The shutdown of the United States government: what changes compared to the past and what is its impact
2 OCT, 2025
By Joanna Piwko from RankiaPro Europe
The United States has officially entered a government shutdown following Congress's failure to pass a funding bill. The closure of non-essential services, the first since 2018, has led to temporary suspensions of many administrative functions and research programs, while essential services, such as defense, law enforcement, and air traffic control, continue to operate, often with staff working without pay.
Why this time is different from the previous ones
According to Libby Cantrill, Head of US Public Policy at PIMCO, the current scenario differs from past shutdowns because there is no coercive mechanism to reopen the government, as happened in 2013. The prolonged closure could generate “non-linear” economic effects, such as permanent loss of GDP activity and destruction of demand: "We estimate that annualized real GDP suffers a negative impact of 0.1%-0.2% per week, but that this impact could accelerate with the prolongation of the shutdown".
Amar Reganti, Fixed Income Strategist at Wellington Management, emphasizes that one of the key issues concerns the Executive's power to determine which legislative priorities to execute. As Reganti states: "Beyond the rhetoric, one of the key issues at stake is the embargo, that is, the Executive's ability to determine which of Congress's priorities will be executed as provided for by legislation". The possibility of permanent layoffs of public employees during the shutdown would add pressure to the labor market and could influence the Fed: "President Trump has alluded to the possibility of firing public employees during the shutdown and not rehiring them afterwards".
Finally, Kevin Thozet, member of the Carmignac investment committee, highlights how greater political uncertainty and the absence of immediate answers on the labor market make it more difficult to understand whether the American economy is experiencing a temporary slowdown or a real contraction: "Crucial issues about the state of the US labor market will hardly find an answer in the short term".
Markets react calmly
The market has reacted with relative calm to the shutdown. According to Luke Bartholomew, Deputy Economist at Aberdeen Investments, this is not surprising: "For better or worse, over the past 15 years investors have become relatively accustomed to shutdowns and now there is a well-established script, especially considering that this is not tied to debt ceiling issues". However, Bartholomew warns that "the most significant impact on the market could be the slowdown in the publication of crucial employment data".
Kevin Thozet notes that the euro and the yen have strengthened, while the US dollar has weakened. American stock markets have recorded a slight drop, while in Europe and Asia the movements have been more contained or positive. In addition, "the VIX index (the so-called volatility thermometer) has risen, albeit from very low levels".
Also Libby Cantrill notes that, historically, risk assets undergo an initial sell-off followed by a rebound during the shutdown, while yields, dollar and gold show transitory variations: "Markets have largely overcome previous shutdowns: risk assets suffered a sell-off at the start of the closure, but then recorded a rebound with its continuation and with the progress made towards the reopening of the government. Yields also recorded a rally, the dollar suffered a sell-off and gold recorded a rise during the shutdown period".
Future prospects and possible developments
The duration of the shutdown remains uncertain and political negotiations are still ongoing. Libby Cantrill predicts that if the closure continues, the negative economic effects could intensify: "The longer the closure continues, the more “non-linear” effects may manifest (for example, destruction of demand, permanent loss of GDP activity, etc)". In addition, there is anticipation for a possible re-acceleration of growth in 2026 thanks to tax cuts.
Amar Reganti also argues that, although the direct impact on financial markets is limited for now, a significant prolongation of the shutdown or an extension towards a broader fiscal dysfunction could generate more substantial effects: "We expect the direct impact on financial markets to be limited, unless the shutdown is significantly prolonged or extends to a broader fiscal dysfunction". Unlike a failure to raise the debt ceiling, the shutdown does not entail insolvency: "Even though shutdowns are harmful, they do not imply insolvency. The United States Treasury continues to pay the debt and mandatory programs (for example, Social Security and Medicare) continue to be funded".
Luke Bartholomew adds that the lack of key employment data will complicate the Federal Reserve's decisions: "It is still very likely that the Fed will proceed with a new rate cut in October, but given the importance that the labor market currently has in its considerations and the various other political pressures it is under, this lack of clarity on the data will certainly not make its task any easier".
