Economist Explains Impact of Government Shutdown on US Economy and Fed Policy

Economic Impact of Government Shutdown

• shutdowns will absolutely impact fourth quarter growth, potentially shaving off 1 to 1.5 percent.
• 📉 A negative fourth quarter GDP print is possible, but an offsetting pickup is expected in the first quarter of next year as government activity resumes.
• 💰 Large refund checks to households in the first quarter will also support the economy and boost consumption.

Labor Market Dynamics

• 💡 The labor market is described as a story of winners and losers, with strong AI build-out contrasting with labor market pressures from tariffs, immigration, and AI displacement.
• 📉 Demand and supply in the labor market have decelerated, with companies attempting to cut costs in response to tariffs.
• ⚠️ The closing of the southern border and deportations have impacted labor supply, but wage inflation in affected sectors like agriculture, housing, and construction has not yet accelerated.
• 📊 Construction payrolls are contracting, aligning with a decline in structures investment, suggesting demand is falling as much as supply in this sector.

Inflation and Tariffs

• 📈 Companies are managing tariffs by cutting costs and passing some along, but the management of labor costs has been a significant surprise.
• 📉 Auto loan delinquencies and repossessions are increasing, feeding into disinflationary pressures by increasing used car supply.
• ⚠️ Smaller and mid-sized businesses are more directly impacted by tariffs and are expected to struggle.

Monetary Policy Challenges

• 🔍 The lack of released labor market data makes monetary policy decisions more difficult for the Federal Reserve.
• 📊 While the UK experienced negative GDP, the US shutdown's impact is expected to be temporary, with activity returning in Q1.