The Shutdown's Impact on the Economy and Construction
- Ed Sullivan
- 6 days ago
- 6 min read
The federal government is once again shutdown. Since 1975, there have been 19 federal government shutdowns. Most of these shutdowns are short, averaging roughly one week in length. In each of the short shutdowns, the disruption to the economy has been muted. Furthermore, whatever disruption that materializes during these brief shutdowns, nearly all of the lost economic activity is quickly recaptured once the shutdown ends. No permanent economic losses have generally been accrued to these short shutdowns.
The magnitude of the adverse impact on the economy, however, varies directly with the length of the shutdown. Longer shutdowns carry more significant economic disruptions and permanent losses to the economy. These losses reflect lost consumer spending by furloughed workers, cancelation or delays in government contracts, reductions in tourism at national parks, as well as the overall adverse impact on consumer sentiment.
Six shutdowns since 1975 have endured at least ten days. As estimated by the Congressional Budget Office (CBO), the immediate and longer-term impacts on economic activity from these shutdowns are more pronounced. Typically, when the federal government shuts down a disruption to the economy immediately materializes. Immediately after the shutdown ends, the economy quickly recovers foregone activity lost during the shutdown. This essentially shifts economic activity across quarters.
The Congressional Budget Office (CBO) estimates that each week of shutdown reduces quarterly GDP growth by about 0.1 to 0.2 percentage points. In past shutdowns, much of that output was recovered once funding resumed and workers received back pay. Most, but not all, economic activity lost during the shutdown was recaptured. Any permanent loss to the economy depends on the length of the shutdown. Aside from the timing of economic activity, the rule of thumb for federal government shutdowns is that no significant damage is done to the economy until a minimum of two weeks passes.
Long shutdowns always carry economic costs. This time, the shutdown impacts may be different. The White House has directed agencies to prepare reduction-in-force (RIF) plans - permanent layoffs that go far beyond the temporary furloughs of past shutdowns. Traditionally, shutdowns trigger furloughs of “non-essential” staff, who later receive back pay; while essential workers—such as military personnel, air traffic controllers, and law enforcement - must keep working without pay.
There are currently 2.2 million federal workers. Of these, roughly 725,000 are considered “essential” and likely not subject to the RIF. That leaves 1.475 million exposed to RIF fallout. A 5% RIF of these workers translates into nearly 75,000 workers, and a 10% RIF translates into nearly 150,000 workers. No “target” level of job reduction has been announced. Keep in mind that the average employee cost (pay plus benefits) for a federal employee is roughly $147,000. For every 100,000 workers cut, that translates into nearly $15 billion in annual savings.
The threat of permanent layoffs implied by RIFs magnifies the damage. While the economy has recently posted some relatively good news regarding its strength, it is still vulnerable to a downturn. That implies that a long shutdown, accompanied by a drop in consumer confidence, could cause a significant disruption to the economy at a time when it is ill-prepared to handle such a disruption.
This time, agencies have been told to identify programs dependent on discretionary funding, and to target positions “not consistent with the President’s priorities” for permanent elimination. Presumably, the RIFs are aimed at reducing the footprint of the government and its annual deficit.
Impact on Construction Projects
From a more singular focus, the construction industry, in particular, faces a mix of disruptions during shutdowns.
Federal Building Projects: New GSA buildings or Army Corps of Engineers projects tied to annual appropriations may stall if contracts are not fully obligated before the shutdown. Payments to contractors can be delayed, creating cash-flow problems for firms. New contract solicitations are also suspended.
Highways & Transit: Most roads, bridges, and transit projects continue thanks to the Highway Trust Fund, which is mandatory and not subject to annual appropriations. Delays here are usually administrative - such as slower reimbursements or approvals - meaning activity is deferred rather than lost.
Airports & Aviation: FAA construction and safety upgrades requiring agency review may face delays if inspectors and administrative staff are furloughed.
Permitting & Oversight: NEPA reviews, EPA approvals, Army Corps wetlands permits, and OSHA inspections can all be delayed - slowing the start of new projects.
State & Local Spillovers: Infrastructure projects that rely on federal matching funds may face financing gaps if states hesitate to front money without assurance of timely reimbursement.
For most projects, especially highways and already-obligated federal contracts, a shutdown is largely a matter of timing. Work is paused and then made up later in the year. But there are circumstances where activity is permanently lost. Smaller contractors facing cash-flow pressures may not survive prolonged delays.
Federal contractors are not guaranteed backpay, meaning lost wages and output never return. Permitting bottlenecks can push new projects months down the line, sometimes colliding with financing deadlines or construction seasons. And if RIFs shrink the federal workforce in permitting or oversight agencies, project approvals and safety inspections could slow for years to come - creating a lasting drag on construction activity.
How the Economic Outlook Could Change
The shutdown could be over quickly or take a bit of time to be resolved. To explore the potential impact on the economy and construction activity, let’s build a scenario making some key assumptions. Consider the following:
It seems both sides have dug their heels into the sand with little effort to compromise. The longest shutdown in history, 35 days, occurred during Trump’s first administration. This shutdown could rival the length of that one.
The prolonged 35-day shutdown is accompanied by a RIF of 150,000 - 10% of nonessential federal workers.
Using these assumptions and past behavior during shutdowns, real GDP could reflect a minimum 0.6% reduction in real GDP growth. According to the Philadelphia Federal Reserve Survey of Professional Forecasters, third-quarter growth was expected to average 1.4% growth. That estimate does not include the shutdown. Subtracting out that impact, leaves third quarter real GDP growth at 0.9%. The extra weakness could boost unemployment and lower inflation – temporarily.
Arguably, these developments could bolster the case for an October rate cut by the Fed. Two points may counter that viewpoint. First, the Fed may dismiss the shutdown phenomenon as transitory. Second, due to the shutdown effecting government reporting agencies, there may not be new data for the Fed to consider. In this context the Fed sits. This scenario suggests if the shutdown persists for 35 days, the Fed will sit and if needed make a cut at the December meeting.
After the shutdown is settled (early-November), there will be a recapture of activity lost during the shutdown and furloughed workers are expected to receive back pay. This will boost economic activity during the remainder of 2025 and into January 2026.
Not all activity lost during the shutdown, however, will be recaptured. Typically, the longer the shutdown, the lower the recapture rate. This period will also be characterized the loss of 150,000 federal worker jobs that materialize under the RIF. Combining the two impacts yields an estimate of roughly a 0.3% draw to fourth quarter growth.
If all this materializes, the shutdown will have little impact on 2025 construction activity. In the context of weaker economic activity resulting from the shutdown and RIF, the Fed could move to cut rates faster and more aggressively compared to our current forecast outlook. As such, private sector construction, particularly single-family construction could be marginally stronger. All this, however, materializes in 2026.
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