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October 31, 2025 | 14:02
The Shutdown Rundown: Assessing the Economic Toll
Economics
Economics
Economics
Fixed Income Strategy
Economics
Economics
Economics
Economics
Economics
Economics
Economics
Fixed Income Strategy
Economics
Economics
Economics
Economics
The Shutdown Rundown: Assessing the Economic TollDigging into the economic and human impacts of the current U.S. federal government shutdown. |
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The U.S. government shutdown, which began on October 1, has now exceeded the 30-day mark, and is not far behind the record-breaking 35-day shutdown back in 2018-19 (Table 1). The current episode was triggered after Congress failed to pass the necessary appropriations bills to fund federal agencies for FY2026. The sticking points are largely on spending priorities, foreign aid cuts, and healthcare funding, leaving vast swaths of the federal government without operating budgets. This has left about 1.4 million federal employees without pay, stalled critical public services, and delayed key economic data releases. The implications for the broader economy are mounting. As the standoff drags on, what should be a temporary disruption could turn into a lasting drag on economic growth and labour market stability at a time when other headwinds persist. Labour Market Impact |
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The economic hit is primarily felt by additional strain on an already weakening labour market. The Bipartisan Policy Center has estimated that approximately 1.4 million federal employees missed a full paycheque this week, with roughly 730,000 individuals working without pay and 670,000 others furloughed—i.e., no work and no pay. Furloughed workers are not counted as unemployed in the Establishment Survey because they technically still have a job to return to once funding is restored. However, in the Household Survey, these workers are counted as unemployed, which means they are included in the jobless rate. |
During the last shutdown (December 22, 2018, to January 25, 2019), the jobless rate rose from 3.9% in December to 4.0% in January before quickly falling back to 3.8% the following month. According to estimates from the Chicago Fed, the October jobless rate stands at 4.35%. That’s little changed from 4.3% reported in August, at least for now. Still, initial jobless claims among government workers have risen from 588 before the shutdown to more than 7,000 by mid-October. Meanwhile, the share of D.C. claims has spiked following some volatility related to DOGE layoffs (Chart 1). Holding under 1%, the share might seem insignificant, but it is notable because it signals stress in what is normally a relatively stable segment of the workforce (government jobs). As in past episodes, jobless claims are expected to come back down, assuming the government reopens soon. But, as this drags on, the longer-term hit could become more serious. Small businesses that depend on government contracts or spending by federal employees may also reduce staff. Over time, this can lead to a higher jobless rate, weaker labour force participation, and slower wage growth. While the job market is already cooling, the shutdown is another economic headwind—weakening household finances, demand, and confidence. |
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Social ImpactThe effects reach far beyond politics and economics. There is also a human cost—one that is immeasurable. The financial stress is severe for those households missing a full paycheque. Some reports following the 2018-19 shutdown found that more than half of federal workers had less than two weeks of savings available, meaning families are facing difficult choices between rent, groceries, or childcare and medical bills. The toll doesn’t stop with furloughed workers and their households. Essential workers, such as air traffic controllers and TSA agents, as just one example, continue to work without pay, leading to fatigue, low morale, and even absenteeism, which in turn impacts airport wait times and flight safety operations. Meanwhile, the U.S. Department of Agriculture (USDA) confirmed that, as of November 1, Supplemental Nutrition Assistance Program (SNAP) benefits will come to a halt. According to the USDA’s Economic Research Service (ERS), an average of 42 million Americans per month rely on SNAP, suggesting food insecurity has risen for roughly 12% of the population. What might seem like an impasse in Washington translates into real financial and emotional hardship for many. This is perhaps the biggest cost stemming from the shutdown. And, the longer this goes on, the greater the cumulative damage to the nation’s social fabric. GDP Growth ImpactWe estimate each week of closures reduces annualized quarterly real GDP growth by 0.1-to-0.2 ppts. A four-and-a-half-week shutdown points to a 0.4-to-0.9 ppt hit to growth, so far—that includes a recovery when the shutdown ends and employees receive backpay. As it stands, the uncertainty about the timing of workers’ next paycheques weighs on consumer sentiment and spending. The reported increase in absenteeism among essential workers will further hit hours worked. There will be additional disruptions to travel services as national parks and museums remain closed. Together, these impacts suggest the effect on economic growth could balloon the longer the stoppage drags on. Note that the Congressional Budget Office estimates that, over the long term, the shutdown could cost the economy between $7 billion and $14 billion depending on duration. Granted, even the high end of that range amounts to only 0.05% of GDP, so the economic effect is limited compared to the social effect and longer-term loss of confidence in a prolonged shutdown. Assuming a four-and-a-half-week shutdown, fourth quarter GDP looks to nearly stall, compared to our current call for +1.0% annualized growth. That could mark the weakest rate since 2018Q4—the start of the last government shutdown—excluding pandemic- and tariff-related disruptions. Even with tailwinds from easier monetary and fiscal policies, equity wealth effects, and substantial AI-related investment, there is reason to believe that this estimate is optimistic: this shutdown is wider ranging than past episodes and follows uncertainty around DOGE cuts, immigration restrictions, and tariffs. However, our current call for Q1 (+1.6% a.r.) could be ripe for an upgrade if the government reopens by then. Monetary Policy ImpactAnother wide-reaching consequence of this shutdown is the lack of official government data, considered the gold standard for private- and public-sector decision-making—especially monetary policy. The lack of data adds another layer of uncertainty just as the Fed is beginning to cut rates again, coming off the sidelines in September for its first move since last December. Granted, ahead of this month’s cut, the Fed had most of the top-tier data it would have had in the absence of a shutdown; namely, the September CPI [1] and August PCE. However, the unreleased September jobs report left a hole in the other half of the Fed’s dual mandate. This is especially crucial as the softening labour market is driving the Fed’s ongoing dovish tilt. |
With almost no government data since October 1, markets and the FOMC have turned to other sources (Table 2). Earlier this month, Fed Chair Powell said that the data before the shutdown had pointed to “a somewhat firmer trajectory” for economic growth, but rising downside risks to the job market. Now that government releases are unavailable, he pointed to the availability of alternative data but suggested that these sources were more effective at illustrating the job market than the inflation picture. The Fed’s next rate announcement is in early December; if the shutdown isn’t over by then—a big if—the FOMC will be deliberating without the last three months of payroll reports and two months of CPI and PCE reports. Summing it up, Powell said this week that the FOMC wouldn’t necessarily have a “granulated understanding” of the economy in the absence of government data, but would at least be able to pick up a “material change”. At the same time, the economic impact of a prolonged shutdown could keep the Fed with an easing bias, though Powell has highlighted that there might be a need to be more cautious with limited data. And Finally, the Impact on CanadaIt’s not just the U.S. economy that is feeling the effects of the shutdown. Statistics Canada has already delayed its September merchandise and services trade data, as it uses U.S. figures as a key input. Not only does that reduce visibility on the effects of tariffs, but since the trade data are used to calculate real GDP by expenditure, the Q3 GDP estimates (released in late November) are subject to larger-than-normal revisions. Of course, travellers from Canada and elsewhere also face the shutdown firsthand in the form of the aforementioned delays at airports and borders, and closures of federally owned attractions. ConclusionWith no end in sight to the stalemate in Washington, the government shutdown is on track to become the longest in U.S. history. Negotiations have repeatedly stalled in Congress, particularly surrounding spending caps, foreign aid, and funding for health and social programs. Meanwhile, the economic and human toll continues to grow each day. And, at a time when major headwinds are already working to slow the U.S. economy, the shutdown is an added strain. Still, there is cautious hope that policymakers can force a breakthrough to get Washington running again. |
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[1] The Bureau of Labor Statistics brought back some furloughed workers to publish the September CPI report, but has since indicated the October CPI will not be published if the shutdown continues. [^] |