What history tells us, plus the current market response.
The U.S. government closed this week after Democrats and Republicans failed to reach agreement on the spending bill. The primary sticking points are demands from the Democrats to extend the ACA premium tax credits that were expanded during COVID and will expire at the end of 2025. Additionally, they are demanding a reinstatement of the health care subsidies that were cut in the One Big Beautiful Bill Act.
This marks the first full shutdown since 2019, when the government closed shop due to President Trump’s demands for funding to build a wall on the southern border with Mexico. As a result, important data releases like today’s jobs number, CPI, GDP and others are being delayed.
Since the mid-1970s, the average government shutdown has lasted about 7.5 days, with some only lasting a few hours. In the past, the economic cost has been minimal, largely because they have tended to be short and furloughed employees were still paid, albeit after a delay. However, for shutdowns that last several weeks, the near-term economic impact can be more significant, although any lost output will often be recovered in the subsequent quarter. One estimate suggests a partial government shutdown reduces GDP growth by about 0.1% to 0.2% per week.
The impact on markets has generally been limited. On average, U.S. equity returns during shutdowns have been flat, although there have been instances in which equities performed notably better or worse. However, many other factors were at play, and attributing market moves to government shutdowns is difficult. The impact on the U.S. dollar and 10-year government bonds have historically been similarly muted. The market appears to be taking events in stride, in part because the debt ceiling is not part of the debate this time around, removing the threat of default.
As the public backlash grows, we expect one or both parties to look to reach an agreement. Some Washington insiders suggest it could be a while before that happens, as both parties appear to be drawing a firm line in the sand.
No two shutdowns are the same, and we believe a more protracted shutdown is a risk in the current political climate. We currently do not foresee any material changes to our economic outlook, but we could adjust our view if the administration follows through on threats to permanently terminate “hundreds of thousands” of government employees. For now, the Congressional Budget Office is estimating that 750,000 federal employees will be furloughed—historically, temporary government work stoppages like these have had only limited impacts on consumer confidence and spending.
For now, markets are pretty sanguine about the developments in Washington, again more focused on tech sector developments and the revival in the mergers, acquisitions and initial public offering (IPO) markets. We are pleased financial markets have endured and soared to these high levels and look forward to reviewing your portfolios and making plans for some good housekeeping and prudent rebalancing going into year-end. As the scouts like to say, be prepared.
Written by a human.