As the U.S. fiscal year began on Oct. 1, the government entered its first shutdown in more than six years as Congress failed to reach a short-term deal to pass a bill that would fund the activities and services of federal agencies.
While negotiations continue between congressional leaders, thousands of government employees face furloughs, and non-essential public services are temporarily suspended. Americans may eventually experience the familiar disruptions associated with previous shutdowns, including delays at airports, closures of national parks and longer wait times for passport processing.
For investors, the central concern is the shutdown’s impact on financial markets and broader economic activity. The extent of that impact largely depends on the duration of the shutdown. Each week of a government shutdown could reduce gross domestic product (GDP) by approximately 0.1%, according to Morgan Stanley Research economists. However, once Congress reaches an agreement and federal employees return to work, the money that was withheld is typically put back into the economy, helping offset the initial drag.
Permanent Job Cuts Could Be Wild Card
Historically, shutdowns have ranged from just a few hours to several weeks. The longest one occurred during President Donald Trump’s first term, when the government was shut for 35 days from Dec. 2018 to Jan. 2019. That impasse ended after unpaid air traffic controllers at New York’s LaGuardia Airport stopped reporting to work, prompting a breakthrough in negotiations.
“The average shutdown lasts only a few days, and the net market effects tend to be muted,” says Michael Zezas, Morgan Stanley's Global Head of Fixed Income Research and Public Policy Strategy. “This time around, however, there could be a wrinkle as the Trump administration is talking about permanently laying off employees during the shutdown.”
The White House’s Office of Management and Budget (OMB) issued a directive in September instructing federal agencies to use the shutdown as an opportunity to consider permanent job cuts in certain areas. This marks a departure from past practice, when furloughed employees typically returned to work once the shutdown ended.
“Those layoffs might not be all that consequential at the end of the day, because they might end up being temporary, and courts might intervene,” Zezas says. “But the new OMB directive is a bit of a wild card, relative to recent history.”
Delay in Economic Releases
Another consequence of the shutdown is heightened economic uncertainty, particularly as investors await key data ahead of the Federal Reserve’s next interest rate decision in late October. Agencies such as the Bureau of Labor Statistics are likely to suspend collection and release of critical economic data, such as employment and inflation.
“We could see Treasury yields fall and equity markets wobble,” Zezas says. “Those effects could be temporary, but that volatility could easily be amplified by having to price in the risk of not getting economic data.”