The direct GDP impact from furloughed federal workers is small, mechanical, and quickly reversed. The more significant and lasting economic damage from a prolonged shutdown stems from its effect on the private sector, such as backlogged IPOs at the SEC or delayed construction projects waiting on permits.
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The dollar initially weathered the U.S. government shutdown. However, with the FAA now actively canceling flights, the negative GDP impact is becoming more tangible and less likely to be recovered quickly, increasing downside risk for the currency.
A shutdown doesn't just delay data reports; if it extends into mid-month, it prevents the government from conducting the surveys needed for future reports. This disrupts the entire data collection pipeline, causing a ripple effect that can obscure economic trends for months after the government reopens.
A prolonged shutdown leaves the data-dependent Federal Reserve "flying blind." This uncertainty, combined with the shutdown's negative economic impact, creates a downside risk that reinforces the case for monetary easing. The lack of new data makes it easier to continue the current cutting cycle.
A critical, non-obvious consequence of a shutdown is the suspension of the National Flood Insurance Program. Because this insurance is mandatory for many mortgages, the inability to issue new policies directly stalls approximately 1,300 home sales each day, creating a significant bottleneck in the real estate market.
While furloughed federal employees are typically guaranteed back pay after a shutdown, government contractors are often not. These individuals, who perform similar work without the same protections, face a permanent loss of income, highlighting a significant and often overlooked inequity in how shutdown risks are distributed.
A government shutdown has a hidden economic impact: it halts the National Flood Insurance Program. Because private insurers avoid this high-risk market, homeowners in flood zones cannot get new or renewed policies, freezing an estimated 1,400 mortgage-dependent home sales every day the shutdown continues.
Unlike the 2018 shutdown, the Bureau of Labor Statistics may not have funding this time, potentially halting the release of non-farm payrolls and CPI data. This would leave the highly data-dependent Federal Reserve and markets "flying blind" at a critical monetary policy juncture.
Shutdowns halt the release of key data like jobs reports and inflation figures. This obstructs the Federal Reserve's ability to make informed interest rate decisions, creating market uncertainty. It also delays Social Security COLA calculations, impacting millions of retirees who rely on that data.
While mass firings of federal workers may not significantly alter overall payroll statistics, their real impact is a potential shock to consumer and business confidence. This second-order effect on sentiment is a key underappreciated risk that the market has not fully priced into the US dollar.
A recent White House memo indicates that employees in departments reliant on discretionary funding could be permanently dismissed, unlike typical shutdowns where workers are furloughed and retain jobs. This introduces a new, more severe labor market risk that could negatively impact the dollar.