Historically, short US government shutdowns have had minimal lasting impact, with GDP typically rebounding once operations resume. However, this episode may prove more disruptive.
Both political parties appear to have incentives to prolong the standoff, and crucially, the Trump administration has indicated it may use the shutdown period to pursue permanent reductions in federal headcount – a sharp departure from precedent. While the legal basis for such action during a funding lapse is unclear, the potential for lasting damage to public sector capacity and the labour market data is materially greater than in previous episodes.
The shutdown is also creating a growing information vacuum, with the Bureau of Labor Statistics pausing the release of many data releases including nonfarm payrolls reports and GDP data . As an exception, the September CPI release will be published albeit later than originally scheduled. While alternative data remains available, these official figures are central to market pricing and policy decisions, especially so close to the Fed’s October meeting. In this data dependent regime, delayed releases could risk policy missteps.
Adding to the uncertainty, Trump has also suggested that furloughed workers may not receive back pay – another break from precedent. If implemented, it could suppress the typical post shutdown rebound in GDP and dampen household consumption. Together with the possibility of structural staffing cuts, the risk is that this shutdown extends beyond a temporary disruption, reinforcing a broader shift towards a more volatile macro policy environment.
The US shutdown notwithstanding, we see underlying recession risks potentially receding; there is still fiscal support baked into the system and the Fed is cutting rates at a time when the economy is showing resilience. Inflation risk further down the line is something we are keeping a watchful eye on.
By Hetal Mehta, Chief Economist at St. James’s Place
