Rapid Response - Time will tell how damaging the US government shutdown will be

As Congress has failed to keep US federal agencies open, this note outlines some of the potential impacts of the government shutdown.

• The US government entered shutdown on 1st October, after Congress failed to pass a continuing resolution before the 30th September deadline.

• The impasse is centred on healthcare subsidies. Democrats are seeking to reinstate the subsidies before provisions of the "One Big Beautiful Bill Act" that removed them can take effect.

• Neither side has shown much willingness to compromise. The last shutdown under President Trump lasted 35 days (December 2018 to January 2019), the longest in US history. 

• In the near term, key economic data releases may be delayed, including Friday’s US labour market report. 

• Once data is released, unemployment figures could show a temporary spike as employees are furloughed. 

• Around 150,000 federal employees are also set to come off their “gardening leave” period linked to earlier DOGE cuts.

• President Trump has indicated this shutdown may be used to enact mass layoffs, beyond the temporary furloughs of an estimated 750,000 government workers.

Source: Bloomberg, 2nd October 2025

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• The economic impact depends on duration: short shutdowns are disruptive, while prolonged ones risk more lasting damage. The CBO estimated that the 2018–2019 shutdown permanently reduced US GDP by around $3 billion.

• In the meantime, there is likely to be a period when the labour market data is even noisier than usual. It could take time for temporarily furloughed workers to be reinstated.

• In any event, there will likely be an increase in unemployment as some of the previously terminated public workers rejoin the labour force. Moreover, the QCEW revisions, which remove -911,000 previously counted jobs from the non-farm payrolls according to the first estimate, will be added to the unemployment rate from February. However, this number could be lower in updated estimates before February.

• There is a risk that the timing of the shutdown sets the unemployment rate on a path higher into 2026, as leading indicators such as the youth unemployment and Conference Board labour differential have already suggested. It is difficult to determine how much of the increase the additional tax breaks in the OBBBA will be able to offset.

• The case for Fed easing continues to strengthen. The market expects the Fed to cut by 0.25% at the end of October and assigns a 75% chance of a second cut in December.

Source: Bloomberg, BLS, Conference Board, 1st October 2025

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