A protracted shutdown could certainly weigh on market sentiment, as it did seven years ago.
The flipside of the coin is that it may help increase the probability of future interest rate cuts, with the Fed already moving in that direction.
Government employees will ultimately be repaid, so the direct impact on consumer spending is quite temporary, especially if the shutdown is short.
Back in 2019, the Congressional Budget Office estimated a total permanent impact of the 35-day shutdown to be a relatively immaterial 0.02% of GDP. The temporary impact in the quarter that it occurred, however, was more like 0.2%.
Basically, salaries and other payments that were halted during the shutdown were restored in subsequent periods, reversing the short-term impact on economic activity.
Labor market weakness
Still, a government shutdown is a negative for the economy, as it affects government contractors, slows down permitting and loan approvals, and reduces tourism.
This one also comes at a moment when labor markets are in questionable condition.
As we have previously explained (How Low Can Interest Rates Go?), labor market fragility is the main reason behind the Fed’s recent pivot towards rate cutting.
Just today, ADP reported net private sector job losses of 32,000 in the month of September. The ADP report is valuable because the company is the largest payroll processor in the U.S. and arguably has better and more real-time data than the government itself.
An important footnote to the report is that 33,000 jobs were estimated to have been created in the non-cyclical “education/health services” sector. Excluding that more stable area of the economy, private sector job losses were 65,000.
Focus on rate cuts
The mild reaction of the stock market, along with the positive reaction of gold and Bitcoin, suggests investors are paying close attention to the prospect of a faster shift towards easier monetary policy.
Gold and Bitcoin gain traction as decentralized, supply-constrained, hard money alternatives when investors sense the Fed’s printing press is getting fired up again. Both assets also benefit from perceptions of American political dysfunction.
We continue to view gold and Bitcoin as unique assets that warrant material allocations within individual investment portfolios—especially given that economic conditions and Trump’s policy agenda both support easier monetary policy going forward.
Why the stalemate?
It is interesting that illegal immigration is again the flashpoint for this federal government shutdown.
In 2018, Democrats resisted border wall funding. Today, they are opposed to cuts in certain forms of health care spending that, according to the Trump administration, flows to illegal aliens.
Democrats frame the health care cuts as targeting hard working Americans. The areas where Trump seeks to preserve spending cuts do not explicitly direct funds to non-citizens, but as Vice President JD Vance explained earlier today, they tend to be the recipients.
