Shutdown Looms Amid Political Standoff
Without a last-minute agreement, parts of the U.S. government are expected to shut down on October 1. With government funding bills requiring 60 votes in the Senate, and Republicans holding just 53 seats, bipartisan support is essential to avoid a shutdown. However, a tense political environment and tight timeline have pushed the probability of a shutdown to 85%, according to betting markets.
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Shutdown Duration Historically Short
Historically, government shutdowns have been brief, with an average duration of 8 days and a median of 4 days. The lengthy 2019 shutdown is somewhat misleading, as only 25% of government operations were affected. While past episodes suggest shutdowns are short-lived, the current political standoff raises the risk of a longer-than-usual shutdown.
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ACA Tax Credits and Political Leverage
Senate Democrats are pushing to extend enhanced tax credits under the Affordable Care Act (ACA)—set to expire at year-end—in exchange for support on funding legislation. Meanwhile, the administration has floated the use of Reduction in Force (RIF) notices during a shutdown, aiming to reduce government size and apply pressure on Democrats. Both parties believe they hold negotiating leverage, potentially prolonging the standoff.
Limited Economic and Market Impact
Historical data shows that government shutdowns have not triggered economic recessions. In the two instances where GDP contracted during a shutdown, the economy had already been in recession prior. According to Goldman Sachs, each week of shutdown trims GDP growth by 0.15 percentage points, though this is often recouped once the government reopens, as federal employees receive retroactive pay.
Importantly, the One Big Beautiful Bill Act (OBBBA)—which offers tax incentives for capital investments and R&D—should help cushion any short-term economic drag.
Reduced Economic Visibility, But Markets Resilient
While the broader market impact is likely minimal, a shutdown would delay key government reports, such as the monthly payrolls report scheduled for Friday. However, private data, including the ADP employment report on Wednesday, will still be released as planned.
Equity markets are generally expected to weather the disruption, though companies with significant government contracts or exposure may face short-term earnings pressure.
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