Core Summary

  • On Wednesday, the U.S. federal government entered a shutdown due to a bipartisan budget dispute, forcing hundreds of thousands of federal employees to take unpaid leave. The Trump administration may use this as an opportunity to push for cuts in the federal workforce, while the release of employment data and other reports crucial to business decisions faces delays.
  • On Tuesday, Senate Republican leaders failed to secure enough votes to pass a seven-week temporary funding bill. Most Democratic senators voted against it, demanding the restoration of billions in healthcare funding, including subsidies for ObamaCare that expire this year.
  • Economists point out that there are almost no winners in the U.S. fiscal impasse. "A shutdown doesn't save money; it wastes money," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, in astatement. "We pay federal employees not to work, rent unused buildings, and bear the costs of expensive shutdown planning, inefficient allocation of government resources, and reduced services to the American people," she said.

In-Depth Analysis

Hours before most U.S. federal agencies closed, the Bureau of Labor Statistics said it would not release highly anticipated employment and other job-related data on Friday.

The pause in employment data releases—along with other key reports like the mid-October inflation update—could hinder business executives, investors, and Federal Reserve policymakers from assessing the severity of recent rising price pressures and a weakening labor market.

Federal Reserve Chair Jerome Powell and other central bank officials have recently noted weak labor demand and inflation persistently above 2%, making it harder for them to achieve their dual mandate of stable prices and maximum employment.

Policymakers warned last month about risks to the job market and cut borrowing costs by 0.25 percentage points, while the median forecast shows two more 25-basis-point cuts by 2026. A lack of fresh, credible data will make it difficult to calibrate monetary policy correctly.

"Employment and sentiment risks are rising, and economic policy uncertainty is also increasing," Scott Helfstein, head of investment strategy at Global X, said in a statement on Wednesday. He also noted that "the overall economy remains healthy by most metrics."

The Congressional Budget Office said on Tuesday that the shutdown's damage to the economy would be limited in the short term but would intensify over time.

Phillip Swagel, director of the Congressional Budget Office, said in a letter to Republican Senator Joni Ernst of Iowa that about 750,000 federal employees could be furloughed, with daily compensation costs reaching $400 million.

The Congressional Budget Office noted that the five-week shutdown ending on January 25, 2019, had suspended some federal services and delayed pay and spending on goods and services.

Although most of the GDP growth lost due to the shutdown would be recovered, the CBO estimated at the time that about $3 billion (equivalent to 0.02% of annual GDP) would be permanently lost.

"The impact of a government shutdown on business activity is uncertain, and its scale depends on the duration of the shutdown and decisions by the executive branch," Swagel said in the letter.

"The CBO expects that if the shutdown lasts for several weeks, some private sector entities will never fully recover the income lost due to the suspension of federal activities," he said.

President Donald Trump may use the shutdown as an opportunity to bypass Democratic opposition and mass-fire federal employees.

The Office of Management and Budget, earlier this week, in line with Trump's efforts to shrink the federal government, called on federal agencies to develop mass layoff plans during the shutdown.

"Even though we are in a shutdown, we still need to keep things running, which means we have to prioritize certain matters," Vice President J.D. Vance said at aWhite House press conferenceon Wednesday.

"This means some people will have to be let go," Vance said, adding that the administration has not yet "made final decisions on how to handle certain employees."

Vance blamed Senate Minority Leader Chuck Schumer and other Democrats for the federal spending impasse, saying their main goal was to restore healthcare funding for illegal immigrants.

Democratic leaders "shut down the government because they told us: 'We will open the government, but only if you provide billions in funding for healthcare for illegal immigrants,'" Vance said.

Schumer posted on X that Democrats want to avoid a spike in health insurance premiums for citizens relying on ObamaCare early next year.

"Republicans shut down the government because they couldn't be bothered to protect healthcare for people across America," the senator said onX.

"This didn't have to happen," Schumer said in a Senate speech. "It happened because our Republican colleagues want tax cuts for billionaires."