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INSIGHTS FROM THE PRIVATE BANK

The End of the Government Shutdown: Political Settlement and Economic Fallout

Brett Mitstifer, CFA
Flagstar Chief Investment Officer

Brett Mitstifier headshot

Political Negotiated Settlement

After a record setting 40-day shutdown, the Senate voted late Sunday (60-40) to advance a measure that funds federal government through January 2026. The deal includes three appropriations bills (full year)—covering defense, agriculture, and veterans’ programs—alongside the key continuing resolution (CR) for remaining agencies. Notably, the measure omits an extension of Affordable Care Act premium subsidies, a key Democratic priority, though Republicans have agreed to allow a separate vote on healthcare legislation by mid-December. This compromise is the result of growing pressure amid an acceleration in travel disruptions, hardships caused by furloughs, and halted social services. The bill now heads to the House, where a vote is expected midweek, potentially reopening the government by the end of the week.

Economic Impact

The shutdown’s economic toll was substantial. According to Congressional Budget Office estimates, the disruption could have shaved up to 2 percentage points off annualized GDP growth in Q4 2025, equating to as much as $14 billion in permanently lost output. While much of the delayed spending—such as salaries, procurement, and agency services—will resume, these estimates underscore the irreversible nature of some lost activity. The sudden halt of federal operations impacted consumer spending, deprived $170 million in daily SBA lending, snarled air traffic (where thousands of flights were canceled), and stalled regulatory approvals, creating ripple effects across local economies and businesses dependent on government activities.

Lost Economic Activity

Beyond the headlines, the shutdown has the potential to inflict deeper damage. Households and businesses that exhausted savings or missed critical opportunities during the freeze may take longer to recover fully. Contractors faced canceled projects, while small businesses reliant on federal lending programs saw plans derailed. Observers caution that the longer the shutdown lasts the longer these scars could persist, particularly in sectors more closely tied to government operations.

Prospects for Rebound

Despite these setbacks, history and economic projections point to a strong rebound in early 2026. As agencies reopen, back pay is issued, and delayed projects restart, pent-up demand is expected to drive a surge in economic activity. Federal workers resuming normal spending patterns and businesses re-engaging with procurement cycles will partially offset the fourth-quarter slump. However, the recovery will be uneven: while aggregate indicators may improve quickly, households and firms that suffered liquidity shocks could take longer to regain stability.

Unlocking Investment Opportunities

The reopening of government and the anticipated economic rebound present a unique window for investors to act decisively. Companies positioned to serve pent-up consumer demand and capitalize on liquidity restoration will likely outperform in the early stages of recovery, while infrastructure and technology firms stand to benefit from accelerated procurement cycles. 

Now is the time for investors to reassess portfolios, identify strategic assets, and align strategies with these emerging trends. By moving swiftly and strategically, investors can transform short-term market volatility into long-term opportunity.

Key Insights

Top Outperformers:

  • Defense & Aerospace—Strong rebound from resumed federal contracts.
  • Industrials & Infrastructure—Infrastructure spending and projects restart.
  • Consumer Discretionary—Back pay for federal workers boosts retail and travel.
  • Financials—Mortgage and lending activity normalizes.

Moderate Gains:

  • Technology—Sentiment improves, IT budgets stabilize.
  • Energy—Higher demand from economic activity.

Neutral to Slight Gains:

  • Healthcare—Regulatory and payment flows resume.

Likely Underperformers:

  • Utilities and Consumer Staples—Strong rebound from resumed federal contracts.
  • Industrials & Infrastructure—Defensive sectors lose relative appeal as risk appetite returns.

Let’s explore the possibilities

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Important Legal Disclosures and Information

 

These materials are intended for distribution to Flagstar Private Bank clients, and do not constitute the provision of investment, legal, accounting, or tax advice to any person. This material presented is for informational purposes only and is not intended to be an offer, recommendation, or solicitation to purchase or sell any security or product, or to employ a specific investment or tax planning strategy. Forward looking projections are based on historical trends, actual results will differ. Past performance is no guarantee of future results.

 

The information contained herein was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy, timeliness, or completeness.  The information contained and the opinions expressed herein are subject to change without notice, are those of the individual author(s), and may not necessarily represent the views of Flagstar Bank or any of its subsidiaries.

 

Flagstar Private Bank is a division of Flagstar Bank, N.A. (“Flagstar Bank”), Member FDIC.  Flagstar Bank provides FDIC-insured banking products and services and lending of funds to individual clients.  Securities, insurance, brokerage services, and investment advisory services are offered by Flagstar Advisors, Inc. (“Flagstar Advisors”), Member FINRA/SIPC, a registered broker-dealer and SEC registered investment adviser. Flagstar Advisors is a wholly-owned subsidiary of Flagstar Bank.

 

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