We are all relieved that the government shutdown has ended. But what economic impact is it likely to have?
In their Weekly Market Recap, JP Morgan, one of the Portfolio Strategists we utilize for client accounts, wrote the following regarding that question…
The longest U.S. government shutdown on record, lasting just over six weeks, ended late last Wednesday. As the dust settles and federal spending resumes, investors are starting to tally the damage.
Our base case was for a soft fourth quarter 2025 followed by a stronger first quarter 2026. That still holds, but the swings could likely be more dramatic. fourth quarter 2025 GDP, initially expected to grow around 1%, is now tracking a mild contraction. Frozen federal outlays, hundreds of thousands of unpaid or furloughed workers and disruptions to the SNAP food assistance program likely weighed on fourth quarter activity.
Crucially, much of this government-driven demand is delayed, not destroyed. With the government reopening, spending resumes, staff receive back pay and suspended programs restart, albeit gradually. This shift into early 2026, paired with a now lower fourth quarter base, suggests the first quarter 2026 growth print could come in stronger than previously expected.
Even so, some output will not return. The CBO estimates a cumulative $15 billion shortfall in real GDP through first quarter 2026 relative to a no-shutdown path, reflecting lost output from hours not worked and foregone private demand, such as canceled travel plans, that will not be recouped.
Markets largely looked through the shutdown, much as they have in past episodes. But just as the deal removed one overhang, new risks emerged, with uncertainty around the Fed’s December cut contributing to the late-week sell-off. Valuations still remain stretched, and more risks sit on the horizon. The current funding deal runs only through January 30, and looming IEEPA tariff rulings could introduce fresh volatility. Against this backdrop, investors may want to consider further diversifying their portfolios and adding downside protection should economic turbulence begin to catch up with markets.
