The turn of a New Year can represent many things: A fresh outlook, healthier habits, and goals to work toward. But entering January also marks a threshold: The looming government shutdown is only a matter of weeks away.
In November, the U.S. government experienced its longest shutdown in history after Republicans and Democrats took 43 days to agree on new funding arrangements for the likes of SNAP food aid, the Department of Agriculture, Congress, and veterans affairs through September next year. Unfortunately, it didn’t get to the rest of government, where coffers will run dry come January 30.
When Congress broke for Christmas a fortnight ago, it had not come close to agreeing on a deal to fund the majority of its federal departments, as well as the imminent expiration of additional programs such as the National Flood Insurance Program Authorization and Medicare and health care extenders.
Optimists might argue that with four weeks to the day until the shutdown, a change of tone has already been observed. For example, Senate Minority Leader Chuck Schumer told reporters before the holidays that he and Senate Majority Leader John Thune were going to “work through the process and get the appropriations bills done.”
Thune echoed the message, though hinted that he’s making contingency plans if the best-case scenario doesn’t materialise. He told reporters: “There’s a lot of thought being given and just to make sure that we don’t end up in a … posture at the end of the month where we’re looking at staring at a shutdown again.”
While the political will to avert another shutdown appears to be strong among some key figures, the question of compromise will become all the more important as a deadline approaches. Here, President Trump has been firm. When signing the funding deal back in November, Trump said: “We’re sending a clear message that we will never give in to extortion”—fighting talk indeed with another deadline around the corner.
Shutdown ramifications
If an economist were to cast their mind back to September last year, they’d recall that overall, the sentiment about a government shutdown wasn’t too ominous. Largely, the sentiment was that while growth or the markets might take a slight knock, they would bounce back without much trouble.
But as the shutdown dragged on, and as threats from the president over the future of federal workers’ careers intensified, that confidence quickly began to fade. For example. Moody’s chief economist Mark Zandi told Fortune late last year that roughly half the U.S. States were in a recession, including the District of Columbia, which had tipped into economic shrinkage because of federal layoffs, then exacerbated by a shutdown that saw remaining staff go weeks without pay. These issues also saw nearby states such as Maryland and Virginia also pulled toward contraction.
Headaches also emerged in the form of a void of data, with the Fed making highly scrutinised decisions about the future of interest rate policy without the federal data needed to help fully inform their decisions. Both labor market and inflation data from the Bureau of Labor Statistics were delayed and, in some cases, will never be released, meaning investors and policymakers couldn’t form a clear picture of a significant period of time.
Pressure also intensified given the sheer inconvenience the shutdown had caused. Delta Air Lines, for example, took a hit of $200 million due to long delays at major airports and historic flight cancellations at 40 of the country’s busiest airports, after unpaid air traffic controllers missed work, citing additional stress and the need to take on side jobs.
These facts will be a sharp reminder to Capitol Hill when staring down the next deadline that comes at the end of the month. With the full impact of last year’s shutdown still unknown, officials will be keen to avoid another diplomatic breakdown in such quick succession.
As RSM’s Chief Economist, Joe Brusuelas, pointed out in a note last week, the fallout from the most recent shutdown hasn’t yet been realised: The longest government shutdown in American history will most likely provide a drag of close to 1.5% on overall economic activity during the October to December period, which will set up for a soft growth estimate for the final quarter.”
That being said, the outlook for 2026 (notwithstanding another potential shutdown) is relatively rosy, he added: “The shape of things in 2026 are coalescing. Large tax cuts and the full expensing of capital investments will fuel growth well above the 1.8% long-term trend” which will result in month job creation of between 20,000 and 50,000 positions per month on average.
