The Power of the Purse
The United States Constitution explicitly grants Congress responsibility for federal finances. This authority, often referred to as “the power of the purse,” is part of our government’s system of checks and balances among the three branches. That oversight includes the Antideficiency Act, which prohibits U.S. agencies from spending or committing funds without appropriations authorized by Congress.
And that brings us to today, when, as we write, the U.S. government is set to enter its third week of shutdown. Congress has yet to pass any of the 12 annual appropriations bills needed to fund the government for its fiscal year that began October 1. The battleground for the stalemate is healthcare. Democrats want an extension of enhanced healthcare subsidies and restoration of cuts made to Medicaid under the One Big Beautiful Bill Act. Meanwhile, Republicans want to vote for funding to reopen the government first and then later negotiate on healthcare.
The impact of the shutdown on the U.S. economy varies. It will likely be felt most by federal workers: 750,000 federal workers are on furlough; hundreds of thousands more “essential” workers are required to work without pay. Under the Government Employee Fair Treatment Act of 2019, affected workers are guaranteed backpay, but President Trump has said, “It depends.” In addition, the administration has begun permanent layoffs of federal workers. Further, many contract workers providing service for the federal government are not guaranteed backpay, and progress on their current and any future projects is being hampered.
While this is surely an unpleasant experience for those affected, we also wanted to provide some broader perspective. The U.S. economy is about $30 trillion, and the total U.S. non-farm workforce is about 160 million strong. Estimates suggest that about 0.2 percentage points are shaved off GDP growth for each week of shutdown. Some significant portion of that, though, is regained once the government reopens. (For example, someone who needs new car tires might not buy them while on unpaid furlough but will once paychecks resume. Conversely, someone who budgets for one dinner out a week might not make up all missed dates.)
As it relates to the impact on financial markets, fortunately (or unfortunately, depending on your perspective), government shutdowns are not uncommon. Since 1976, there have been 20 complete or partial shutdowns, as shown in the exhibit.
Exhibit: Historical Government Shutdowns and S&P 500 Price Returns
Source: Bloomberg as of 10/1/25, BlackRock, Clayton Wealth Partners.
To be sure, averages need to be taken with a grain of salt because each episode is unique and context matters. But as a baseline, the S&P 500 has been flat on average during the shutdowns. Meanwhile, the S&P has gained on average about 3% in the three months after shutdowns and almost 13% during the 12 months after shutdowns. The upshot is that, on balance, long-term investors have done well by looking through the short-term noise that accompanies government shutdowns.
Bullish
- The Fed has restarted its rate-lowering campaign, providing relief for smaller businesses.
- The Fed has made good progress in reducing inflation since 2022.
- The most attractive yields for fixed income and cash in years.
- Credit spreads remain contained.
- Consumer and corporate balance sheets generally remain healthy.
Bearish
- Slowing global economic growth.
- Trade policy uncertainty is having a negative effect on consumer and business confidence.
- Housing affordability remains at a decades-low.
- Job growth has slowed to a standstill.
- Delinquency rates on consumer loans are rising.
- Russia-Ukraine war and other geopolitical concerns.
- China is experiencing a growth recession, with deflation fears growing.
- Federal debt and deficits have ballooned.