Government Shutdown: Continuing to be a Resolute Headache

Co-authored: Pate Campbell, Keren Luo

The U.S. government has officially entered a shutdown. The federal budget process typically begins with the President’s detailed budget request for the fiscal year starting October 1^st. However, without the passage of either a full year spending bill or a continuing resolution (CR) by Congress, the subsequent funding gap has required unfunded departments and agencies to shut down and cease all discretionary operations. On Monday (September 29^th), Democratic and Republican congressional leaders left a White House meeting with President Donald Trump showing little willingness to move from their entrenched positions in order to avoid a lapse in funding. As a result, preparations should be made for a potentially long and fraught full government shutdown.

What Does the Shutdown Entail?

Of the approximately $6.8 trillion the U.S. federal government spent in 2024, about 74% was non-discretionary, primarily allocated to programs like Social Security, Medicare and interest payments on outstanding debt. The remaining 26% represents discretionary spending on areas such as the military, the National Park Service, the Environmental Protection Agency, and the Food and Drug Administration. Discretionary spending levels in these categories must be determined for each fiscal year (October 1 – September 30) through Congress passing, and the President signing, 12 appropriations bills that cover various categories. If only a portion of these bills are passed, the government can partially shutdown; if none are passed, a full shutdown occurs, as is the case currently.

In lieu of the appropriation bills being passed, Congress and the President can enact a Continuing Resolution (CR) to temporarily fund the government, typically at the prior year’s spending levels. CRs are often used to give Congress additional time to pass appropriation bills or to fund the government for an extended period when agreements cannot be reached.  Currently, a CR is under consideration. The House passed a resolution in September that would fund the government through November 21, but the measure has stalled in the Senate. Opposition from Democrats is due to the bill’s failure to extend specific tax subsidies under the Affordable Care Act, reverse Medicare cuts enacted by the Big Beautiful Bill, and release funds previously allocated by Congress but withheld by the Executive Branch. Until this legislative gridlock is resolved, the end date of the shutdown will remain uncertain.

During a government shutdown, unfunded federal agencies and departments must cease all discretionary activities and furlough non-essential employees. Each agency submits a plan to the Office of Management and Budget (OMB), highlighting which services will be shut down, which are essential, and the expected number of furloughed workers. Agencies may adjust these plans as time passes, but most federal employees (furloughed or not) do not receive pay for the duration of the shutdown. Once the shutdown ends, all affected employees are entitled to back pay.

A recent memo issued by the OMB has the potential to circumvent this process by allowing agencies to terminate employees who would otherwise be subject to furlough. However, unless their hands are forced, agencies may avoid this option, as many are already operating on a shoestring due to earlier budget cuts.

The CBO estimates that approximately 750k employees – about 26% of the federal workforce – could be furloughed during the 2025 government shutdown.[1] Historically, the peak furloughs during the 1995-1996 and 2013 shutdowns, reached roughly 800K and 850K employees, respectively. Furloughs do not have to be an all or nothing approach – as appropriation bills are passed, workers can be called back. For example, during the 2013 shutdown, many of the 350K furloughed Defense Department employees returned back to work within a week. However, given that none of the 12 appropriations bills have been passed thus far, another continuing resolution appears to be the most likely end to the current shutdown.

Shutdown	Nature	Length (Days)	Furloughed Employees	Solution
Oct. 1990	Full*	3	2,984	Continuing Resolution
Nov. 1995	Partial	5	800,000	Continuing Resolution
Dec. 1995	Partial	21	284,000	Continuing Resolution
Sept. 2013	Full	16	850,000	Continuing Resolution
Jan. 2018	Full	2	692,900	Continuing Resolution
Dec. 2018	Partial	34	380,000	Continuing Resolution

*While none of the appropriation bills were passed not all agencies completely shutdown.

Sources: Government Accountability Office: ‘Data on Effects of 1990 Columbus Day Weekend Funding Lapse’, Congressional Research Service: ‘Shutdown of the Federal Government: Causes, Processes, and Effects’, Congressional Research Service: ‘Federal Funding Gaps: A Brief Overview’, New York Times: ‘What Will Happen if the Government Remains Shutdown’, Committee for a Responsible Federal Budget: Government Shutdowns Q&A: Everything you Should Know

Economic Impacts

How significant is the economic impact of a government shutdown? Likely small. During a shutdown, essential services, such as the military and the processing of interest and principal on government debt, are maintained. This makes a shutdown’s importance relative to an event like the debt-ceiling, with which it is often mistakenly conflated.

Sell-side and policy analysis suggest that each week of a shutdown reduces annualized real GDP by 0.1 percentage points. The Fed’s internal estimate[MP1]  from 2013 put that number at 0.2 percentage points. Once the shutdown ends, much of this effect is reversed, as agencies reopen and furloughed employees spend their back pay to make up for lost consumption, helping GDP return to its trend through “catch-up” consumption.

The 2018 shutdown provides a useful illustration of this effect. Though it was only a partial shutdown, it was also the longest on record by some distance. As the chart below illustrates, the shutdown resulted in a steep decline in non-defense discretionary spending during Q4’18. However, the pass-through to broader economic activity was relatively minimal for two reasons:

1. Non-defense discretionary spending accounted for only about 3% of GDP.
2. Non-defense spending rapidly recovered following the end of the shutdown – resulting in GDP quickly returning to trend by the end of Q1’19.

Figure 1: JP Morgan Investment Research: “US: The economic data vs. a government shutdown”, BEA

Key takeaway: Because the reduction in government spending during a shutdown tends to be both small and temporary, it is unlikely to have a material impact on overall economic growth.

So, what can we expect? A multi-week shutdown could temporarily distort the timing of GDP within a quarter but may not produce a large net decline in Q4 growth. If the shutdown is shorter, the effect is likely negligible and quickly reversed as back pay and deferred spending re-enter the economy. Even a six week shutdown, making it the longest on record, would leave time for catch-up spending once government operations resume, potentially offsetting much of the headline drag on growth.

In the event of a prolonged government shutdown, the economic outlook becomes a little murkier. It’s possible that a multiple month shutdown could weaken business and consumer confidence, particularly if government agencies opted to terminate employees. Consumption spending could be negatively impacted due to permanent income losses, while business investment and capex spending could slow marginally if government contracts lapse or allow for activities, like construction, to ground to a halt. If this occurs, the impact on economic growth could be greater than that of prior shutdowns.

Beyond the growth arithmetic, a government shutdown also threatens to disrupt the flow of economic data: a shutdown starting October 1 would likely delay key releases from the BLS, Census Bureau, and BEA. Per the BLS’[KL2] s published contingency plan, the agency will “suspend all operations” during a funding lapse, meaning no economic data would be released, all active survey data collection would halt, and the BLS website would not be updated. Two near-term releases are at risk: the October 3^rd monthly nonfarm payrolls, arriving as job growth has already been substantially weakening, and the October 15^th CPI, the last inflation reading before the Oct.28-29 FOMC meeting. The 2013 precedent is instructive: BLS pushed the September jobs report to October 22^nd and the September CPI to October 30^th, and the October CPI sample size fell to about 75% of normal. While more CPI components are collected digitally today, similar timing risks remain in play.

An extended shutdown would present a critical challenge for the Federal Reserve as it prepares for its October FOMC meeting. With the labor market showing signs of cooling and inflation pressures proving persistent, policymakers are already navigating a delicate balancing act. But without timely, high-quality economic data, the risk of a policy misstep rises: the Fed could maintain overly restrictive policy amid a weakening labor market or ease prematurely in the face of sticky inflation. While alternative and private-sector data can partially fill gaps, they lack the same precision or coverage as official government releases. A shorter shutdown may have limited economic impact, as much of the September jobs and CPI data are already collected and could be released soon after reopening. However, a multi-week shutdown would impede future survey collection and degrade data quality, complicating the Fed’s decision-making and increasing the likelihood of a policy error. In short, the Committee’s next move remains uncertain. The longer the shutdown continues, the greater the fog around the economic outlook, and the more cautious markets and policymakers must be when interpreting the limited available data.

Credit Markets

The impact of a government shutdown on fixed income markets is inherently uncertain, though such events generally create a “risk-off” event. Somewhat perversely, this often means that Treasury demand holds up – even though the issue originates with government funding, since debt servicing and market operations continue even during a shutdown. Past shutdowns offer evidence of this pattern: during the 2013 and 2018 shutdowns, interest rate movements were muted or driven more by broader macroeconomic data than by the shutdown itself.

Figure 2: JP Morgan Investment Research: “US Treasury Market Daily: What would a potential government shutdown mean for Treasury markets?”

The impact of a government shutdown on corporate credit is less clear. During the 2013 and 2018 shutdowns, credit spreads initially widened but later retreated to levels below their starting point. The exact rationale for this movement in spreads is difficult to pinpoint. Investors may assign a temporary risk premium to credit at the initial stages of a shutdown, only to quickly reverse course when a resolution appears imminent. Alternatively, the impact of a shutdown could be outweighed by other factors. The bigger near-term impact tends to be on new issue activity. With the SEC[KL3]  operating at reduced capacity, staff reviews of registration statements are paused, delaying IPOs and registered bond deals while pushing more issuance into Rule 144A or private channels.

Figure 3: Bloomberg US Corporate Investment Grade Index – OAS Levels

Finally, it is unlikely that a government shutdown would trigger any ratings action on U.S. government debt. Moody’s has previously described a shutdown as a “credit negative” event for the U.S. government, but gave no indication that it would downgrade the country’s Aa1 debt rating if it occurred. Similarly, neither S&P nor Fitch has signaled any intention to issue a downgrade in response to a shutdown.  

Conclusion

The bottom line: The economic impact of a government shutdown depends overwhelmingly on how long it lasts. Historical patterns suggest that most shutdowns are short-lived with no discernible macroeconomic effects. However, this episode carries distinctive risks that warrant closer attention. The lack of progress in negotiations, deepening partisan polarization, and the potential for mass terminations give this shutdown a different character than previous iterations. Even so, we believe the situation remains less severe than the debt ceiling fights. At this time, investors should remain attentive but not overreact to this shutdown.

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[1] The total federal workforce is 2.918 million as of August 2025 according to FRED.