Another quiet week for news has meant that the financial market headlines have been dominated by the US government ‘shutdown’, which began on Wednesday as a result of the inability of the US Congress to agree on a new budget for the start of the new US fiscal year.
The reaction in financial markets has been very muted; indeed, US equities are back to record highs, and we have also seen UK and European indices making new record highs this week.
Tuesday night saw Republicans and Democrats fail to reach agreement on a budget to fund the federal government into the new fiscal year. A series of votes took place on Tuesday where Senate Republicans and Democrats rejected rival proposals that would have prevented a shutdown. So, what is a government shutdown, and should it concern us? To give some context, there have been ten government shutdowns because of funding gaps since 1980, ranging from a few hours to the most recent, in 2018-19 which lasted 35 days. The government will now cease all non-essential functions, while employees whose work is considered essential such as military members and law enforcement officers are required to work, potentially without being paid.
The most recent government shutdown (until this week) took place during President Trump’s first term of office and lasted 35 days from December 2018 to January 2019 and saw 800,000 federal employees furloughed. The Congressional Budget Office (CBO) estimated the 2018 shutdown reduced economic output by $11 billion, including $3 billion that was never regained. While this is a substantial number, it is a drop in the ocean in the context of annual GDP of $29 trillion. A colleague in the US notes that the only consequence of the 2018 shutdown was nine months later with a small baby-boom in the Washington D.C. area – clearly furloughed workers were making productive use of their unexpected time at home!
The CBO said on Tuesday it expected around 750,000 federal employees to be furloughed this time, at a cost of around $400 million a day in back pay. The CBO commented that the impact would be contingent on decisions to fire rather than furlough workers. President Trump had previously threatened that a government shutdown would be seen as an opportunity to “fire a lot” of government workers, calling for a clear out of “dead wood” instead of the usual procedure to temporarily furlough workers.
The impact of a government shutdown increases the longer the duration of the event. The general rule is that the shorter the shutdown the more limited the impact and the impact on financial markets, looking at historical data, is hard to spot. The previous shutdown in 2018 saw a strong equity rally, as the shutdown coincided with the “Powell Pivot” to shift away from tighter monetary policy. It also helps that the current shutdown is not coincident with a fight over the debt ceiling which was extended earlier this year. The debt ceiling, at $41.1 trillion, is some way above current debt levels of $37.5 trillion so this is not an issue (apart from how much all that debt is costing in interest payments!) The historical data suggests that shutdowns are more ‘noise’ than anything else, and the main impact on markets will be a sense of frustration in the coming days will be the lack of economic data being released by government agencies. We have already seen yesterday’s weekly jobs report postponed, and the crucial monthly employment data due today will be delayed. A protracted shutdown, at a time when US economic data is crucial in guiding sentiment on the pace of future interest rate cuts, is less than ideal.
We appear to be at the stage where Republicans and Democrats are more focussed on the blame game rather than finding consensus on a short term ‘continuing resolution’ to fund the government for another six weeks or so. Given the extremely polarised nature of US politics, agreement on an actual budget for the fiscal year appears even more distant. The Democrats clearly see an opportunity to exert some pressure on the Republicans and President Trump in a year when their ability to exert influence has been diminished by Republican majorities in both houses of Congress and a President happy to rule by Executive Order. Hence comments such as those from House minority leader Hakam Jefferies that “We are in this fight until we win this fight… we are not going to support a partisan Republican spending bill that continues to gut the healthcare of the American people. Not now. Not ever.” Hence this could turn into a protracted shutdown, or it could all be over in a matter of days if some unlikely pragmatism prevails.
History shows government shutdowns tend to leave no scarring on financial markets and once they are over, they are swiftly forgotten. While they are ongoing however, financial markets will not enjoy the fog of uncertainty resulting from an absence of economic data, not least at a time when there is such a huge focus on the health of the labour market and implications for monetary policy. Thankfully the next Federal Reserve meeting is not until 29 October, plenty of time – in theory – for these issues to be resolved.
Source: Columbia Threadneedle Investments as at 3 October 2025.
