Will The U.S. Government Shut Down? Economic & Market Impact Explained

Barring a deal today, portions of the US government will be shut down on October 1. Government funding bills require 60 votes in the Senate, and the Republicans hold 53, so Democratic votes are needed to avoid a shutdown. The combative political climate and the ticking clock are conspiring to make a shutdown the most likely outcome. Betting odds of a government shutdown have risen to 85%.

Length Of Government Shutdowns

Government shutdowns have typically been relatively brief, with an average duration of 8 days and a median of 4 days. The most recent lengthy shutdown in 2019 is misleading because only 25% of the government was closed during this period.

Senate Democrats are seeking an extension of the enhanced tax credits for the Affordable Care Act (ACA), which are set to expire at the end of the year, in exchange for their votes on government funding. The administration has threatened to use Reduction in Force (RIF) notices, in the event of a government shutdown, to achieve its goal of reducing the size of the US government and pressure Democrats. In any case, both sides believe they have leverage in the fight, so there is a chance of a longer-than-normal shutdown if it reaches that point.

Economic & Market Impacts Of Government Shutdowns

Interest payments on Treasury securities and Social Security payments will be made without interruption. National security personnel and essential Federal employees must continue to work but will not receive pay. The White House determines which jobs are “essential,” and all non-essential government employees would be furloughed without pay.

In addition to straining the household finances of government employees, some economic data collection would be suspended. A shutdown would impact the employment report, inflation readings such as CPI, and GDP measurements. The length of the shutdown would determine if some of these reports are just delayed or skipped entirely. Economic releases from the Federal Reserve should be produced without interruption. This financial data could prove crucial as the Federal Reserve ponders the pace of rate cuts with elevated inflation and a softening labor market.

History shows that shutdowns have not sent the US into an economic downturn. In the only two quarters with a decline in GDP accompanying a shutdown, the US economy had already entered into a recession in the previous quarter. Goldman Sachs estimates that each week of government shutdown reduces GDP growth by 0.15 percentage points. The economic impact of a shutdown should be less than typical because the One Big Beautiful Bill Act (OBBBA) provides tax refunds to companies for capital expenditures and research and development, which should help offset the drag. Because federal employees receive retroactive salaries after the shutdown ends, any GDP growth lost is typically recouped.

According to Strategas, stocks have not been significantly impacted by government shutdowns in the past. In fact, it has been a relatively even split between gains and losses for the S&P 500 during these periods, and the most significant move was a strong stock rally in 2019, the most protracted shutdown in our data set. Generally speaking, the evidence suggests that the government shutdown is not the primary driver of stock returns during these periods.

Summary & Conclusions

Despite the high likelihood of a government shutdown on October 1, the impact on financial markets is expected to be minimal. Due to the interruption of certain government services and salaries of government employees, including congressional staff, most shutdowns tend to be relatively brief. A government shutdown changes the timing of a relatively small amount of economic activity, so it doesn’t appreciably raise the risk of economic recession. Unfortunately, some visibility into economic trends would be reduced since many reports, including the crucial monthly payrolls report on Friday, would likely be delayed. Since it is a private company, the ADP employment report on Wednesday will not be impacted. The stock market is unlikely to be significantly affected by a shutdown, but companies with substantial exposure to government spending may experience a negative earnings impact.