A political standoff in Washington has triggered a government shutdown, prompting fears of broader economic consequences. Thousands of federal employees considered to be inessential in protecting people and property will be off duty, as President Donald Trump and Congress did not find a common ground on a spending bill.
The stalemate is anticipated to impact around 750,000 federal employees at a cost of roughly $400 million a day, while essential workers such as troops will continue without pay.
Annually, Congress formulates detailed spending legislation for most US government agencies. However, it rarely finishes before the fiscal year, which starts on October 1. In the meantime, lawmakers pass temporary spending bills to avoid disruption for several weeks or months while they finish their work.
The current stopgap bill expired on September 30, as the Republicans and Democrats did not reach an agreement on an extension, indicating many departments of the government would lack funding to continue their operations.
Trump’s 'Big Beautiful Bill' involving Medicaid cuts is a major reason behind the disagreement between the Republicans and the Democrats. The Democrats demanded a reversal of the Medicaid cuts and an extension of the tax credit on health insurance premiums, making them more affordable, which the Republicans have refused.
The recent shutdown is expected to pause the release of key economic data, including Friday’s jobs report, slow air travel, suspend scientific research, and disrupt services across the country. Meanwhile, Trump had earlier threatened to lay off more federal workers if lawmakers did not pass legislation. "We will be looking for opportunities" to reduce the size of the federal government, said White House budget director Russ Vought in an interview.
Non-essential (non-excepted) staff across many agencies are typically laid off, as per previous US shutdown records. These include administrative staff, regulatory inspectors, grant program officers, research staff in discretionary programs, many regional and field offices of federal agencies, and support services. Contract tasks pause, and contractors generally are not guaranteed back pay.
Essential services such as law enforcement, border security, air traffic control, TSA, FBI agents, and certain health and safety functions continue amid the shutdown. Those workers are classified as excepted or essential and must remain on duty, often without pay, until funding is restored. Military personnel continue to serve during a shutdown, but their pay may be delayed unless covered by special provisions.
Thousands of federal positions across agencies like the Departments of Interior, Agriculture, Commerce, Education, EPA, and Transportation are often curtailed or suspended. In recent forecasts, agencies expect to furlough large shares of their workforce.
During Trump’s first-term shutdown, which continued for 35 days, about 340,000 of 800,000 affected workers were furloughed.
Meanwhile, the US President escalated tensions by warning that the “shutdown could pave the way for irreversible cuts to programs and jobs, to shrink the federal workforce by some 300,000 by year’s end.”
Bret Kenwell, an investing analyst at eToro, said, "These things usually work out pretty quickly. Investors have come to expect that outcome. A prolonged shutdown is something that could weigh on equities. Nobody dislikes uncertainty more than the markets dislike uncertainty."
“A prolonged government shutdown could rattle investors since the uncertain outcome in the Capitol may collide with warning signs in the economy,” claimed Callie Cox, chief market strategist at Ritholtz Wealth Management.
Cox added, "A shutdown would be another shock to absorb, and it's tough to say how well investors will absorb it. I'd feel better about the shock absorption if the economy were in a better spot, and this catalyst were a little more defined."
Investors may shift their focus to safe-haven assets like gold or bonds during this time. If the shutdown is prolonged, consumer confidence and GDP growth can also take a hit.
Major Silicon Valley firms often rely on government contracts, research grants, and timely regulatory approvals, all of which can be delayed during this shutdown. While established tech giants with large cash reserves may go through the storm, smaller businesses and growth-stage companies could face instant cash flow constraints and investment delays.
A few days ago, a steep hike in H-1B visa fees came into place, which, accompanied by the shutdown, renders a concerning picture for the tech industry as it heavily relies on skilled foreign employees and policy stability. Amidst the shutdown, key immigration services may face processing delays.
The combination of higher costs and ongoing uncertainty creates a huge blow to the industry, intensifying market anxiety and potentially slowing down innovation pipelines in one of the most vital sectors of the US economy.
According to an FAQ sheet regarding the shutdown published on the official website, "To end a government shutdown, Congress needs to pass, and the President must sign appropriations bills to fund the departments and agencies that have been shut down. The President does not have the power to end a shutdown unilaterally. The funding bills follow the same legislative process as any other bill, requiring approval from both the House and Senate before the President can sign them into law."
The Senate is expected to hold further votes in the coming days, but considering the polarized political climate, there is no clear path to reopening the government soon.