U.S. Government Shutdown: What it Could Mean for the Economy and Markets
The U.S. government has shut down for the first time since January 2019. Since the modern budget process was adopted in 1976, there have been more than 20 U.S. government shutdowns of varying length. While most have been short-lived, lasting only a few days before lawmakers reached a deal, others have stretched longer. For example, the 35-day shutdown in late 2018 and early 2019 (Trump’s first term), was the longest in history, demonstrating how entrenched political standoffs can become when neither party is willing to compromise. On average, U.S. government shutdowns have lasted about a week, reflecting that they often arise less from structural budget reforms and more from the dynamics of political negotiations.
When a government shutdown occurs, the economic impacts tend to be temporary and relatively small. Ned Davis Research estimates there is a 0.1%-0.2% drag on real GDP growth for every week the shutdown continues. While a shutdown can have a negative short-term economic impact due to federal employees being furloughed, there is often a catch-up period when federal employees are compensated retroactively once the government reopens.
Introducing a government shutdown into the current environment adds another layer of uncertainty. The economy has already been contending with mixed signals from growth, inflation, and policy, and while we believe some positive drivers remain, the cushion they provide is not overwhelming. A shutdown does little to improve the outlook and instead introduces incremental risk at a time when clarity is already limited. Importantly, a shutdown will delay the release of key economic data, just as employment concerns are rising and the Federal Reserve has restarted interest rate cuts. Policymakers and markets rely on timely government data, and its absence could add uncertainty at a critical moment. Some analysts suggest that disruptions from the shutdown could influence the Fed’s future decisions, though outcomes remain uncertain.
While government shutdowns can feel unsettling, they have not historically warranted broad, sudden portfolio changes. According to data from Ned Davis Research, the S&P 500 has had an average gain of 0.5% three weeks after a shutdown, and 1.5% two months after the shutdown. That said, each shutdown has its own circumstances, and markets may not respond the same way. We will continue to monitor the underlying economic and market data as it becomes available.