How A U.S. Government Shutdown Could Affect The Economy

With Republicans and Democrats at an impasse over funding the federal government, a partial shutdown this week looks more likely than not.

On Monday, President Donald Trump was set to meet with lawmakers from both parties to negotiate an agreement to keep the government running, according to reports from several outlets, but expectations for success were low. Gamblers were recently pricing in 72% odds of a shutdown on Oct. 1, according to betting website Polymarket.

Lawmakers in the Senate are in a showdown over healthcare funding. Last week, Republicans and Democrats shot down one another’s funding proposals in the Senate, with Democrats demanding a rollback of Republican cuts to Medicaid, and the extension of a Biden-era tax credit that reduces premiums on Obamacare plans by hundreds or thousands of dollars a month. Republicans need at least several Democrat votes to keep the government open since Democrats, while in the minority, can block legislation using the Senate’s filibuster rule.

Should the negotiations fail, many government functions would cease at 12:01 a.m ET Wednesday though some, including the military and Social Security, would continue to operate. The impact on the economy and financial markets could be significant, especially if it drags on for weeks or more, economists said. Here’s what experts say could happen to the economy during a shutdown:

Hundreds of Thousands of Workers Laid Off

The federal government could lay off hundreds of thousands of workers, at least temporarily. Based on past shutdowns, economists at Goldman Sachs estimated 900,000 people will be sent home, but will be given back pay when the shutdown ends and they return to work. That’s what happened during the most recent shutdown, which took place in Trump’s first term in 2019. That also happened to be the longest shutdown in history, lasting 35 days.

However, this shutdown could go differently. Trump’s administration has threatened to permanently fire laid-off workers instead of just furloughing them like in past shutdowns, expanding the deep staff cuts at federal agencies begun earlier this year, according to a White House memo first reported by Politico.

“The administration has some flexibility in determining how to operate during a shutdown and could differ from the approach prior administrations have taken,” Alec Phillips and Ronnie Walker of Goldman Sachs wrote in a commentary.

Economic Growth Would Slow, But Not By Much

The layoffs as well as the suspension of government services would cause a hit to the economy, though it would not likely be very large at first, according to several forecasters.

“The economic impact of a shutdown would likely be modest,” analysts at Nomura, led by chief developed markets economist David Seif, wrote in a commentary.

The shutdown would drag down economic growth by 0.1 to 0.2 percentage point each week it goes on, they estimated.

The unemployment rate would also temporarily rise for the month of October, as furloughed workers will be counted as jobless in official surveys.

The shutdown is taking place against the backdrop of an economy that’s already showing red flags in several important areas, with the job market deteriorating in recent months and inflation accelerating because of tariffs. If past experience is any guide, the shutdown could further demoralize consumers, whose outlook about the economy was already sinking.

“It’s important to understand the U.S. economy is already on a knife’s edge—the labor market has softened and inflation has risen,” Michael Linden, Senior Policy Fellow at the Washington Center for Equitable Growth, a progressive think tank. “Adding a government shutdown to the mix certainly won’t help, and  in fact has the potential to slow economic growth. By how much, we don’t know, but it’s certainly not worth the risk.”

Important Reports Delayed

The shutdown could also temporarily leave investors and policymakers in the dark about the state of the economy: in the past, shutdowns have delayed the release of important economic reports, and that could easily happen again. Financial markets and officials at the Federal Reserve are eying a crucial report on the job market due Friday, but that report and others later in the month could be delayed if the shutdown drags on.

“Nearly all federal data releases would be postponed until after the shutdown ends and subsequent data releases could be delayed if data collection is affected,” Phillips and Walker wrote.