A potential government shutdown is looming, with significant implications for the federal workforce and the economy. The U.S. government may halt operations at 12:01 a.m. Wednesday unless a resolution is reached concerning the extension of health insurance subsidies, amidst a stalemate between Republican and Democratic leaders. Such shutdowns can lead to furloughs of hundreds of thousands of “nonessential” federal workers, who would be placed on unpaid leave. In contrast, “essential” workers would still be required to fulfill their duties without pay.
Historically, while government shutdowns impact economic operations—closing national parks and museums, slowing health inspections, and worsening services for veterans—the long-lasting effects tend to be limited. Various estimates indicate that even the longest shutdowns, such as the 35-day interruption in 2018 and 2019, only slightly impacted economic output, decreasing it by as much as 0.4%. Economic growth may be curtailed further if the number of furloughed workers mirrors the 2013 shutdown, during which 40% of civilian employees were affected, perhaps reducing growth by approximately 0.15% weekly.
This shutdown represents a particularly precarious moment for the U.S. economy. Inflation has been rising consistently since April, and recent job reports suggest a weakening labor market. The Bureau of Labor Statistics recently adjusted previous job creation figures downwards, revealing that approximately 911,000 fewer jobs were created than initially estimated. This comes on the heels of a stark jobs report showing only 22,000 jobs added in August, alongside a revision of June’s job growth into negative territory. A government shutdown would delay the imminent jobs report scheduled for release on Friday, complicating the Federal Reserve’s next policy decision in October.
Amidst these challenges, markets historically show resilience during such shutdowns. Research from Truist Wealth found that the S&P 500’s performance remains relatively stable, displaying little average change during the 20 government shutdowns since 1976. Notably, the S&P 500 has historically risen by about 12% in the 12 months following such events. The market has already shown strength this year, with the S&P 500 up over 13%, the Nasdaq Composite increasing by 17%, and the Dow Jones Industrial Average rising nearly 9%.
Concerns regarding the U.S. credit rating may also surface during a shutdown. According to analysts from JPMorgan Chase, the government can still issue debt but may face restrictions on expenditures. The previous enactment of the One Big Beautiful Bill Act raised the debt ceiling, making a credit downgrade less likely. However, major rating agencies have reiterated concerns about budgetary and fiscal risks. While there are potential challenges, they maintain that the resilience of the U.S. economy and effective monetary policy could help mitigate the risks associated with political uncertainties.
Overall, while a government shutdown carries immediate ramifications for federal operations and the workforce, historical data suggests the long-term effects on both the economy and the markets may be limited. The coming days will be pivotal, as legislators must navigate this impasse, ideally securing a resolution to avoid a halt in government functions.
