The U.S. government could partially shutdown on October 1. That’s according to prediction markets Kalshi and Polymarket. Both project a 2 in 3 chance of a shutdown. However, the economic impact of a potential shutdown, might be milder than it first appears. That’s because many essential government functions, including Social Security, Medicaid and the U.S. Postal Service are not impacted by a shutdown. In recent years lawmakers have passed legislation that minimizes disruption from a government shutdown to some extent. That including guaranteeing backpay for government employees once the government reopens.
A Shutdown’s Impact
Still, a protracted partial government shutdown can delay paychecks for government employees, who are typically furloughed depending on their role. Shutdowns can cause more significant disruption to government contractors. The defense and healthcare sectors are relatively exposed to this to the extent they receive government funding and require government approvals.
Many other non-essential functions of government are hit as a shutdown lengthens, this can include disruptions to certain food assistance programs, airport security, national parks and delay government loans to small businesses and for housing among other functions. What remains open during a shutdown is determined by the Office of Management and Budget, so can vary.
Government shutdowns have historically been short according to analysis by Axios. That’s in part, because of the disruption can increase significantly for longer shutdowns. The longest U.S. government partial shutdown at 35 days was under President Trump’s last administration from December 2018 to January 2019 in part over funding for a border wall.
Economic Implications
Short government shutdown of just a few hours or days is relatively common and the economic impact, historically speaking, has been mild. That’s because government employees may see no delay to their paychecks depending on the specific payroll cycle.
However, as any shutdowns lengthen the economic impact can become more significant. A delayed paycheck can disrupt household spending. Delays for contractors, who are not necessarily guaranteed any backpay, has the potential to impact businesses that work closely with government. Delays to housing and small business loans can also impact those sectors of the economy. Furthermore, statistical reporting from the government can be delayed or skipped, this can include economic releases that are relevant to financial markets such as inflation and unemployment reporting.
What To Expect
Typically, government shutdowns, when they occur, are sufficiently short to have limited economic and stock market impact. However, any government shutdown runs the risk of becoming more drawn out. A shutdown of a week of more does have the potential to become a material drag on economic growth and cause broader uncertainty and disruption.
Therefore, the relevant metric to track may be not whether a government shutdown occurs, but how long it lasts. Currently Kalshi estimates the length of a shutdown at 5 days and the estimated length is increasing. Should that length continue to increase, the associated economic risks could rise too. Still at this point there is also a chance that final negotiations cause a shutdown to be avoided entirely.