The United States begins to emerge from the blockade. Congress and the White House have agreed to end the longest shutdown in history, which paralyzed the administration for 43 days. Thus ends the suspension of salaries of public employees, the closure of agencies, museums and national parks and the growing chaos in air traffic. On the eve of one of the busiest travel seasons of the year, a group of Democratic senators broke party discipline, ending a blockade that was beginning to weigh on markets. With the reactivation of the administration, official economic statistics will also arrive, paralyzed by the closure, the main thermometer to measure the health of the economy at a time when signs of weakness in employment and inflationary tensions are putting the Federal Reserve to the test.
When will the lockdown be lifted?
The president signed the financing project after its approval by the House of Representatives, with 222 votes in favor and 209 against. However, it is unclear how quickly agencies will be able to restore services. While each department has contingency plans detailing how to shut down and resume operations, most are designed for short interruptions and not a shutdown of up to seven weeks.
The agreement offers a temporary truce to the Government (until January 30) and avoids further economic damage, but does not resolve party tensions, which could reopen the conflict within a few weeks.
When will macroeconomic data be released again?
Since the government turned off the public spending tap on October 1, investors and monetary policymakers have had to operate blind, as Jerome Powell, Fed Chair, acknowledged at his meeting on October 28 and 29. ING analysts point out that, with the end of the lockdown, the market could see a high concentration of indicators, some even contradictory, in the coming days. At a time when Fed officials are divided, September’s inflation data and jobs report are eagerly awaited.
If the shutdown pattern of the previous Trump administration were repeated (from December 22, 2018 to January 25, 2019), Berenberg analysts recall that the September employment report – which was supposed to be published on October 3 – could be available five days after the end of the paralysis. I mean, next week.
Other indicators, however, will take longer to see the light. ING analysts recognize the challenge of reopening: “it will involve processing a large volume of information accumulated over the following days and weeks.” The director of the National Economic Council, Kevin Hasset, acknowledged this in an interview Fox News that the October data will be published without the unemployment rate reading, so will only include data on business affiliation.
What impact will the month and a half of lockdown have on the economy?
Knowing the effect of the closure on the economy is the great unknown that analysts will try to clarify in the coming days. Traditionally, administrative closures have tiptoed around the market and indicators. The problem is that this is the longest period in history and coincides with an economy already affected by protectionist policies. Raising tariffs has a dual effect, increasing pressure on inflation and slowing growth.
David Kohl, chief economist at Julius Baer, points out that high inflation and slower income growth had already hurt consumer spending and that the lockdown could have exacerbated this trend. “Alternate weekly retail sales data confirms that consumption momentum weakened in September and October, coupled with a deterioration in consumer confidence, driven by pessimistic employment and income outlooks,” he explains.
While Benoît Anne, director of strategy at Insights MFS Investment Management, believes that the end of the lockdown will have a fairly limited negative impact, other analysts are more cautious. Experts compiled by Bloomberg estimate that each week of closure has taken between 10 and 15 billion dollars (8,630-12,950 million euros) from the economy.
How will it affect the market?
In a stock market dominated by the push for artificial intelligence, Wall Street’s recent appreciation shows that neither political noise nor trade tensions have curbed risk appetite. In recent days, the stock cuts have been motivated by one factor: the risk of a new tech bubble, a sector that weighs more than 40% in the S&P 500 index. Overall, the S&P index is up 2.37% in the last month and a half, a far cry from the 9.3% the index has recorded in recent days. stop from 2018-2019, when the market was discounting the positive effects of the tax cuts.
Julius Baer analysts recall that, historically, government shutdowns in the United States have had a limited impact on markets. “The reason is simple: economic fundamentals rarely change. In general, they are more of a sentiment event than a structural one,” they point out.
However, this disruption coincided with a time of great economic uncertainty. Added to the doubts about tariffs are fiscal imbalances, the possible artificial intelligence bubble and the weakness of the labor market. These are the factors that Jerome Powell has mentioned in each of his latest speeches. In other words, the shutdown, beyond its direct impact, prevented us from clearly seeing underlying trends. The next data will therefore be fundamental. Indeed, Wall Street has already reacted with declines to negative signals about the health of the economy.
The key role of the Fed
The final say belongs, once again, to the Federal Reserve. The lack of visibility on the economy became evident in the latest meeting, when Powell struck a more cautious tone and warned that a further rate cut in December was “not a foregone conclusion.” Ahead of the meeting on December 9 and 10, the Fed will have new data.
The internal divide is increasingly evident, but UBS analysts maintain their forecast of two further rate cuts between now and early 2026. “Recent inflation data is not enough to divert attention from cooling employment. As official data releases resume, we believe new evidence of a job slowdown will pave the way for further monetary stimulus,” they argue. A vision shared by Julius Baer, who anticipates new declines in the meetings of December, January and March 2026.
However, analysts only pay attention to the labor market. Just as the employment data have not been published, neither have the prices data been published. It is possible that protectionist policies have had a greater effect on inflation over the past month and a half. If the Fed gives in to pressure from the White House and lowers rates again, this could fuel a new rally in prices. If that were the case, the risk of stagflation – high prices and low growth – would be difficult to ignore. The market is starting to price it in, and a day after the president voted on the bill, federal funds futures calculated by the CME’s FedWatch tool assign nearly identical odds to a rate cut in December (51.6%) and the Fed holding the current level (48.4%).
Impact on companies
The campaign on the third quarter results shows that the geopolitical noise had minimal impact on the company’s accounts. However, according to FactSet data, during conference calls held between September 15 and November 6, 76 S&P 500 companies mentioned the “government shutdown,” the highest number since the fourth quarter of 2018 and the second highest in the past decade. Of these, 29 companies indicated that they have not yet perceived any impact, while 22 acknowledged that they have incorporated some effect into their forecasts for the end of the year.
With such a tight market, CFOs recognize how risky it is to not meet expectations. To protect themselves from possible shocks resulting from political gridlock, many companies have chosen to offer more conservative forecast ranges than usual, thus mitigating uncertainty until activity normalizes.
