What the Federal Shutdown Means for the Economy and Markets

Q&A with GW&K’s Global Strategist, William P. Sterling, PhD

We are now four weeks into a United States government shutdown that began on October 1, 2025, driven largely by a standoff over whether to extend Affordable Care Act (ACA) premium tax credits as part of any funding bill (Democrats’ demand) versus passing a “clean” stopgap first (Republicans’ position).

Q: What exactly is a government shutdown? How is it different from a debt ceiling crisis? 

A: A shutdown occurs when Congress doesn’t pass appropriations or a continuing resolution, forcing many agencies to halt “non essential” operations. It is about spending authority, not the legal ability to borrow. A debt ceiling impasse risks missed Treasury payments; a shutdown does not, though it disrupts services and pay until funding resumes.

Q: How much economic growth does each week of shutdown typically shave off — and how much is usually made back?

A: Recent estimates put the hit near 0.1% – 0.2% (annualized) off quarterly gross domestic product (GDP) per week, with much recovered once back pay and delayed outlays flow. The Council of Economic Advisers cites Goldman Sachs at about 0.2 percentage points per week (about $15 billion of weekly GDP at today’s scale). In 2018 – 2019, the Congressional Budget Office found most lost output came back, but roughly $3 billion was permanently forgone.

Q: If the shutdown lasts longer, why can the damage rise faster than “one week = one week of impact”?

A: Costs often accelerate as missed paychecks curb spending, contractors face cash flow stress, and more activities exhaust contingency funds. Analysts flag nonlinear effects as disruptions accumulate, making a drawn out lapse disproportionately more costly than a short one.

Q: Who feels it first in the real economy?

A: Federal workers and contractors are the front line. After that: permit and loan pipelines (US Small Business Administration lending, some mortgage verifications), air travel if absenteeism rises among unpaid Transportation Security Administration and air traffic controller staff, and nutrition and social programs as contingency funds dwindle. States can also face cash and administrative strains where federal pass throughs slow.

Q: What is the “data blackout,” and why does it matter?

A: Statistical agencies such as the Bureau of Labor Statistics and the Bureau of Economic Analysis have suspended most releases, delaying jobs, inflation, GDP and other reports that investors and the US Federal Reserve use to navigate the cycle. Less official data means wider forecast bands and potentially choppier market reactions to private proxies.

Q: How have markets typically behaved during shutdowns?

A: History says markets generally look through shutdowns. Equities tend to tread water as shutdowns approach and then resume climbing as funding returns and growth resumes, on average posting solid double-digit gains over the following year (Figure 1). On the fixed income side, US Treasuries have tended to perform well in the weeks leading up to shutdowns as well as in their aftermath (Figure 2).

Q: What could make this time different for markets?

A: There are two things to watch: 1) Length — if this break extends, confidence effects and earnings knock-ons can grow; and 2) Visibility — with key releases on ice, rate cut expectations and risk sentiment may whipsaw more than usual. Those factors raise the odds of higher volatility if the stalemate drags on.

Q: How long might it last? Are there market based clues?

A: Prediction markets have leaned toward a record length shutdown. Recent pricing on prediction market companies Kalshi and Polymarket clustered around 40 – 45 days, pointing to a mid November resolution (Figure 3). While this only illustrates real time sentiment, not certainties, they help frame risk windows for planning.

Q: What signs should be monitored regarding the shutdown duration and an off ramp?

A: Substantive leader to leader talks, or staff level bill text is the best tell. Also watch for movement around the ACA credits (a time limited extension or paired reforms could unlock a deal) and for procedural votes on a short-term continuing resolution to buy time. Headlines about party lunches without negotiation are less informative than concrete vote counting.

Q: What, if anything, should investors change in their portfolios now?

A: For most diversified investors, a shutdown is a transitory policy shock. History supports staying disciplined. Some best practices:

• Revisit but don’t abandon financial plans;
• Use volatility to rebalance toward targets;
• Ensure an adequate cash/income buffer;
• Consider high-quality duration as a ballast if growth wobbles; and
• Avoid large tactical shifts based soley on political headlines.

Bottom line: A short shutdown dents Q4 growth but is usually made up quickly after reopening; the risks rise nonlinearly if it lingers. Markets tend to look through brief lapses, but a protracted fight plus a data blackout argues for prudence and diversification.