Investing.com – The United States recently avoided a government shutdown, which occurs when Congress fails to pass a bill to fund federal operations, forcing agencies to halt non-essential activities.
according to Wells Fargo (NYSE:) Analysts: “The government shutdown only affects the 25% or so of federal spending that is described as 'discretionary.'
Programs such as Social Security, Medicare, and Medicaid, classified as “mandatory” spending, continue unaffected.
During a shutdown, federal agencies cease nonessential functions while essential services, including public safety and national security, remain operational.
Wells Fargo explains that civilian federal employees, totaling 2.3 million, and active-duty military employees, totaling 1.3 million, are facing work interruptions. “Essential” employees work without pay, and “non-essential” employees are furloughed. Ultimately, all workers receive their wages after the lockdown ends.
The bank says the economic impacts of lockdowns have historically been modest but noticeable.
“The direct hit to economic growth from government shutdowns in 2013 and 2018-19 was relatively modest, amounting to a few tenths of a percentage point,” Wells Fargo noted. While GDP growth rebounded after the lockdown, some economic activity has not fully recovered.
The bank adds that indirect effects, such as lower consumer confidence and delayed investments, are difficult to measure but exist.
Analysts also noted that the closures are delaying the release of important economic data, such as employment and inflation reports.
After the 16-day 2013 shutdown, Wells Fargo highlighted that the Department of Labor's “monthly reports on employment status and the Consumer Price Index” faced delays of nearly two weeks, causing a ripple effect in economic planning.
Wells Fargo warned that prolonged lockdowns add uncertainty to the economic outlook, with broader implications for policy decisions.
“The economic disruption caused by a prolonged government shutdown and extended delays to key government data releases will inject further uncertainty into policy forecasts and, in turn, the economic outlook,” Wells Fargo says.
