The US government has shut down – what happens next?
Shutdowns typically do not make sizeable impacts on the markets or the economy, though the potential for a lengthy political impasse bears monitoring.
The United States federal government shut down today after lawmakers were unable to agree on funding allocations ahead of the October 1 start to the government’s fiscal year.
While shutdowns loom large in the political sphere, historically, they tend not to be market events.
“While volatility may increase, it tends to be moderate – far less severe than the market turbulence experienced related to tariff uncertainty in April and May,” says Raymond James Chief Investment Officer Larry Adam.
Regardless of near-term choppiness, the S&P 500’s 12-month gains following the 20 shutdowns over the past 50 years have averaged 13%, with positive performance 85% of the time. Ultimately, fundamentals such as gross domestic product and earnings growth drive the market in the long term.
“Should equities experience a temporary pullback,” Adam says, “it could present a potential opportunity for investors to acquire high-quality companies at more attractive valuations.”
The shutdown will continue until Congress votes to fund the government. Republicans control both houses of Congress, but by thin majorities, indicating some level of bipartisan support is necessary to approve a funding bill and reopen the government. In the Senate, Republicans hold 53 seats, but 60 votes are required to pass a resolution.
President Donald Trump’s administration has signaled it could view a lapse in mandatory appropriations for discretionary programs as an opportunity to permanently reduce the size of the government workforce in areas that are not consistent with the president’s priorities.
“The traditional ‘playbook’ for a government shutdown – historically brief, politically damaging for the party perceived as causing it and ultimately being resolved through compromise – may no longer apply,” says Ed Mills, Raymond James Washington policy analyst.
Essential government workers are expected to continue working during a shutdown, keeping the lights on in areas related to public safety. It’s important to note that Social Security and Medicare benefits, as well as federal pension payments, will continue during the shutdown.
Typically, nonessential workers are furloughed and recalled after funding is approved, at which point all workers are paid retroactively.
Even a lengthy shutdown would likely have only modest impacts on the broader US economy, though some will feel acute impacts.
A relatively small group of companies that are heavily reliant on federal contracts could face temporary revenue disruptions. Businesses that require ongoing interaction with federal agencies for permitting or research and development are also likely to face disruptions. The processing of loan applications by the Small Business Administration could be delayed.
Consumer-facing businesses could experience a different kind of impact: furloughed federal employees or those working without pay are likely to cut back on discretionary spending. This poses a particular challenge for retailers and restaurants in regions with high concentrations of federal workers, most notably Washington, D.C.
The reporting of economic data is also likely to be affected. If hundreds of thousands of federal workers are laid off, even temporarily, the unemployment rate will increase. Additionally, government reports will be delayed, which could impact the US Federal Reserve’s ability to make informed monetary policy decisions at its next Federal Open Markets Committee meeting in late October.
Past performance is not indicative of future results. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The performance mentioned does not include fees and charges, which would reduce an investor’s returns. Investing involves risk and investors may incur a profit or a loss.