WASHINGTON, DC – DECEMBER 17: People walk along the east front plaza of the US Capitol as night … [+]
A government shutdown could occur after March 14 if no new funding deal is struck by then. With the Presidency, Senate and House all controlled by Republicans, government shutdown risk might appear low. However, relatively high tensions in Washington mean that a shutdown may be more likely than not according to some prediction market forecasts, and may have market impact, especially if it negotiations are drawn out.
Competing priorities, recent cuts to programs without Congressional input and a thin majority in the House could complicate budget negotiations. Recently shutdowns have been avoided at the last minute, such as in December 2024. However, a shutdown still carries potential for significant market impact if it persists beyond a few days and could cause disruption for sectors that are more reliant on government support such as defense and healthcare.
Shutdown Forecast To Be Likely, But Brief
Event forecasting site Kalshi, implies that there is a 60% chance of a shutdown in 2025, though that’s for the year as a whole, not specifically in March. However, Kalshi also implies that any shutdown, if it occurs, might be brief, lasting approximately 4 days.
This round of shutdown negotiations carries a little more weight because across the board spending cuts known as sequestration may come into force under the 2023 Fiscal Responsibility Act if no budget deal is agreed by April 30.
The Economic Impacts Of A Shutdown
Much of government is not directly impacted by a shutdown. For example, Social Security, Medicaid, Medicare and the U.S. Postal Service would not be impacted.
However, certain non-essential functions of government would see a shutdown impact this typically includes the bulk of the operations of the National Parks, most operations of NASA as well as some food assistance and federal loan programs. Given this shutdown could occur around tax season, the shutdown may also impact some consumer-facing parts of the IRS. The is some discretion within government in determining what is deemed essential for any shutdown, so the exact scope of any shutdown can vary.
Typically, the impact of a shutdown grows as it lengthens. That’s because federal employees seeing delayed paychecks as long as a shutdown lasts, although backpay is guaranteed once government funding resumes. The situation for government contractors is less clear, and backpay is often not guaranteed as it is for federal employees. Firms that rely on government for approvals and funding would likely see disruption during a shutdown period. Government economic statistics are also not released during a shutdown, which can also be disruptive to financial markets.
What To Expect
Recent history suggests that shutdown negotiations may come down to the wire, or that a deal may come hours after the deadline for a shutdown is hit. However, if a shutdown is brief then the market impact may well be limited. Nonetheless, a shutdown could mean additional volatility for stocks with government exposure over the coming weeks even if a deal is ultimately struck.
Beyond that the potential sequestration deadline of April 30, and the prospect of the government hitting the debt ceiling deadline perhaps later in 2025 mean that government funding may continue to have market impact this year.
