A US government shutdown would have a cascading economic effect, beginning mildly and deepening over time as millions of workers go without salary, private contractors aren’t paid and consumer uncertainty grows over Washington’s dysfunction.

Federal contractors ranging from Elon Musk’s SpaceX to janitorial service providers for local federal buildings are bracing for up to $1.9 billion a day in lost and delayed revenue as funding lapses Oct. 1.

About 1.3 million active-duty military and another 2 million civilian federal workers won’t receive pay for the duration of a shutdown, even essential employees who have to work anyway. While federal workers will automatically get their missed salary once a shutdown ends, contract employees historically haven’t received back pay.

The blow would hit as anxiety in financial markets over high interest rates, rising oil prices and labor strikes already have driven down US stocks from their mid-July highs, with the benchmark S&P 500 index dropping more than 5% so far in September alone. Consumers are also increasingly concerned about their finances and employment prospects, with confidence slumping to a four-month low in September, according to the Conference Board’s monthly index.

Each week of a government shutdown would drag down annualized quarterly GDP growth by 0.2 percentage points, according to a Sept. 22 Bloomberg Economics report. While that would be reversed once government funding was restored, a shutdown would still have “a mild negative impact overall due to forgone economic activity and uncertainty.”

A monthlong federal funding lapse risks temporarily pushing up the unemployment rate to 4% in October, triggering a popular rule for identifying the start of a recession, Bloomberg Economics forecast.

“The more a shutdown lasts, the more it goes beyond federal employees,” Goldman Sachs analyst Alec Phillips said. “The longer it goes on, the indirect impact becomes larger.”

A range of US economic reports would be delayed during a shutdown, complicating investors’ ability to assess the fallout. An extended lapse could also make the Federal Reserve’s next interest rate decision trickier at its Oct. 31-Nov. 1 meeting.

Contract Burn

Federal agencies spent some $706.9 billion with vendors on unclassified prime contracts in fiscal year 2022, the equivalent of $1.9 billion a day, according to data compiled by Bloomberg Government.

Already hit by historic inflation, federal contractors would increasingly be strapped for cash and curtail their activities in a protracted shutdown. That could include furloughs, layoffs or worse.

“Capital has become very expensive,” said Eric Fanning, president of the Aerospace Industries Association. “You could see companies go belly up.”

The breadth of the contractor spending ranges from companies like Fluor Corp., which helps the Energy Department run the nation’s emergency oil reserve, to Pfizer Inc., which provides Covid vaccines and other drugs to the federal government.

The danger is greatest for smaller contractors, Bloomberg Intelligence analyst Nathan Dean said.

“The larger ones who have been through government shutdowns before are usually prepared and pre-funded, but the challenge is for those contractors that rely on short-term payments and rolling contracts,” said Dean.

Major contractors could see declines in stock values but those typically extend only for the duration of the shutdown.

“Contractors tend to face an initial bout of uncertainty as the market tries to figure out what is happening, but governments always re-open and when they do, work always resumes,” Dean said.

There are roughly 3 million to 4 million government contract workers, said David J. Berteau, president of the Professional Services Council, which represents federal contractors.

“They are worried,” Berteau said of his members. “It could be pretty big. And the companies have no control over it.”

Defense companies Lockheed Martin Corp, Arlington-based RTX Corp., and General Dynamics Corp. were the contractors that received the most money from federal agencies in fiscal 2022, according to Bloomberg Government’s analysis. Advance payments for major weapons programs may initially blunt the impact for their manufacturers.

The federal government also obligated some $1.145 trillion in grants, or an average of $3.1 billion daily, in fiscal 2022, funding that could also be disrupted during a shutdown, according to government data.

--With assistance from Paul Murphy.

Author: Ari Natter, Erik Wasson and Amanda Allen