Key Takeaways
- The US government is in shutdown, stemming from a failure to agree a budget for the new fiscal year. As such, 750,000 government workers are on furlough – although Trump has suggesting they all be fired.
- Economically speaking, the impact of such shutdowns – and there have been many – is relatively limited. In addition, financial markets seem unfazed.
- A bigger concern is the lack of financial data, with the recent payroll report not being produced, and the potential to miss an upcoming inflation print.
- The Federal Reserve, attempting to navigate a heavily data-driven environment, is flying blind.
- With a reasonable chance that this shutdown could continue, what is currently a frustrating situation has the potential to become a little more problematic.
This week I will be talking about the US government shutdown and whether it is truly a problem for financial markets.
It began last Wednesday, 1 October, and as of today – Monday 6 October – is still ongoing. Given the impasse between the Democrats and the Republicans, it may well continue for a while yet.
The shutdown stems from the US government’s failure to pass a budget for the new financial year. As the new fiscal year started last Wednesday, all non-essential government functions have been suspended until a budget is agreed. In practical terms, this means around 750,000 government workers have been furloughed.
President Trump has suggested that instead of furloughing these workers – sending them home without pay – they should be permanently dismissed. That remains to be seen, but it aligns with his broader agenda of reducing what he refers to as ‘deadwood’ in government.
From an economic standpoint, the impact is relatively limited. This is the 11th government shutdown since 1980. The most recent one, during Trump’s first term from 2018 to 2019, lasted 35 days and was estimated to have cost the US economy around $11 billion. Of that, about $3 billion in economic activity was never recovered, according to the Congressional Budget Office. While that is a significant figure, it is relatively small in the context of a $29 trillion economy.
As for financial markets, the impact has been minimal. US equity markets ended last week at all-time highs, and there has there been no major drama in bond markets. It is also worth noting that, unlike previous shutdowns, this one isn’t tied to a debt ceiling debate. The debt ceiling was raised back in August, by about $5 trillion, as part of the ‘Big Beautiful Bill’, so that particular issue is off the table for now.
The bigger concern is the lack of economic data. Due to the shutdown, the Bureau of Labor Statistics, which publishes key reports such as jobs data and inflation figures, is closed. Last week, we didn’t get the weekly jobless claims or the September jobs report – the non-farm payrolls. If the shutdown continues into mid-October, we won’t get the inflation report either.
This is particularly important because the Federal Reserve (Fed) is currently navigating a very data-dependent environment. Without access to this information, the Fed is essentially flying blind. While there are alternative data sources they can use, those will take on greater prominence in the coming weeks if no resolution is found.
Looking at prediction markets such as Polymarket, there is currently a 72% probability that the shutdown will extend into the middle of the month, and a 25% chance it could become the longest shutdown on record.
So, while this situation is more frustrating than dramatic for financial markets, the lack of information – especially around jobs and inflation – could become problematic. That said, from both an economic and market perspective, it is not a major drama. The longer it drags on, however, the more frustrating it becomes.
Thanks very much for watching, and I will be back very soon.
