Gov't Shutdown Unlikely to Have Long-Term Economic Effect

Over the next two days the Bureau of Economic Analysis will release the first estimate of GDP growth for the third quarter of 2013, while the Bureau of Labor Statistics will issue the employment report for the month of October. Mercatus Center senior research fellow Keith Hall--a former commissioner at the Bureau of Labor Statistics--previews how last month's government shutdown could affect the upcoming BLS jobs numbers and future GDP growth.

Economic Outlook:

“There are likely to be few long lasting effects of the government shutdown. Federal workers have had no loss in pay and suspended government contracts are likely to continue with no long-term loss of employment. Since income for those affected by the shutdown will recover quickly, the indirect effect is likely to be temporary, as consumption has probably been delayed rather than permanently lost.

“This is actually likely to lead to a modest, temporary boost in economic growth over the next few months. For example, during the last government shutdown, government employees were furloughed from December 16, 1995, to January 6, 1996. The Congressional Budget Office estimated that GDP growth in the fourth quarter of 1995 fell by 0.5 percentage point. After growing 2.3 percent in 1995, GDP growth nearly doubled to 4.5 percent in 1996. Similarly, after payroll jobs actually declined in January of 1996, we averaged 257,000 new jobs per month for the rest of the year.”

On Friday's Employment Report:

“Furloughed federal government workers were not working during the household survey week (October 6-12) and will be counted as unemployed, on temporary layoff. Some of those working on federal contracts may also have been unemployed, on temporary layoff.

“This will likely cause a rise in the unemployment rate and we should look at the number of people that BLS categorizes as 'Job Losers on Layoff' to see the impact. Since workers on layoff are automatically considered unemployed (rather than just jobless), there should be no direct effect of the shutdown on labor force participation.

“There may be a rise in those working part time for economic reasons as hours may have been cut to below 35 hours for private employees working on federal government contracts. The establishment survey should not, however, be as directly impacted by the government shutdown. Since furloughed workers were paid, they will be fully counted as employed in this survey. There may be some indirect effect of the government shutdown as some employees working on federal contracts may or may not show up on payrolls in October.”