Any time a legislative deadlock preventing the passage of funding bills required to keep federal agencies and operations running (i.e., government shutdown), additional uncertainty is inserted into the economy. During a shutdown political theater dominates the headlines. However, a shutdown has real-world consequences that extend far beyond Washington, D.C.
Government shutdowns create macroeconomic headwinds for nearly all business operations, setting up more granular effects on individual sectors and company valuations. The three most significant downsides are a direct reduction in economic output, the furloughing of a large swath of the federal workforce, and a lack of official economic data relied on by many.
- Reduced Economic Growth: A government shutdown can put a drag on economic growth. Quantification may vary, but sources point to economic slowing. According to Goldman Sachs, the current shutdown could directly reduce weekly economic growth by approximately 0.15 percentage points, or about 0.2 percentage points when accounting for private sector effects [5]. Morgan Stanley economists are more conservative, estimating a 0.02 percentage point direct reduction from real quarterly GDP for each week a shutdown continues [3]. Dollar estimates suggest a weekly economic loss of around $6 billion [6]. The variance in these figures reflects different modeling assumptions; the higher Goldman Sachs estimate captures broader private-sector spillovers, whereas the Morgan Stanley figure represents a more narrowly defined direct impact.
- Furloughed Workforce: The most immediate human impact is the furloughing of non-essential federal workers. During the 2018–2019 shutdown, approximately 800,000 employees were affected [6], with similar estimates of 800,000 to 850,000 cited in other analyses [4, 6]. While Congress has historically granted back pay to these workers once a shutdown concludes [4, 6], backpay is not guaranteed. This lack of pay to government employees can curtail consumer spending and can have a ripple effect, reducing demand for goods and services across the economy.
- The "Data Blackout": One disruptive but often overlooked consequence is the delay in the release of crucial economic data. Federal agencies like the Department of Labor and the Department of Commerce cease publishing key reports, including nonfarm payrolls (jobs reports), inflation figures, and other vital statistics [1, 4, 6]. This "data blackout" leaves the Federal Reserve, investors, and business leaders operating "in the dark," complicating monetary policy decisions and making it nearly impossible for companies to create reliable strategic forecasts or forward-looking guidance [1].
The actual impact of the government shutdown will be felt differently across different industries in the private sector. In terms of business valuation, the industry in which the subject company resides must be analyzed to determine the extent to which it will be impacted by the shutdown.
For different privately held businesses, a government shutdown can introduce significant operational and financial headwinds that can negatively affect their valuation.
- Government Contractors: Private firms with direct federal contracts are likely the most immediately and severely affected. A shutdown can lead to a halt in payments, and if employees cannot be transferred to non-government contracts, those employees may face layoffs [6]. This disruption to cash flow and revenue can severely damage a contractor's financial health, directly lowering its valuation by increasing its perceived credit risk and negatively impacting cash flow.
- Depressed Consumer Demand: The potential pullback in consumer spending [4, 6] can depress demand for retailers, hospitality, service industries, and others that are reliant on strong consumer confidence, even if they have no direct federal ties.
- Strategic Paralysis: For entities that rely on data produced by the Federal Government, the "data vacuum" can create profound challenges [1, 6]. Without such data these businesses may struggle to make informed decisions about inventory, hiring, capital investment, and other needed decisions. This uncertainty increases the perceived risk associated with the company, lowering the company's present value.
Conversely, the same uncertainty that harms most businesses can create opportunities for others, particularly those positioned as safe havens or operating in resilient sectors.
- The "Flight to Safety": Periods of increased political and economic uncertainty often trigger a "flight to safety," where investors move capital from riskier assets to those perceived as more stable. Gold is a classic safe-haven asset, and its price has been shown to rise significantly during government shutdowns as fearful investors seek stability [1, 2]. This trend may benefit private companies involved in the mining, refining, and selling of gold, increasing their value.
- Resilient Government Partners: Not all government-related sectors are equally affected. Funding for essential services will continue to be funded [5]. This stability may spare private defense contractors and other providers of essential services from the uncertainty and increased risks from a shutdown. According to Morgan Stanley, a shutdown can even provide attractive long-term entry points for investors in defense stocks [3].
It is important to assess the impact of the shutdown on the value of a business and the industry in which the business operates, negative or positive. These can include negative macroeconomic consequences, slowing growth, worker layoffs, and disruptive data blackouts. However, more complex impacts for privately held businesses may get overlooked. Further, the ultimate effect on a private company's valuation will not be uniform across all businesses, rather, it is determined by a unique combination of factors. Ultimately, a shutdown forces investors and business owners to price political dysfunction into their risk models.
Footnotes
- Gold and Bitcoin go through the roof as...
- Gold climbs to record high above $3,900...
- Government Shutdown: Effect on Stock Market, Morgan Stanley
- How A U.S. Government Shutdown Could Affect The Economy
- How much does a US government shutdown cost the economy?, Goldman Sachs
- How the US government shutdown hits the US economy, EY - US
This article was written with the assistance of artificial intelligence.