US government shutdown

Overnight, the US government entered a partial shutdown, meaning it will have to reduce some of its ‘non-essential’ daily operations. Healthcare spending cuts appear to be the sticking point in this latest political deadlock: Democrats want to extend insurance subsidies and reverse some cuts that were made in the recent ‘One Big Beautiful Bill Act’.

The economic and portfolio impact of the US federal government shutdown will depend on its extent and duration, which – as we speak – are unclear (and may remain so for a while if the shutdown postpones the publication of key economic statistics). The most obvious channel of economic disruption will likely be the furlough of government workers, which could cause temporary unemployment to rise. While Trump has threatened to make some of those job cuts permanent, the hit to output would not necessarily be significant: federal government jobs account for less than 2% of the overall US non-farm payroll (and some estimates suggest that only around a fraction of them may be furloughed).

Political dysfunction in the US is sadly not new: there have reportedly been just over 20 government shutdowns since 1950. While they have usually lasted a matter of days, the last one – which started in December 2018 – may spark uncomfortable memories. At 35 days it was the longest on record, and occurred under the Trump administration. The US stock market was particularly volatile towards the end of that year – but this was likely due to other developments. During the government shutdown, the S&P 500 actually rose by 13%.

Today, the initial market response has been marginal: the dollar and US stock index futures are slightly softer, the US Treasury note is unchanged. Indeed, earlier shutdowns, debt ceiling freezes and near-misses – including those under the first Trump administration – ended with the budgetary ball eventually being kicked firmly down the road, with little lasting damage to US borrowing costs. That said, there may be some unseen threshold waiting to be crossed, and we are of course watching developments carefully.

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