Analyzing the US Government Shutdown

This week I'll be discussing the US government shutdown and whether it's actually a problem for financial markets.

The shutdown began on October 1 and remains in effect today. Given the discord between Democrats and Republicans, it's very likely the lockdown will continue for some time.

The closure is due to the fact that the U.S. government The government has failed to pass the budget for the new fiscal year. Since the budget began last Wednesday, all non-essential government functions have been suspended until a new budget is approved. In practice, this means that around 750.000 public employees have been laid off.

El President Trump He has suggested that, instead of temporarily suspending these workers—sending them home without pay—they should be permanently laid off. While it remains to be seen whether this will happen, the proposal fits with his broader agenda of trimming what he calls the government's "deadwood."

From an economic perspective, the impact of the shutdown is relatively limited. This is the eleventh US government shutdown since 1980. The most recent, during Trump's first term in 2018-2019, lasted 35 days and is estimated to have cost the US economy around $11 billion. Of that amount, according to the Congressional Budget OfficeSome $3.000 billion in economic activity was never recovered. While this is a significant figure, it is relatively small in the context of a $29 trillion economy.

As for the financial markets, the impact has been minimal. US stock indices closed last week at record highs, and no major shocks were observed in the bond markets. It's also worth noting that, unlike previous closes, this one is not linked to the debt ceiling debate. The limit was raised in August by approximately $5 trillion as part of the so-called "Big Beautiful Bill," so that issue, at least for now, is off the table.

The main concern lies in the lack of economic data. Due to the shutdown, the Bureau of Labor Statistics (BLS)—which publishes key indicators such as employment reports and inflation figures—remains closed. Last week, neither the weekly unemployment claims nor the September employment report, known as the nonfarm payrolls report, were released. If the shutdown extends into mid-October, the results of the inflation report will also be unknown.

This is especially relevant because the Federal Reserve (Fed) The Fed is currently in a highly data-dependent environment. Without access to this information, the Fed is essentially sailing blind. While alternative data sources are available, these will become increasingly important in the coming weeks if a solution to the shutdown isn't found.

According to prediction markets, such as polymarketThere is currently a 72% chance that the lockdown will last until mid-month and a 25% chance that it will end up becoming the longest in history.

Consequently, while this situation is more frustrating than worrying for financial markets, the lack of information—especially regarding employment and inflation data—could become a problem. That said, from both an economic and a market perspective, it's not a major crisis. However, the longer the shutdown lasts, the more frustrating it will become.

Anthony Willis,

Senior Economist, Columbia Threadneedle Investments