Government shutdowns often high profile but typically low impact market events

Executive summary

A government shutdown is looming if Congress is unable to pass the appropriations bills that fund government operations before the start of the new fiscal year on October 1, 2025.

• We expect minimal economic impact, barring a prolonged shutdown.
• Government shutdowns tend to be high profile though low-impact market events. In the previous 20 shutdowns, there has been almost no change, on average, for the S&P 500, while it has been in positive territory 50% of the time during the shutdown period.
• U.S. Treasury yields have risen modestly on average during prior shutdowns and typically decline the week following a resolution.
• Previous credit rating downgrades by Moody's, S&P, and Fitch - partially in direct response to concerns around pervasive political gridlock - reduce the risk of a near-term downgrade in the event of a shutdown.

Our take & Q&As

What does a government shutdown mean for the economy?

Prior government shutdowns have had minimal lasting economic impact. Instead, it tends to mimic a hurricane or snowstorm, delaying most activity and quickly making up for it upon reopening.

Each week of a government shutdown shaves off roughly 0.2 percentage points from annualized gross domestic product (GDP) primarily from the loss of income for federal workers being furloughed. But those workers will be paid retroactively once the shutdown is resolved; thus, GDP should get boosted by a similar amount in the subsequent weeks and months.

Hourly federal contract workers, who generally don’t get retroactive pay for hours not worked, would permanently lose that income. There would be a similar permanent loss of income for private-sector workers dependent on federal workers, especially service providers. For instance, the restaurant server or hairdresser down the road would likely see reduced tips or bookings, which don’t get recovered (e.g., you don’t get your hair cut twice the next time).

A shutdown would also delay most economic data compiled by the government – everything from GDP and retail sales to housing and inflation data and unemployment figures – from being released. Essential government workers, including Transportation Security Administration (TSA) officers, will continue to work. Also note that the Federal Reserve (Fed) doesn’t shutdown as it is funded by industry fees, not the federal government.

How could stocks react to a shutdown?

Government shutdowns tend to inject volatility but typically don't have a lasting market impact.

• There have been 20 shutdowns since 1976.
• They have averaged 8 days, with the longest one being the most recent at 34 days.
• Stocks have been up 50% of the time during the actual shutdown period and have been flat on average over all periods.

How have bonds done during previous shutdowns?

On average, the 10-year yield has risen slightly during government shutdowns, but out of the 20 past shutdowns, 10-year yields were higher only 50% of the time.

After these previous shutdowns have ended, bond yields typically fall with an average 10-year decline of 0.06%. The most recent shutdowns saw yields move only by 0.05-0.10%, whereas in the 1970’s and 1980’s yields sometimes moved by increments greater than 0.50%.

The October 1st deadline to avoid a government shutdown is well-known by market participants. They also endured the longest closure in history less than 7 years ago. We would expect a relatively muted response in the yield curve, unless any shutdown dragged on for an extended period of time (i.e., weeks as opposed to hours or days).

Will this affect the credit rating of the U.S.?

Currently, the U.S. is rated Aa1 by Moody’s, AA+ by S&P, and AA+ by Fitch – all one notch below each credit rating agency’s highest measure of credit quality. All three credit rating agencies have assigned a stable credit rating outlook. Moody’s announced the most recent downgrade in May, citing similar concerns as the S&P and Fitch downgrades in 2011 and 2023, respectively, such as rising fiscal deficits, growing debt levels, and instability in domestic governance.

Government shutdowns tend to shine a bright light on D.C. gridlock and partisan fissures within Congress. However, the previous negative rating actions taken by each of the three major credit rating agencies – partially in direct response to political brinksmanship – make it less likely that a government shutdown would trigger an immediate credit rating downgrade this time. However, credit rating agencies would have the option to place their stable rating outlooks under review, particularly in the event any shutdown were to continue over a prolonged period. 

Are U.S. Treasury securities still safe?

Yes. A government shutdown does not impact the Treasury’s ability to issue new or pay existing bonds. The Treasury has ample funds available to service the national debt. Unlike during debt ceiling standoffs, U.S. Treasuries are not at risk of a delayed payment during a government shutdown.