A government shutdown could begin early on December 21, though discussions continue on a potential resolution. Forecasting site Kalshi currently estimates the chance of a shutdown at 40%, with the precise measure used being that the government is shutdown at 10am ET on any given day. Government shutdown risk last surfaced in September 2024, but a shutdown was narrowly averted.
A short government shutdown is unlikely to have major economic impact, aside from the considerably uncertainty that results. However, were any shutdown to lengthen beyond a few days, then the economic impact would likely become more significant.
Typical Shutdown Length
Historically most shutdowns have lasted just a handful of days, though in recent years shutdowns have lengthened, according to analysis by Axios. That includes a 35 day partial government shutdown in 2018, the longest in history, though some government departments were fully funded during that shutdown making it a partial rather than full shutdown. If, as is historically typical, a shutdown lasts just a few days, the economic impact is unlikely to be material.
What’s Not Impacted By A Shutdown
A government shutdown is no longer as extreme as it sounds because many measures are now in place to reduce the impact of any shutdown. For example, Social Security, Medicare, Medicaid, the military and the U.S. Postal Service would all continue to function largely as normal. Given this is a potential federal shutdown, the activities of state and local government would also generally not be impacted.
Essential functions of government are preserved during any shutdown and some government budgets are outside of the annual budgetary cycle too, and hence not impacted. The is some discretion as to what is an essential function of government, which can cause some variation in what is funded between different shutdowns. Also, government employees are guaranteed back pay after any shutdown ends. However, delays to paychecks for federal workers are likely for the length of any shutdown.
What Would Be Impacted By A Shutdown
A shutdown does impact many non-essential functions of government. That typically means National Parks can be closed or not maintained, NASA would cease anything but core functions, economic reporting would stop. In addition, federal loan approvals for housing and small businesses would typically be delayed. Lack of pay for TSA employees could increase screening lines at airports, though air traffic control would remain fully functional.
More generally, the defense and health industries that often rely on government partnership and approvals for many activities would see impact as any shutdown progresses as non-essential programs are temporarily closed and payments are potentially delayed. The essential functions of the active military and other defense agencies are preserved.
What Would See More Impact As A Shutdown Lengthens
Federal employees would see delayed paychecks during a shutdown. This could have a significant impact during the holiday period when household budgets are stretched.
However, backpay is guaranteed by legislation once any shutdown ends. Federal contractors have no such guarantee. They could lose pay during a shutdown period. Whether or not federal employees are required to work during a shutdown depends on their role, essential worked may be required to work, but other workers are furloughed, which means they do not have to work, but typically do then receive backpay.
Programs such as Supplemental Nutrition Assistance Program (SNAP) would likely have funds on hand to maintain payouts during a shorter shutdown. However, for a longer shutdown payments may be delayed once funds are exhausted.
The Overall Shutdown Impact
As discussions continue on measures to avert a government shutdown, it is a reasonable bet, based on history, that any shutdown is short. While any shutdown is in place uncertainty will mount and that could impact the markets with perhaps larger impacts for those companies that partner more closely with government such as health and defense firms.
The general lack of economic reporting from the government during a shutdown can add to uncertainty for markets too. Overall, though the impact of a shutdown does depend largely on its length and only if a shutdown lasts more than a few days could it have a lasting economic impact.
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