What is a government shutdown, and what are the potential economic implications? By Investing.com

Investing.com – The U.S. recently avoided a government shutdown that occurs when Congress fails to pass a bill to fund federal operations, forcing agencies to shut down non-essential activities.

By: Wells Fargo (NYSE:) analysts. “The government shutdown affects only the 25% of federal spending that is characterized as ‘discretionary’.”

Programs such as Social Security, Medicare, and Medicaid, which are classified as “mandatory” spending, remain unchanged.

During a shutdown, federal agencies suspend non-essential functions while essential services, including public safety and national security, continue to operate.

Wells Fargo explained that civilian federal employees, totaling 2.3 million, and active-duty military personnel, numbering 1.3 million, are experiencing outages are fired. All employees ultimately receive back pay after the shutdown ends.

The bank says the economic effects of shutdowns have historically been modest but noticeable.

Wells Fargo noted that “the direct hit to economic growth during the 2013 and 2018-2019 shutdowns was relatively modest, a few tenths of a percentage point.” While GDP growth has rebounded, some economic activity has not fully recovered.

The bank adds that indirect effects, such as falling consumer confidence and delayed investment, are harder to quantify but do exist.

Analysts also noted that the shutdowns delayed the release of key economic data, such as employment and inflation reports.

After a 16-day shutdown in 2013, Wells Fargo pointed out that the Labor Department’s monthly reports of the employment situation and consumer price index were delayed by nearly two weeks, causing a ripple effect in economic planning.

Wells Fargo warned that prolonged shutdowns add uncertainty to the economic outlook, with broader implications for policy decisions.

“The economic disruption from the prolonged government shutdown and the extended delay in the release of key data will inject additional uncertainty into the policy outlook and, by extension, the economic outlook,” Wells Fargo said.