HRIS Market Flash- US Government Shutdown

US Government Shutdown

On 1st October, the US government shutdown after Congress failed to reach an agreement on funding for the federal government for the next fiscal year.

What does a government shutdown mean?

The shutdown is driven by the US Congress’ inability to pass a bill on federal funding, with healthcare funding being the key stumbling block between the two main political parties.  The shutdown means that most non-essential government agencies will close and approximately 750,000 federal workers could be furloughed, while thousands more ‘essential workers’ will work without pay. This is similar, but not the same, to the debt ceiling crisis from 2023. Both are political deadlocks that create issues for the smooth functioning of government. However, with the debt ceiling, the big risk was that the federal government was unable to issue extra debt and may even have struggled to pay interest on its bonds. In this case, the shutdown is a temporary halt in discretionary spending (albeit for an undefined period) but there is no risk of a default. Shutdowns of this nature are relatively common. The last one happened during President Trump’s previous term in 2018 and lasted for 35 days, the longest in America history.

What is the economic impact?

The shutdown will most likely have a short-term economic impact. Estimates suggest it could reduce GDP by 0.1-0.2% per week of shutdown. However, any lost output normally recovers after the shutdown ends as furloughed workers are backpaid. President Trump has suggested there may be layoffs this time, as opposed to just furloughs, which may have a more permanent impact, but it is yet to be seen whether this is a negotiating tactic. One other issue that may arise is a delay in economic data being released. Non-farm payrolls and other key employment data are scheduled to be released this Friday but will likely be delayed if the shutdown is still in place. On top of this, the data may start to be skewed if the shutdown is sustained. This comes at a critical juncture where the Federal Reserve is intently analysing employment data for signs of a labour market slowdown.

What is the impact to markets and portfolios?

Asset markets tend to be relatively resilient to shutdowns and the impact so far this time has been muted. The US equity market was due to open modestly lower on Wednesday morning. US Treasury bond yields were relatively flat, as was the dollar, while gold was up. Investors currently expect a compromise to be made, but things may get a bit more tense if the shutdown continues for several weeks. Ultimately the effect on the economy and markets should be small and fleeting.  We continue to monitor the situation closely, but no portfolio changes are planned on the back of this news.

If you have any questions or would like to find out more, please get in touch.