US Government Shutdown: Economic & Market Implications

The US government officially shut down on 1 October after Congress failed to reach a funding deal. While political gridlock has created near-term uncertainty, history suggests shutdowns are usually temporary events with limited long-term impact on the economy or markets. 

What’s happened?

Lawmakers were unable to agree on funding terms before the deadline, with Republicans backing a continuing resolution through 21 November at current spending levels, while Democrats pushed for a shorter extension tied to making Affordable Care Act (ACA) subsidies permanent. With neither side giving ground, the government shut down. Both parties, however, face political costs if the standoff drags on, and history shows shutdowns are usually resolved before lasting damage occurs.

What does this mean for the US economy?

Around 1.6 million federal employees are affected, either furloughed or working without immediate pay. This reduces short-term spending, but employees are legally guaranteed back pay once government operations resume. Essential services — such as national security, air traffic control, and health care benefits like Medicare and Social Security — continue to function, ensuring day-to-day life for most Americans remains uninterrupted.

A useful rule of thumb is that each week of shutdown reduces GDP by ~0.1% to 0.2%. However, these impacts are typically reversed once operations restart, meaning the longer-term effect is usually negligible. The US economy has demonstrated remarkable resilience in recent years, and underlying fundamentals — from strong household balance sheets to solid corporate earnings — remain supportive.

How are markets reacting?

Markets initially responded with caution, but so far the reaction has been contained. Equity markets dipped slightly before stabilising, consistent with past episodes where shutdown concerns faded once investors looked through short-term noise. Treasuries have drawn safe-haven flows, while gold has firmed modestly, both signs of healthy market functioning rather than distress. Importantly, corporate fundamentals and global demand drivers remain far more influential than political headlines over medium-term horizons.

Could this affect the US Federal Reserve?

The Federal Reserve (Fed) remains fully funded and operational. While the temporary loss of government data complicates near-term analysis, the Fed has multiple alternative indicators to track economic conditions. Policymakers are likely to view the shutdown as a short-lived event, keeping their focus on broader trends in inflation, growth, and employment. Unless the disruption proves unusually prolonged, the Fed’s medium-term policy path should remain largely intact.

Our view

The US government shutdown has begun, but history shows these events leave little lasting damage. With strong incentives to resolve the standoff and a resilient economy, we see near-term noise rather than lasting consequence. We remain confident in markets’ ability to weather political turbulence and will stay alert to opportunities as they emerge.