When the U.S. government shuts down, it often sparks fear that the economy will come to a halt. But if you take some time and look back at history, the truth is a bit more complex. In most cases, the American economy has managed to bounce back quickly once things reopen, but of course, the pain during the shutdown is real for millions of workers and families in America.
Let us take a closer look at what really happened to the U.S. economy during previous government shutdowns and why this time might feel a bit different.
How government shutdowns affect the economy
A government shutdown more often than not happens when Congress cannot agree on how to fund federal agencies. When that happens, many departments stop operating, and federal workers are either furloughed (sent home without pay) or required to work temporarily without pay.
This directly affects people and families who completely rely on government paychecks with no other source of income. It also impacts local economies, especially in areas where large numbers of government employees live or work, such as Washington, D.C., and parts of Virginia and Maryland.
Even though federal employees typically receive back pay once the shutdown ends, the short-term hit to household spending can slow down business for restaurants, stores, and even service providers.
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What happened during past shutdowns
Over the years, the U.S. has experienced several shutdowns, with the most notable ones in 1996, 2013, and more recently, 2018–2019.
- 1996 shutdown (21 days): This shutdown happened during President Bill Clinton’s administration. It affected about 800,000 workers. However, after the disruption, the economy recovered quickly once the government reopened.
- 2013 shutdown (16 days): Under President Barack Obama, federal workers were furloughed again, but the overall economy barely slowed. The U.S. GDP dropped slightly for the quarter, but consumer confidence and spending soon rebounded.
- 2018–2019 shutdown (35 days): This was the longest shutdown in U.S. history, happening during President Donald Trump’s term. It cost the U.S. economy about $11 billion, according to the Congressional Budget Office, with $3 billion permanently lost due to delayed spending and reduced consumer activity.
Even so, once the shutdowns ended, jobs and growth generally picked up again. The reason is that most of the lost government spending and wages eventually flowed back into the economy when back pay was issued.
How shutdowns affect jobs and federal workers
During past shutdowns, hundreds of thousands of federal employees missed their paychecks. However, they were always reimbursed after the shutdown ended. Because of this, the broader job market did not suffer long-term damage.
Still, the uncertainty creates stress for workers and their families. For contractors, who are not federal employees, the story is tougher because many of them lose their income permanently since they have no guaranteed back pay.
Economists also note that temporary government closures tend to slow hiring in the private sector because businesses grow cautious when the political environment looks or is unstable.
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Why the current situation could be different
In recent years, politics have caused more shutdowns, and this has added more risk to the economy. For instance, during one of his recent interviews, President Trump hinted that this time around, there could be permanent layoffs for some federal workers or the cancellation of certain federally funded projects.
If such actions were taken, they would have a deeper impact on people’s jobs and growth. “We could cut projects they wanted, favorite projects, and they’d be permanently cut,” Trump said.
That kind of uncertainty can shake consumer confidence, and consumer spending is the backbone of the U.S. economy.
What markets and experts say
Despite the potential risks, financial markets have reacted calmly to government shutdowns. For example, during the 2018–2019 shutdown, the S&P 500 actually rose slightly as investors bet that the disruption would be temporary.
However, if a shutdown lasts too long or leads to actual layoffs, the story could change. That would not only hurt federal workers but could also slow the job market and make people more cautious about spending.
