Potential Government Shutdown Looms Amid Congressional Deadlock

A potential government shutdown could commence within days, halting pay for hundreds of thousands of federal workers and delaying services, as lawmakers remain deadlocked over funding beyond September 30. The financial impact of a shutdown typically depends on its duration, with each week costing the U.S. economy about $7 billion, according to a new analysis from EY-Parthenon Chief Economist Gregory Daco. A suspension could also weigh on investor and consumer confidence at a time when the U.S. economy is already facing headwinds, he told CBS News.

Government shutdowns aren't new: The U.S. has experienced 14 of them since 1980, with the longest occurring over 34 days from December 2018 into January 2019, according to the Bipartisan Policy Center. They're triggered when Congress fails to pass a full-year spending bill or a continuing resolution to fund the government for the pending fiscal year, which begins on October 1.

"We've been to this picnic before, unfortunately," Wayne Winegarden, a senior fellow in business and economics at Pacific Research Institute, told CBS News. "In general, things like Social Security, Medicare and Medicaid, those will continue to go out, and we'll continue to pay interest on the debt," Winegarden said. But, he added, "The general rule is that the longer it goes on, the bigger the disruption."

Without congressional approval for new spending, federal agencies are typically prohibited from doling out money. Activities at many agencies will be suspended until lawmakers agree on a new funding bill, with hundreds of thousands of federal workers likely to be furloughed during that time. Yet because the government must continue to provide services that protect life and property, agencies will determine which essential workers must continue working, although they won't receive pay until lawmakers resolve the funding gap. And while some federal employees would eventually receive back pay, others could experience financial strain while their paychecks are suspended, Daco noted.

During the shutdown of 2018-2019, about 800,000 government workers missed several weeks of pay, creating financial hardships for many. Some turned to online fundraising campaigns for assistance, while others relied on food banks to help them get through the period.

While the biggest direct hit would be on government workers, followed by federal contractors who would also be shut off from funding, delayed federal procurement on goods and services could also ripple through the broader economy, Daco told CBS News. A shutdown could also undermine confidence in the economy at a time when some sectors, such as the labor market, are facing headwinds, he added. Markets could be rattled by the disruption, as well as consumer sentiment, some economists noted.

"We need more certainty in the rules of the game of the economy," Winegarden said. "Uncertainty, at this moment, is the last thing we need."

A halt in government functions could also complicate monetary policy decisions, potentially resulting in delays for key economic data next month, such as the October 3 jobs report from the Bureau of Labor Statistics. With the labor market stalling out over the summer, Federal Reserve officials are expected to closely scrutinize the latest jobs data when they make their next rate decision at the central bank's October 29 meeting.

"A government shutdown at this economic juncture represents a graver risk than when the economy is running at full steam," Daco said.

Social Security, Medicare and Medicaid are covered by mandatory spending, which means that funding for these programs has been approved by Congress to continue without an expiration date. Social Security benefits would be paid on time, while health care payments for seniors in Medicare and low- and middle-income Americans enrolled in Medicaid would continue. However, Social Security's administrative budget needs to receive approval from Congress, which means that some of its services could be impacted in a shutdown, some experts note.

"In the event of a government shutdown ... customer service at the Social Security Administration may be disrupted, including benefit verifications, earnings record corrections and updates, overpayments processing and replacing Medicare cards," Max Richtman, CEO of the National Committee to Preserve Social Security & Medicare, said in a Friday email.

Air traffic controllers and Transportation Security Administration agents would be required to work without pay because they provide essential services. Unlike other government agencies, the U.S. Postal Service operates as a self-funded, independent agency. That means mail, packages and other shipments would still be delivered and post offices would remain open in the event of a shutdown. But there could be other impacts for consumers and businesses. For one, some mortgage processing could face delays because the flood insurance program would be closed to new policies until Congress agrees to a new spending deal, according to TD Cowen analyst Jaret Seiberg. "That means no mortgages which require federal flood insurance will be originated," he noted.