A looming government shutdown could introduce additional strain on an already fragile U.S. economy, though analysts suggest its broader impact may be limited even if the closure extends for weeks. With Congress deadlocked over the renewal of health insurance subsidies, federal operations could halt by Wednesday unless lawmakers reach an agreement. n nIn past shutdowns, hundreds of thousands of nonessential federal employees were placed on unpaid furloughs, while essential personnel continued working without immediate compensation. Services affected typically include national park closures, delayed veterans’ benefits, reduced food safety inspections, and longer wait times for Social Security inquiries. n nHistorically, the economic consequences of such shutdowns have been modest and temporary. Wall Street estimates and Congressional Budget Office analyses indicate that even the longest shutdown—35 days between 2018 and 2019—reduced total economic output by no more than 0.4%. The extent of disruption depends largely on the number of workers affected. During the 2013 shutdown, 40% of civilian federal employees were furloughed, which slowed GDP growth by approximately 0.15% per week. A similar scale today could yield comparable effects. n nThis potential shutdown occurs during a period of economic vulnerability. Inflation has risen steadily since April, and labor market indicators are weakening rapidly. In early September, the Bureau of Labor Statistics revised job creation figures downward by 911,000 for prior months. The August jobs report showed only 22,000 new positions added, with June’s growth revised into negative territory. n nA shutdown would delay the release of the next employment report, scheduled for Friday, complicating the Federal Reserve’s upcoming interest rate decision. Fed Chair Jerome Powell recently stated that “there is no risk-free path,” citing persistent uncertainty around inflation. The central bank cut rates earlier this year but now faces the dual challenge of managing price increases and a softening job market. Traditionally, rate hikes curb inflation while cuts stimulate hiring, but the current environment makes policy choices particularly complex. n nFinancial markets have historically shown resilience during government closures. Truist Wealth found minimal average movement in the S&P 500 across the 20 shutdowns since 1976. In fact, the index has risen about 12% on average in the 12 months following such events, according to Jacob Falkencrone of Saxo Bank. The 2018–2019 shutdown saw the S&P 500 gain over 10%, though it followed a market sell-off driven by unrelated factors like corporate earnings concerns and prior rate hikes. n nAs of now, the S&P 500 is up more than 13% year-to-date, the Nasdaq Composite has gained 17%, and the Dow Jones Industrial Average has risen nearly 9%. n nThe Dollar Index, which measures the U.S. dollar against major currencies, typically sees minor fluctuations during shutdowns but no sustained shifts. U.S. Treasury bonds may experience short-term demand as investors seek safe-haven assets, though long-term impacts are usually negligible. This year, the Dollar Index has declined nearly 10%, largely due to uncertainty surrounding the administration’s trade and tariff policies. n nAlthough a shutdown prevents government spending, it does not restrict debt issuance, especially after recent legislation raised the debt ceiling. JPMorgan Chase analysts believe this reduces the likelihood of a credit rating downgrade. However, major rating agencies—including Moody’s, which downgraded U.S. credit in May—have repeatedly warned about growing fiscal risks. They acknowledge the strength and diversity of the U.S. economy and the Federal Reserve’s independent monetary policy, even as political gridlock tests institutional stability. n— news from NBC News
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What would a government shutdown mean for markets and the economy?
A government shutdown could add another headwind to an already-precarious economy, but most analysts say that even a prolonged hiatus would have only a limited impact on the wider U.S. economy. n nWith Republican and Democratic leadership at an impasse over the extension of health insurance subsidies, the U.S. government could temporarily cease operations at 12:01 a.m. Wednesday unless a deal is struck. n nGovernment shutdowns put hundreds of thousands of “nonessential” federal workers on furlough, meaning they are forced to take a leave of absence without pay, while other “essential” workers will be required to show up to work without getting paid either. Often, such shutdowns lead to the closure of national parks and museums, fewer health inspections, slower services for veterans, longer wait times on Social Security phone lines and more. n nWhile the government plays a big part in the economy, history shows that the lasting effects of shutdowns are limited. n nEconomic growth can be dented, but slightly and temporarily, with an array of estimates from Wall Street as well as the Congressional Budget Office finding that even the longest shutdown ever — 35 days in 2018 and 2019 — shaved only as much as 0.4% from total economic output. n nThe full impact will likely depend on how many workers are furloughed or fired. In the 2013 government shutdown, 40% of all civilian employees were furloughed. If a similar number of workers are furloughed during this shutdown, U.S. economic growth could be slowed by about 0.15% per week. n nIn a break from previous shutdowns, the president and his administration have threatened not just furloughs, but permanent job cuts in the event the government comes to a halt. n nThis shutdown comes at a particularly perilous time for the U.S. economy. Inflation has been rising every month since April, and the labor market is weakening at what appears to be a rapid pace. n nIn early September, the Bureau of Labor Statistics said the U.S. economy created 911,000 fewer jobs than previously thought. That came on the heels of a jobs report days earlier that showed the economy added just 22,000 jobs in August. n nThe most recent jobs report also revised June’s job growth into negative territory. n nA government shutdown would delay the next jobs report, due to be released Friday. It’s unclear how soon it would be released after the government reopens. n nThat could make the Fed’s next rate decision in October more difficult. “There is no risk-free path,” Fed Chair Jerome Powell said a week ago. “Uncertainty around the path of inflation remains high.” n nThe central bank recently cut rates for the first time this year, but now has to carefully balance inflation and a weakening labor market. Normally, a central bank would hike rates to slow inflation and cut rates to spur job creation. n nIt’s a “challenging situation,” Powell said. n nMarkets tend to fare reasonably well during government shutdowns. n nTruist Wealth, a financial advisory company, found that there was little change on average to the S&P 500 across the 20 government shutdowns that have occurred since 1976. n nIn the long run, a shutdown can have even less impact on the markets. “On average, the S&P 500 has risen about 12% in the 12 months following shutdowns,” Saxo Bank’s global head of investment strategy, Jacob Falkencrone, wrote Tuesday. n nThe last major shutdown in 2018-2019 is the outlier. The S&P 500 posted a more than 10% rise during that shutdown, but there was a major sell-off ahead of that impasse due to other factors, such as fears about declining corporate earnings and the Fed raising rates. n nHeading into a likely shutdown this week, the S&P 500 is up more than 13% year-to-date. The Nasdaq Composite is up 17%, and the Dow Jones Industrial Average is up nearly 9%. n nThe Dollar Index (the value of the dollar vs. a basket of foreign currencies including the pound sterling, euro and yen) often wobbles but doesn’t usually move decisively on a shutdown, according to analysts. U.S. Treasury bonds sometimes rally on a pickup in demand for “safe haven” assets but typically are largely unaffected by a government closure in the long run. n nThis year, the Dollar Index is down nearly 10%, due in large part from uncertainty about the president’s sweeping tariff and trade agenda. n nA government shutdown could also lead to questions about the U.S. credit rating. n nBut “a government shutdown means the government can issue debt but not spend it. The [One Big Beautiful Bill Act] raised the debt ceiling so, most likely, a credit downgrade is off the table,” according to JPMorgan Chase analysts. n nHowever, the three major rating agencies have warned repeatedly about rising fiscal and budget risks, including in May, when Moody’s downgraded the U.S. credit rating. n nAll three have continued to underscore that they believe the strength and diversity of the U.S. economy, paired with independent and effective monetary policy at the Fed, will likely persist even as some “institutional arrangements can be tested at times,” as Moody’s put it.