October 3, 2025
The U.S. federal government began a partial shutdown this week. The impact of federal shutdowns on the economy and financial markets has typically been modest. Shutdowns generate headlines and can induce some short-term volatility, but history suggests that their impact tends to be transitory. We discuss this and more below.
What is going on?
Funding covering roughly 25% of the budget for the U.S. federal government expired on October 1st, causing a partial shutdown that will disrupt a range of government services and cause the furlough of many federal workers. This is a storyline that we have seen before, as partisan divisions once again drove a standoff over a budget agreement. Republicans are pursuing a narrower spending bill, while Democrats are seeking an extension of healthcare subsidies and a reversal of recent cuts to healthcare programs. Negotiations are ongoing, but it is difficult to gauge what a final resolution will look like or when it will arrive.
Importantly, not all federal services “shut down”. Essential operations, including Treasury payments and mandatory spending programs like Social Security, continue uninterrupted. Federal workers, however, are typically placed on temporary leave and receive backpay when government financing is restored.
Economic and market implications
U.S. government shutdowns vary in length, often producing some near-term turbulence. Historical episodes show that U.S. stocks tend to weaken just before, during and shortly after shutdowns end. Since most shutdowns do not last very long, the equity market impact is typically short-lived, with stocks usually regaining lost ground soon thereafter.
For the economy, U.S. government shutdowns can temporarily weigh on growth, but have historically not been significant enough to derail ongoing expansions. The economy has typically recovered briskly after a resolution. This current shutdown comes at a delicate time. The U.S. labour market has recently shown signs of softness, and President Trump’s proposed plans to dismiss federal workers during the shutdown add another layer of uncertainty. Moreover, the suspension of key economic reports, such as the monthly employment report, makes it harder for both policymakers and investors to assess economic conditions. Notably, the delay of major economic data makes the job of the U.S. Federal Reserve more challenging in the near-term, as policymakers evaluate whether further interest rate cuts are needed to support the economy.
Canada - Update
Recent data suggests that the Canadian economy is holding up despite persistent trade-related disruptions that have weighed on exports, business investment and overall growth. Canadian GDP rebounded in July from its recent weakness, and RBC Economics now forecasts a modest expansion in the third quarter. Sentiment has also improved, with strong equity market performance helping to lift household net worth in the second quarter, while softening home prices and lower interest rates have eased housing affordability pressures.
Takeaway
U.S. government shutdowns are not unusual. There have been twenty such episodes since 1976, with most of them resolved in under ten days. While shutdowns can create short-term volatility, they have generally not been meaningful drivers for financial markets or the economy. We are closely watching labour market conditions but, in our view, the U.S. government shutdown is not a reason to change portfolio strategies.
If you have any questions, please do not hesitate to contact us.
Drew M. Pallett LL.B.
Senior Portfolio Manager and Investment Advisor
RBC Dominion Securities
Email: drew.pallett@rbc.com
Website: www.pallettprivatewealth.com