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The US government officially shut down earlier today, marking its first shutdown since 2018 under President Trump’s first term.
The full shutdown was triggered by a failure from Congress to pass funding bills, causing Washington to be thrown deep into a major political crisis during President Trump’s second term.
With no agreement between Republicans and Democrats, the shutdown poses threats to the American economy, especially to the labor market, potentially costing the US government billions of dollars.
What Caused the Shutdown?
The shutdown began after Republicans and Democrats failed to reach an agreement on a funding deal to keep the federal government active in the new fiscal year.
Republicans continued to push for a resolution to maintain current funding levels until mid-November, but Democrats demanded that any deal needs to include an extension for healthcare subsidies, which are set to expire by year’s end. ⁽¹⁾
Democrats are also seeking to repeal $1 trillion in cuts to Medicaid, which is part of Trump’s flagship spending bill passed earlier this year. ⁽²⁾
During the vote, Senate Republicans and Democrats rejected each other’s proposals, as the Republican-backed resolution failed to pass. All but three Democrat senators voted against it, falling short of the required 60-vote process. ⁽³⁾
Impacts of the Shutdown
The shutdown has stopped operations of all non-essential government sectors, forcing federal agencies to suspend almost 750,000 workers. Active-duty military members and federal law enforcement officers must continue to work, most likely without pay.
The Congressional Budget Office estimates the shutdown could cost the economy $400 million per day, with potential losses reaching billions if it persists. ⁽⁴⁾
The shutdown also delays the release of economic data, including the labor market report scheduled for release on Friday. This creates confusion and pressure to assess the economy’s performance without access to the key data the Fed and financial markets normally rely on.
The last government shutdown was in late 2018. It spanned 35 days and reduced economic output by $11 billion. ⁽⁵⁾
The current shutdown’s impact remains unclear. The full impact will depend on how quickly the administration can resolve the issue and whether government workers will be laid off rather than just suspended.
Market Reactions: USD Pressured, Gold Rises, Stocks Decline
The US dollar dived for four consecutive sessions due to the shutdown, with no clarity of a solution. Meanwhile in the metal markets, gold continues to trade higher at record levels.
The yen and Swiss franc are attracting safe-haven flows, with USD/JPY dropping 0.54% while EUR/USD is taking aim around the 1.18 level if the shutdown drags on. GBP/USD recovered its previous weekly losses despite ongoing UK political noise.
European markets opened mixed, while US stock futures dropped as markets monitor the US government shutdown. The stock market has typically dropped slightly during previous government shutdowns, but this one could prove to be riskier given the impact of economic factors at play.
Markets remain concerned about a slowing labor market and inflation risks, as well as historically elevated stock valuations.
