What happens when the U.S. Government shuts down?

Today marks the first U.S. government shutdown in nearly seven years, the result of lawmakers failing to reach a new spending agreement. While shutdowns often draw widespread media attention, their long-term impact on financial markets and the broader economy has historically been limited. The following analysis focuses on historical market behavior during prior government shutdowns.

When the federal government shuts down, programs funded by annual appropriations, also known as discretionary spending, are paused. Mandatory programs such as Social Security, Medicare, Medicaid, and interest payments on U.S. Treasury debt continue without interruption.

Defense is largely funded through discretionary spending and makes up nearly half of that category. While core national security operations persist, temporary disruptions may occur in adjacent activities. Based on prior events, approximately 40% of federal workers, roughly 900,000, could face furloughs during a lapse in funding. The remaining employees either qualify as exempt or may work without pay until appropriations are restored.

Markets generally respond more to broader macroeconomic conditions than to the shutdown itself. Over the first 30 days of the last five shutdowns, U.S. equity performance has varied. In the following two months, returns have typically turned positive as investor focus returns to fundamentals and economic indicators. International equity markets, by comparison, have shown consistent gains over similar periods, suggesting shutdowns are viewed as U.S.-specific disruptions, not global shocks. Moreover, none of the historical market moves in the wake of government shutdowns has been statistically significant.

Source: FactSet, as of 10/1/2025

In fixed income and currency markets, the 10-year Treasury yield and the U.S. dollar have often declined in the immediate aftermath of a shutdown. Over longer timeframes, the direction of movement is less predictable.

Source: FactSet, as of 10/1/2025

Beyond asset prices, shutdowns also suspend the release of key government data. These reporting delays introduce temporary inconsistencies, especially in labor statistics. Furloughed workers are often misclassified, leading to short-lived upticks in the unemployment rate of 0.1 to 0.2 percentage points. Initial jobless claims can also rise temporarily if federal employees file under standard programs, though they typically qualify for a separate system and receive back pay once operations resume.

In our view, government shutdowns introduce short-term noise but have not meaningfully disrupted the long-term economic or market outlook. While they may cause administrative friction, the historical record shows a return to fundamentals once normal operations resume, and importantly, we see no need to make portfolio adjustments tied to the temporary shutdown.

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