increasingly significant as the shutdown continued. Although their precise effects on economic output are uncertain, the negative effects of such factors would have become increasingly important if the partial shutdown had extended beyond five weeks,” CBO said.

The partial shutdown, CBO said, impacted about 800,000 of the Federal government’s 2.1 million civilian employees. Of the 800,000 total, about 300,000 were furloughed and the rest were required to work without pay.