A government shutdown could add another headwind to an already-precarious economy, but most analysts say that even a prolonged hiatus would have only a limited impact on the wider U.S. economy.
With Republican and Democratic leadership at an impasse over the extension of health insurance subsidies, the U.S. government could temporarily cease operations at 12:01 a.m. Wednesday unless a deal is struck.
Government shutdowns put hundreds of thousands of “nonessential” federal workers on furlough, meaning they are forced to take a leave of absence without pay, while other “essential” workers will be required to show up to work without getting paid either. Often, such shutdowns lead to the closure of national parks and museums, fewer health inspections, slower services for veterans, longer wait times on Social Security phone lines and more.
While the government plays a big part in the economy, history shows that the lasting effects of shutdowns are limited.
Economic growth can be dented, but slightly and temporarily, with an array of estimates from Wall Street as well as the Congressional Budget Office finding that even the longest shutdown ever — 35 days in 2018 and 2019 — shaved only as much as 0.4% from total economic output.
The full impact will likely depend on how many workers are furloughed or fired. In the 2013 government shutdown, 40% of all civilian employees were furloughed. If a similar number of workers are furloughed during this shutdown, U.S. economic growth could be slowed by about 0.15% per week.
In a break from previous shutdowns, the president and his administration have threatened not just furloughs, but permanent job cuts in the event the government comes to a halt.
This shutdown comes at a particularly perilous time for the U.S. economy. Inflation has been rising every month since April, and the labor market is weakening at what appears to be a rapid pace.
In early September, the Bureau of Labor Statistics said the U.S. economy created 911,000 fewer jobs than previously thought. That came on the heels of a jobs report days earlier that showed the economy added just 22,000 jobs in August.
The most recent jobs report also revised June’s job growth into negative territory.
A government shutdown would delay the next jobs report, due to be released Friday. It’s unclear how soon it would be released after the government reopens.
That could make the Fed’s next rate decision in October more difficult. “There is no risk-free path,” Fed Chair Jerome Powell said a week ago. “Uncertainty around the path of inflation remains high.”
The central bank recently cut rates for the first time this year, but now has to carefully balance inflation and a weakening labor market. Normally, a central bank would hike rates to slow inflation and cut rates to spur job creation.
It’s a “challenging situation,” Powell said.
Markets tend to fare reasonably well during government shutdowns.
Truist Wealth, a financial advisory company, found that there was little change on average to the S&P 500 across the 20 government shutdowns that have occurred since 1976.
In the long run, a shutdown can have even less impact on the markets. “On average, the S&P 500 has risen about 12% in the 12 months following shutdowns,” Saxo Bank’s global head of investment strategy, Jacob Falkencrone, wrote Tuesday.
The last major shutdown in 2018-2019 is the outlier. The S&P 500 posted a more than 10% rise during that shutdown, but there was a major sell-off ahead of that impasse due to other factors, such as fears about declining corporate earnings and the Fed raising rates.
Heading into a likely shutdown this week, the S&P 500 is up more than 13% year-to-date. The Nasdaq Composite is up 17%, and the Dow Jones Industrial Average is up nearly 9%.
The Dollar Index (the value of the dollar vs. a basket of foreign currencies including the pound sterling, euro and yen) often wobbles but doesn’t usually move decisively on a shutdown, according to analysts. U.S. Treasury bonds sometimes rally on a pickup in demand for “safe haven” assets but typically are largely unaffected by a government closure in the long run.
This year, the Dollar Index is down nearly 10%, due in large part from uncertainty about the president’s sweeping tariff and trade agenda.
A government shutdown could also lead to questions about the U.S. credit rating.
But “a government shutdown means the government can issue debt but not spend it. The [One Big Beautiful Bill Act] raised the debt ceiling so, most likely, a credit downgrade is off the table,” according to JPMorgan Chase analysts.
However, the three major rating agencies have warned repeatedly about rising fiscal and budget risks, including in May, when Moody’s downgraded the U.S. credit rating.
All three have continued to underscore that they believe the strength and diversity of the U.S. economy, paired with independent and effective monetary policy at the Fed, will likely persist even as some “institutional arrangements can be tested at times,” as Moody’s put it.
