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Updated November 13, 2023
What a potential shutdown means
Past government shutdowns paused nonessential activities in various government departments—for example, national parks and museums have closed. Critical federal functions such as the Postal Service, payment of Social Security benefits, and air traffic control staffing generally were not affected. The scope of these pauses can vary across shutdowns, and each government agency will publish guidance clearly defining the scope of its activities during a shutdown. Federal shutdowns don’t affect state and local government functions that are not dependent on federal funding.
Shutdowns have occurred more than 20 times since 1976. Unlike a default, a shutdown does not affect the government’s ability to pay its obligations, and, as noted, many critical services continue.
Shutdown: A history of mixed results for markets and the economy
*The government shut down overnight. An agreement was reached before the markets opened.
Sources: Vanguard calculations, based on data from FactSet and the Congressional Research Service.
Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
The results are similar for fixed income securities as bond market activity surrounding U.S. government shutdowns since 1976 shows an even split between positive and negative returns for fixed income.1
The economic effects of a shutdown depend largely on its duration. The Congressional Budget Office (CBO) estimated that the 2018–2019 shutdown, the longest on record, shaved 0.1% off real GDP in the fourth quarter of 2018 and 0.2% in the first quarter of 2019. The shutdown dampened economic activity mainly because of the loss of furloughed federal workers’ contribution to GDP, the delay in federal spending on goods and services, and the reduction in aggregate demand (which then dampened private-sector activity).
Why you should stay focused on long-term results
A government shutdown is only one of many factors, both positive and negative, that affect markets. Because there are so many variables, the effects cannot be accurately predicted.
Political divisions in Washington have made the threat of government shutdowns more common in recent years. Although this is not an ideal practice and a prolonged shutdown could have broader short-term market and economic effects, what’s most important is that investors remain disciplined, diversified, and patient during such an event.
Different from the debt ceiling debate
It’s important to understand that the current negotiations to keep the government fully operational are completely different from the debate over whether to raise the debt ceiling that took place earlier this year. In the case of the debt ceiling talks, the biggest risk was a potential U.S. default if lawmakers did not raise the debt ceiling. Defaulting occurs when the U.S. Treasury has insufficient resources to satisfy the government’s obligations. A default has never happened and would have significant ramifications for U.S. creditworthiness, in addition to spillover effects on the global financial system.
A shutdown occurs when the federal government suspends services deemed nonessential because a new law to fund discretionary spending programs was not approved ahead of a fiscal year deadline. When agreement on a new funding bill is not reached, Congress may pass a “continuing resolution” that extends previous funding levels to keep the government fully operational.
- All investing is subject to risk, including the possible loss of the money you invest.
- Diversification does not ensure a profit or protect against a loss.