The government shutdown drags on

Summary

The federal government shutdown has been ongoing for nearly two weeks, and there appears to be no end in sight. The economic and financial market impact has been muted thus far. Approximately 600,000 federal government workers have been furloughed without pay, while the remainder of the 2.3 million federal civilian workforce is still working, although also without pay. The rule-of-thumb that each week of the shutdown shaves off 0.1-0.2 percentage point of quarterly economic growth still strikes us as reasonable. Most—though not all—of this output should be recouped in Q1, assuming that the shutdown has ended by then.

The Trump administration has taken some steps to minimize the pain of the shutdown. To give two examples, over the weekend President Trump posted on Truth Social that the administration would find a way to pay active duty military troops. The Bureau of Labor Statistics (BLS) also announced that the September CPI report, for which data was collected before the shutdown began on October 1, will be released on October 24. This will be done to ensure that the Social Security Administration has the data it needs to implement its annual cost-of-living adjustment for beneficiaries.

With economic and financial market pain still muted and no major disruptions to government services as of yet, expectations for the duration of the shutdown keep lengthening. Pain points or off-ramps that might drive the two sides towards a resolution seem increasingly hard to identify. Prediction market sites now suggest a roughly 70% chance that the shutdown lasts the remainder of the month.

That said, the shutdown is not costless, and there is not much precedent for a shutdown this widespread lasting longer than a few weeks. The longest shutdown on record occurred in 2018-2019 and lasted 34 days. But, that shutdown was much narrower than the current one: nearly 75% of the government was funded when the shutdown began. The military was funded and operating normally, as was the BLS. This time, none of the 12 annual appropriations bills have been enacted.

Thus, a month-long shutdown (or longer) would be uncharted territory, and we are increasingly worried about new disruptions. For example, if BLS and the other statistical agencies are not able to collect robust samples for the unemployment rate, CPI, etc., the October data slate may be severely curtailed rather than merely delayed. In some instances, the BLS and Bureau of Economic Analysis (BEA) could skip October entirely and simply restart publications with data covering the month of November.

What does this mean for U.S. monetary policy? An extended shutdown strengthens our view that the FOMC will implement another 25 rate cut on October 29. Although the shutdown probably has not had a large impact on the U.S. economy yet, directionally it is clearly a negative rather than a positive development. Furthermore, the limited data that has been released in recent weeks, such as ADP employment and consumer confidence, are supportive of another rate cut.

That said, the upshot of a light data calendar in October is a potential deluge of new information in November and December. We suspect the December FOMC meeting will become even more pivotal as policymakers potentially could receive three employment reports and two CPI reports between the October and December meetings. Our forecast looks for another 25 bps rate cut at the December meeting, but if a pause or pivot is coming from the FOMC, we think it is much more likely to occur at the December meeting rather than the October one.

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