U.S. Government Shutdown: Economic Impact & Market Reaction

Posted on October 8, 2025

The Washington, D.C. skyline at night, as the government shutdown continues

For many investors, there is understandable concern amid news headlines of a government shutdown, which occurred at midnight on October 1st. While the shutdown will eventually be resolved, we are not seeing meaningful progress. The impact is acutely felt by hundreds of thousands of federal contractors who are effectively furloughed, as well as other government workers who, in some cases, are required to work while compensation is delayed.

While there is a broad consensus that the federal budget deficit is unsustainable long term, there is cynicism over the performative aspect to these showdowns, especially as spending levels and policy changes were all previously agreed to. Some have compared it to enjoying a nice meal at a restaurant and then debating whether to pay the check.

The stock market, however, has been largely unaffected thus far. While we’ve missed some federal economic data due to the shutdown, such as the Bureau of Labor Statistics’ monthly jobs report due October 3rd, private-sector reports such as the ADP report have been able to partially fill the void. Economists have estimated that even if the current shutdown were to drag on for 35 days, equaling the longest ever, it would dent US GDP by just 0.12% on net. The macroeconomic impact is muted because federal payments are generally paid in arrears once the shutdown ends—an assumption that is currently being challenged by the administration. Additionally, the longer the impasse persists, the more meaningful the knock-on impacts, such as to business and consumer confidence, with likely larger net losses to the economy.

The key stock market driver is currently enthusiasm over artificial intelligence (AI). As Bill Gates opined years ago, “We tend to overestimate the changes that will happen in the short term and underestimate the ones that will happen over the long term.” AI as a technology will likely continue to proliferate over the long term. But in the shorter-term, investment outcomes in AI-related stocks will depend on the speed of AI adoption and the returns on the massive capital spending being undertaken.

We at Florida Trust are actively engaging in conversations to ensure clients understand and are comfortable with the risks of this fraught juncture of historically high valuations and elevated geopolitical risk, and, where appropriate, diversifying exposures in a tax-sensitive manner.

Chris Morgan, CFA, CFP®, CAP
SVP | Senior Portfolio Manager