Government Shutdown and Labor Market Risks

How U.S. equities historically have reacted to government shutdowns, and what may happen this time.

KEY POINTS

What it is

We analyze what has occurred in past shutdowns, and what investors should look for if a shutdown occurs next week.

Why it matters

A potential U.S. government shutdown poses risks to the labor market.

Where it's going

Historically, the drag from shutdowns has tended to be short-lived.

September 25, 2025

The U.S. faces a likely government shutdown on October 1, with prediction markets assigning a 65% chance. Both parties remain entrenched, showing little interest in a continuing resolution. A temporary shutdown appears to be a reasonable base case.

Shutdowns are a recurring feature of U.S. politics, with 20 funding gaps since 1976 — only four lasting more than a day. The longest was 35 days in 2018–2019; others averaged 14 days. If a shutdown occurs on October 1, it will likely be a full one, affecting all discretionary agencies, similar to the 16-day shutdown in 2013.

EXHIBIT 1: S&P INDEX RETURNS SURROUNDING MULTI-DAY GOVERNMENT SHUTDOWNS (%)

exhibit1-comparison of annual u.s. stock market returns

Northern Trust Asset Management, Macrobond, S&P Global. Data through 12/31/2024. Past performance is not a guarantee of future results. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index. The S&P 500 Index represents large-cap U.S. equities.

Markets have demonstrated a remarkable ability to adapt and recover from these disruptions over the years. At most, shutdowns have led to only small and temporary softness in U.S. equities. In all four of the prior multi-day shutdowns, U.S. equities were higher 30 days following the start of the shutdown. Some risk can be priced in ahead of time, as investors anticipate the possibility of some policy disruption. For example, in the month leading up to the 2018 shutdown, U.S. equities lost over 15%. However, the environment leading up to that episode was much different than today. There were other market influences at play, including Federal Reserve rate hikes.

From an economic perspective, the overall drag from shutdowns has also tended to be short-lived. Discretionary spending represents around 30% of federal spending. Core entitlement programs that represent the bulk of federal spending remain unaffected, helping to limit the direct economic impact for most Americans. Most impacts from furloughed government workers usually reverse once the government reopens. Businesses and local economies that rely on federal contracts can also experience some turbulence.

The current situation poses labor market risks due to Office of Budget and Management directives urging agencies to consider RIFs (reduction in force) where funding may lapse. Permanent layoffs on par with furloughs in previous shutdowns would likely have a sizeable economic impact. While mass layoffs are a concern, it’s unclear if the threat is a negotiation tactic. Key details — such as the number of affected employees and legal feasibility — remain uncertain. We also note parallels to DOGE actions earlier this year, through which we haven’t seen major disruptions materialize yet. Lastly, the size of the government workforce has been declining for most of this year. We should expect this to continue to trend toward 2022 levels. Today, federal jobs as a share of total employment sit under 2%. Smaller, dispersed layoffs may be manageable, though still unhelpful in a weak labor market.

EXHIBIT 2: CIVILIAN FEDERAL JOBS EXCLUDING POSTAL WORKERS (1,000S)

exhibit2 compares 3- and 6-month treasury rate to Fed funds rate.

Source: Northern Trust Asset Management, Bloomberg, from December 2020 to August 2025.

A key challenge for investors and the Fed is the possible delay of vital data releases like September jobs and inflation reports. This hampers the Fed’s data-driven approach, though shutdown-related growth and labor risks may reinforce expectations for an October rate cut. Fortunately, markets have also improved in using alternative data sources to navigate traditional data gaps.

Political uncertainty remains, but history suggests a compromise will likely restore stability and support a rebound in economic and market sentiment. While headlines may drive short-term volatility, long-term investors focused on fundamentals have typically been rewarded. As negotiations unfold, we’ll continue monitoring developments around potential agreements, labor market risks, and policy changes.

Meet Your Expert

Peter Wilke

Senior Vice President – Head of Tactical Asset Allocation

As the head of tactical asset allocation (TAA) at Northern Trust Asset Management, Peter is responsible for the research and development of innovative investment strategies for the firm’s TAA initiatives. Previously, Peter worked at Wellington Management, where he was the team leader of the multi-asset income investment boutique in Boston. His group was responsible for developing and managing multi-asset portfolios.

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