BLOG — Oct. 14, 2025
Economic Risks of a Prolonged US Government Shutdown
By John Raines and Michael Zdinak, Ph.D.
Key Takeaways
- The direct effect on fourth-quarter real GDP growth of a two-week shutdown beginning Oct. 1 would be 0.3 percentage point, reflected in GDP produced by the government sector.
- For a brief shutdown, the effects on private production and financial markets would likely be modest. Likewise, the risk to households not directly affected is small, in part because there is no risk to Social Security or Medicare benefits.
- A protracted shutdown, however, raises the risk of disrupting private production and financial markets. If the suspension of government data collection and publication continues, policymakers at the Federal Reserve may be forced to make decisions without access to the latest data on employment, inflation, and economic growth.
How long is the US government shutdown likely to last?
The US government has entered a partial shutdown. The funding lapse formally began at 12:01 a.m. on Wednesday, Oct. 1, and, according to estimates from the Congressional Budget Office, could result in the furlough of 750,000 federal workers.
While the dispute remains centered on expiring subsidies for the Affordable Care Act (ACA) insurance premiums, the immediate consequences are a halt in government operations and a delay in the compensation of federal employees.
In September, we held a baseline view that the current shutdown would last roughly two weeks, based on past shutdowns and the political divide between the parties over policy. This would result in a resolution by mid-October, or just days after Congress reconvenes after a planned recess (Oct. 14).
Factors suggesting that a shutdown would end quickly included growing public frustration, the threat of mass layoffs of public workers by the Trump administration, and several moderate Democrats and Republicans openly advocating for compromise. Reported higher rates of absenteeism by air traffic controllers, leading to increased travel delays at airports, have also applied pressure on congressional leaders to reach a compromise.
Recent developments suggest higher downside risks, most notably because no negotiations are currently ongoing, and because both parties are beginning to view this as a test of strength in preparation for both the upcoming off-year and 2026 midterm elections.
Still, we anticipate the shutdown will not persist beyond early November, with the most likely scenario being that Republicans agree to some form of subsidy extension into 2026 or beyond. Starting Oct. 15, active-duty military personnel will miss their first paycheck. President Donald Trump has offered mixed signals regarding his preference toward negotiations, at times suggesting he is open to talks, while at other times taking a much tougher approach. This suggests that the White House may be open to extending the subsidies.
How might the shutdown impact the US economy?
In the National Accounts, the direct impact of a shutdown arises because compensation of federal employees is treated as GDP produced by the federal government. The distinction between real and nominal compensation is important. Nominal compensation reflects pay accruing to workers, while real compensation is based on hours worked.
In past shutdowns, federal workers were eventually paid for their time not at work. Therefore, there was no impact on nominal GDP produced by the government. However, because furloughed employees were not working, there is a recorded decline in real GDP produced, corresponding to a temporary increase in the price index for government services. Intuitively, when government workers are paid not to work, less output is produced at the same cost, raising the price.
Following the shutdown, real compensation returns to its previous level, temporarily boosting GDP growth by roughly the same amount that the decline reduced it. Another implication is that the effect of furloughing workers on GDP growth during a given quarter does not depend on when the shutdown occurs during the quarter. This may not be the case for other kinds of federal spending, which are delayed by a shutdown.
If that delay is intra-quarter, there is no impact on the quarterly growth rate of such spending. There is simply a temporal reallocation of spending within the quarter. If the delay is inter-quarter, there is an effect. Since the current shutdown began at the start of the quarter, inter-quarter considerations would become important only if the shutdown proved to be exceedingly long.
The indirect impact of the shutdown is reflected in the Bureau of Economic Analysis’ (BEA’s) source data and is not directly observed. For example, workers whose pay is delayed may delay spending, temporarily reducing personal consumption expenditures (PCE).
Other private commerce and spending might be disrupted by delays in the issuance of licenses and permits, delays in court proceedings, or the closure of public parks and monuments. So far, we judge these costs to be negligible. For a brief shutdown, such costs would arise early in the fourth quarter and would likely be made up without much impact on GDP growth. Of course, if the shutdown drags on, such disruptions and their associated costs would increase.
How is this shutdown different from previous shutdowns?
During the last government shutdown, Dec. 22, 2018, through Jan. 25, 2019, the Bureau of Labor Statistics (BLS) was fully funded and continued to operate as usual. Data collection for the household and establishment surveys occurred as scheduled, and reports on employment and the consumer price index were published on time.
Currently, the BLS has suspended all operations, and the Department of Labor’s contingency plan lists the commissioner as the only employee not subject to furlough. During the lapse, the scheduled release of economic data will not occur, and all active data collection activities have reportedly ceased. Already, the Employment Situation for September, scheduled to be published on Oct. 3, has been delayed, and it remains to be seen if the shutdown will be resolved before the consumer price report is due to be published on Oct. 15.
If the shutdown extends for another three weeks, the Federal Open Market Committee (FOMC) will have to decide whether to adjust the policy rate without the latest data on employment or inflation. Should that come to pass, policymakers will also likely not have access to the advanced estimate of third-quarter GDP from the BEA.
Even after the government reopens, the release of key economic data may be delayed if the shutdown drags on long enough. For example, the delayed release of the October consumer price report could delay the announcement of the cost-of-living adjustment from the Social Security Administration.
Recent media reports suggest the BLS may be planning to recall the staff required to prepare the September inflation report. The Social Security Administration’s cost-of-living adjustment (COLA) for 2026 will be determined by comparing the four-quarter growth rate of the overall Consumer Price Index for Urban Wage Earners and Clerical Workers from the third quarter of 2024 to the third quarter of 2025.
There is a risk that, in the absence of active data collection activities for BLS surveys, a reduction in data quality might impact future estimates. While we view that risk to be small, it is important to consider when weighing the potential cost of a prolonged shutdown — particularly one coinciding with an inflection point in monetary and economic policy.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.