Government Shutdown Will Continue

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The market remains relaxed about the ongoing deadlock, likely because past shutdowns have been short-lived. The assumption is that furloughed wages will be repaid following the reopening, but we see higher risks. Kalshi betting odds are starting to awaken to this reality:

Couple factors at play here. According to polls, people largely blame Trump and Republicans for the shutdown. This means Democrats can hold out longer for concessions on healthcare subsidies without taking blame for prolonging the shutdown.

Trump, on the other hand, sees this as opportunity to permanently cut budgets and spending, thus has no incentive to re-open government. With threats to permanently lay off federal workers, this could hit unemployment statistics hard and cause a sharp contraction in consumer spending patterns. This spending is dearly needed to keep this fragile economic cycle going.

So watch for this story to develop further as investors realize the shutdown will be extended and the implications that brings. The Fed estimates the impact to be 0.2% of annual GDP per week that the shutdown lasts. This does not include impacts from financial conditions or market disruptions. At the current forecast of 40 days, GDP could be down 1.2 percentage points with no recovery.

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