Initial impact from government shutdown should be minimal, economist says

Scott Colbert: Financial markets are not impacted so far.

As Congress failed to reach a deal by Oct. 1 to approve new funding, most of the federal government shut down this week for the first time in more than six years.

However, Scott Colbert, a St. Louis-based chief economist with Commerce Bank, said the economic impact of the shutdown should be muted in the short term. When it comes to delayed government services such as loans from the U.S. Small Business Administration, approvals from the Food and Drug Administration or funding for federal housing programs, local economic growth will slow but shouldn’t stall, he said.

“The initial impact is just almost zero. It’s almost negligible because most people can delay anything for about a week or two,” he said. “But to the extent that it drags on, that’s where it’s starting to affect (gross domestic product).”

Leading up to the shutdown, Republicans supported a short-term measure to extend government funding at current levels until Nov. 21, but Democrats rejected it, according to multiple national media reports. Democrats countered with an offer to keep the government open through October, attaching health care provisions such as reversing cuts to Medicaid made in President Donald Trump’s funding bill passed this summer, as well as extending tax cuts to make health care premiums more affordable. But the Republicans considered the health care measures unacceptable.

As a result of the partial government shutdown, about 750,000 employees will be furloughed daily, according to the nonpartisan Congressional Budget Office. Others who work essential jobs, like air traffic controllers, federal law enforcement officers, military members and Transportation Security Administration agents, are asked to work without pay.

Under federal law, the furloughed workers are scheduled to receive back pay once the government reopens. Compensation for them will cost taxpayers $400 million every day, according to the CBO.

“Historically, in every government shutdown, every worker has been paid back every hour that they’ve missed,” Colbert said. “Normally, that’s made up fairly quickly. In this go-around, though, I think the administration is clearly threatening, and this administration doesn’t really threaten so much as it just simply does. There will be some clear firings – whatever you want to call them – layoffs, furloughs, but I think not everyone will be coming back to a job. Now, legally, they might have the right to come back to a job, but legally it might accrue somewhere down the road. But there’s going to be a near-term impact.”

Trump has threatened to use the shutdown to slash the federal workforce, going against the long-standing practice of furloughing workers.

As for the shutdown’s potential length, prediction markets suggest it could last a couple weeks or possibly longer.

On Kalshi, a federally regulated prediction market, the current forecast as of the morning of Oct. 3 implies the stoppage will last 15.3 days, up sharply in recent days as negotiations on Capitol Hill have stalled. On Polymarket, 63% of traders see the highest likelihood that the government will remain shut down between 10-29 days, as of Oct. 3. Around 18% expect it to last over 30 days, while 17% predict 4-9 days.

“If I was a betting person, and I guess I am, I would take the over on this of 14 days,” Colbert said. “The longer it accrues, there’s going to be a gradual and slow impact. Wall Street is largely ignoring that because of history, not lasting too long, everyone getting paid back.”

Since 1980, there have been 14 shutdowns. The longest shutdown in U.S. history was the most recent one, which lasted 35 days in 2018 and 2019. It stemmed from a dispute between President Trump and Democrats in Congress over a $5.7 billion funding request for a wall along the southern U.S. border, according to Springfield Business Journal archives. 

The five-week partial shutdown cost the economy $11 billion, according to a CBO report. The CBO said most of that would be recovered once the shutdown ended but estimated a permanent loss of about $3 billion.

Investors are currently unfazed by the shutdown, Colbert said.

“While the average person might be paying attention to the government shutdown, the markets are frankly very focused on everything technology, and it’s not impacted the financial markets even modestly yet,” he said.