Stories about the government shutdown are illustrated with pictures of closed national parks and unapproved beer labels, making the economic impact appear pretty trivial. The actual effect is a bit worse than the pictures, but not enough to overwhelm the national economy. The impact on particular people and particular businesses may be substantial, but not the impact on the country as a whole.
The greatest impact is reduced spending by the 800,000 federal workers who have been furloughed or are working without pay. This is a temporary impact, as the workers will get back pay. Employees of government contractors mostly will not receive back pay for time not worked, but there will be make-up work for some of them.
To put those 800,000 workers in context, they constitute half of one percent of all employees in the United States, and an even lower percentage if one considers self-employed people. And most of them will continue to spend money, albeit at a reduced level, so total consumer spending will drop by less than half a percent. That impact is pretty close to the noise in the monthly statistical reports (which now have no noise at all, as most government statistical agencies have gone silent).
Forecasters are shading down their estimates of real GDP growth by about 0.1 percent, not enough to get worried about.
Small Business Administration loans are not being processed during the government shutdown. Last year the SBA guaranteed $30 billion of loans, just over one percent of the total commercial and industrial lending by banks ($2.2 trillion). Although the broad impact is negligible, individual companies are certainly hurt by the inability to access this program.
Similarly, the new U.S. tariffs are still in effect, but the Commerce Department is not able to promptly process requests for exemptions. Airlines cannot put new aircraft into service without an FAA sign-off, nor begin new routes. Again, the aggregate impact is tiny, but impacts on specific small businesses can be severe. Take the beer label issue. For a major brewer looking to update its beer cans, that's not a big deal. But a craft brewer with a batch of seasonal ale may be hurt badly.
The prospects for an end to the shutdown are difficult to assess. My best-guess scenario is that Congress agrees to a small section of a fence, in exchange for some pork barrel spending that accommodates both House Democrats and Senate Republicans, and then the President declares the greatest deal ever.
Even if the shutdown drags on a long time, it is unlikely to bring economic growth down much. But it might lead to a realization that we have too many government permits needed for everyday business.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.