One big thing: Is the looming government shutdown a big yawn?

As autumn falls in Washington, DC, members of Congress are returning from recess to an all-too-familiar challenge – funding the federal government. This annual task, which requires Congress to pass 12 appropriations bills by September 30 to ensure discretionary funding supports various agencies and programs, has only been completed on time, and through regular order, four times since the modern budget process began in 1976. This year, Congress may struggle to pass even a temporary solution leading to a federal government shutdown.

The takeaways

• A federal government shutdown is possible, if not likely, but political and economic pressures weigh against the odds of a protracted one. Economic impacts are expected to be temporary and concentrated among certain individuals rather than across the economy. 
• Congress has already raised the debt ceiling, eliminating the greatest risk to markets. In the past, several funding standoffs have coincided with a need to raise the debt ceiling, this has led to heightened market volatility. Having already raised the ceiling, this is a non-issue this September. 
• Mandatory spending continues in a shutdown, including benefits payments and services. This includes Social Security checks, which will continue to be issued; Medicare and Medicaid services will also continue uninterrupted.

Republicans have control of both chambers of Congress and have successfully passed several priorities without any Democratic support. They surprised expectations by quickly passing the One Big, Beautiful Bill Act (OBBB) which extends and expands the 2017 tax cuts, and a small rescissions package, which canceled about $9 billion in previously appropriated funding.

However, Republicans won’t be able to go it alone on 2026 funding because these bills are subject to the Senate filibuster, and Republicans are seven votes shy of the 60 votes needed to end debate on a bill and force action.

The moderates vs. deficit hawks (again)

Democrats are making the cuts from the OBBB a centerpiece of their campaign and will not rush to make the funding challenge any easier for Republicans without some concessions on healthcare and reassurances on how the White House may go about future rescissions.

And the Republicans’ challenge isn’t just with Democrats. Just as there were major differences among the conservative Freedom Caucus members and moderate, blue state Republicans in the House on expanding the state and local income tax deduction (SALT), and among competing factions in the Senate on the extent of Medicaid spending cuts, there will be disagreement among the party itself during the spending debate.

Ultimately the political consequences of a shutdown will matter most to Democrats and Republicans who may be vulnerable in 2026, but how that plays out presents more questions than answers especially as the mid-term elections are over a year away.  

History doesn’t award a clear political winner in a shutdown

While Congress does not usually manage to fund the government through regular order, they have mostly avoided  shutdowns by passing temporary spending measures. There have only been a handful of government shutdowns since the modern budget process started in 1976, and only four lasted more than a few days. These include two shutdowns between 1995–1996 lasting 26 days: one in 2013 lasting 16 days, and the fourth and longest partial shutdown lasting 35 days, stretching from 2018–2019.

Taking stock of election outcomes after a shutdown is tricky. There are many issues on voters’ minds making it difficult, if not impossible, to tell if the shutdown shaped decision-making at all. Nevertheless, a quick review of the elections that followed recent shutdowns serves to underscore the point – there is no party that consistently benefits. 

• 1996 Presidential: Democratic incumbent President Bill Clinton is reelected, while his party makes gains in the House, they lose further ground in the Senate. The result is status quo divided government. 
• 2014 Midterms: Republicans improve their margins in the House and Senate. The result is a worsening of an already divided government for President Barack Obama.
• 2018 Midterms: Democrats make gains in the House but lose ground in the Senate. The result is a loss of unified control for then, first term, President Donald Trump.  

Economic costs are more consistent, but not large across the economy

Government shutdowns mostly do not impact mandatory spending, which makes up the bulk of the Federal budget; this includes payments through Medicaid and Medicare, Social Security and interest on the debt. But they do impact the nearly $2 trillion in discretionary spending, half of which is defense spending. 

According to a Congressional Budget Office (CBO) report, the longest partial shutdown (between 2018–2019) caused a direct 0.1% decline in GDP in Q4 2018, and 0.3% in Q1 2019. Nevertheless, since most spending is merely paused and made up for when a shutdown ends, these effects were mostly made up for in subsequent quarters. The same report found that the 2018–2019 shutdown only permanently shaved 0.02% off GDP. 

A shutdown’s economic impact is more pronounced on certain individuals, communities and businesses. This is especially true for federal workers in agencies that have not received their appropriations. 

In the 2018 shutdown, 800,000 federal employees worked at agencies that had not received their appropriations – this is approximately 40% of the federal workforce. The weekly compensation of those individuals totaled $1.8 billion. While workers should receive back pay after a shutdown, this can temporarily put stress on an individual’s finances. 

In addition to the economic impact on these individuals, members of Congress may see this as a particularly sensitive political matter in 2025, given earlier reductions in force taken across the federal government, which have, to date, eliminated tens (and potentially hundreds) of thousands of jobs.

Both the 1995–1996 and 2013 shutdowns also coincided with potential debt ceiling breaches. Since the mid-nineties, there have been several additional debt ceiling standoffs unrelated to the appropriations process too. 

Debt ceiling standoffs tend to spook markets far more than government shutdowns. In fact, partly in response to these repeated debt standoff crises, all three major ratings agencies have downgraded US debt. This is not a threat this September because Republicans passed a $4 trillion debt ceiling increase in the OBBB Act removing this challenge for the foreseeable future.

In other news

• In August, President Trump issued an executive order (EO) aimed at seeking regulatory changes at the SEC and the DOL that would expand access to alternative assets to retirement and retail investors. The DOL followed the EO by rescinding a 2021 supplemental statement that discouraged fiduciaries from considering alternative assets in 401(k) retirement plan investment menus. More regulatory action will be required before the impact of the EO can be fully understood, but the expectation is that more investors may have access to private markets strategies and potentially crypto currencies in their retirement accounts.
• The Republican-controlled Texas legislature moved to redistrict their map to increase their odds of keeping control of the US House of Representatives in 2026. The move prompted California’s Democratic Governor Newsom to create a ballot referendum which would allow him to do the same, netting Democrats more seats. Several other states have not ruled this out, or will redistrict before the midterms, including Ohio, Missouri, Indiana, Illinois, Florida, and New York. If all of these, a mix of Republican-led and Democratic-led states, move ahead with redistricting, there would be a significant decline in competitive seats in the 2026 midterm elections; and until the final maps are drawn, it is not clear which party will expect to net the most seats.
• Following the August release of jobs data that saw significant downward revisions for previous months, President Trump removed the director of the Bureau of Labor Statistics and has since nominated E.J. Antoni, the Heritage Foundation’s chief economist, as a replacement. The move prompted criticism and political backlash from Democrats and concerns from Republicans regarding the characterization of the data revisions. The position is Senate approved and will require confirmation when they return from recess; Antoni is expected to get approval, though likely along partisan lines.