What this shutdown could mean for the economy and your 401(k)

Although painful for federal workers, travelers, and thousands of people and businesses in and outside Washington that partner with the US government, shutdowns typically aren’t significant events for the stock market or the economy.

This time could be different.

What a shutdown usually means

Shutdowns are typically short-term events, and whatever economic damage occurs during that time tends to be limited and quickly fixed. Even the last government shutdown – the record-long 35-day shutdown in 2018-2019 – had few long-lasting impacts on the US economy and financial markets.

Although hundreds of thousands of nonessential federal employees get furloughed during government shutdowns, investors and economists normally shrug off those temporary layoffs, because impacted workers are repaid and return to work when the shutdown inevitably ends.

Normally, the rule of thumb is that each week of a government shutdown trims about 0.2 percentage points from gross domestic product (GDP) – or economic growth. But those losses are quickly reversed as the government reopens.

That could very well be the case again this time around, especially if the looming shutdown proves to be brief. Yet there are reasons this episode could be different – and not in a good way.

Mass layoffs?

Unlike past shutdowns, when furloughed workers are rehired when the government reopens, the Trump administration has threatened to carry out mass layoffs of federal workers during this shutdown.

Laying off hundreds of thousands of federal workers during a shutdown “would be a really big economic problem” and unsustainable over the medium-term, said Stephanie Roth, chief economist at Wolfe Research.

Permanent layoffs in the federal government would raise the risk of more long-lived effects, forcing investors and economists to rethink the damage to the US economy.

“This is just running over innocent bystanders,” Jared Bernstein, a top economic adviser in the Biden White House and senior fellow for economic policy at the Center for American Progress, told CNN in a phone interview. “It’s not only bad economics because you’d be contributing to an already rising unemployment rate, but it’s profoundly unfair. It’s not their fault you can’t keep the lights on.”

Fed and businesses flying blind

The shutdown will also very likely delay the collection and release of some key economic data. That could leave CEOs, investors and even Federal Reserve officials in the dark when making key decisions.

The Bureau of Labor Statistics, already under fire from the Trump administration over the quality of its data, will not release Friday’s September jobs report if there is a shutdown. The monthly jobs report is always critical, but it has been especially important lately because of cracks in the labor market and sizable revisions to prior months.

The BLS has already struggled to produce accurate and timely data because of massive swings in the economy, steep budget cuts and low survey response rates. If a shutdown lasts at least a dozen days, it would likely interrupt the surveys the BLS must conduct to prepare the October jobs report – the one scheduled for release in early November.

The Labor Department warned that a prolonged shutdown could harm the quality of the data it collects for future reports – including crucial inflation data that the Fed uses to make decisions about rates.

“It’s already complicated enough to interpret the labor market data. If we have a period of time where the data isn’t available, those challenges would significantly increase,” Nathan Sheets, global chief economist at Citigroup, told CNN in a phone interview.

Your 401(k)

Wall Street has been unfazed about the risks a government shutdown, and stocks remain near record highs. That’s because market veterans know that shutdowns tend to be minor events for the stock market.

Since 1976, the S&P 500 has averaged no change during government shutdowns, according to Truist Wealth. US stocks even managed to spike by 10% during the government shutdown that began in late 2018.

“Prior government shutdowns have had minimal lasting economic impact. They tend to mimic a hurricane or a snowstorm, delaying most activity and quickly making up for it upon reopening,” Keith Lerner, Truist Wealth’s chief investment officer, wrote in a report.

Bob Elliott, chief investment officer at Unlimited Funds, said in a Substack post on Friday that markets are going by the “same old playbook” where a government shutdown won’t matter to the economy. Still, because of the unique threats this shutdown poses, this time could be different for markets, too.

“Us macro folks are worriers by constitution, so take this with a grain of salt,” Elliott said, “but there seems to be a risk that this shutdown may be different than what we’ve come to expect.”

A fragile economy

It’s hard to ignore this shutdown’s poor timing: The US economy in 2025 looks more vulnerable than during past budget fights.

The job market is stumbling, which is why the Trump administration’s threats of even more federal layoffs could hurt the economy. This government shutdown adds only more chaos and uncertainty, at a time when there is already plenty of both.

“The timing is bad. It’s a little bit more dangerous this time,” said David Kelly, chief global strategist at JPMorgan Asset Management.