Q3 Commentary: Government Shutdown and the Consequences

“No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.” Article I, Section 9, Clause 7 of the U.S. Constitution underscores the importance of allocating every dollar in the American treasury. Congress must agree on how to allocate these funds, and it is not a unilateral power of the President. If Congress cannot agree on appropriation bills by the end of the fiscal year (September 30), then funding lapses. Under the Anti-deficiency Act, the government is only allowed to continue spending on critical services like law enforcement, social security, and national defense, to name a few.

The United States government shutdown began October 1, 2025, and the political impasse is set to continue indefinitely until Congress can agree on spending. The shutdown has gone into effect due to disagreements regarding healthcare subsidies (especially for the Affordable Care Act), foreign aid recissions, and other policy conditions included in funding bills (NPR) .

Consequently, the impact of the government shutdown will permeate every corner of the country and will affect the Federal Reserve (FED) and financial markets’ visibility of the state of our economy moving forward. In fact, Goldman Sachs estimates that this government shutdown will reduce annualized quarterly GDP by 0.2% for each week the shutdown lingers. That is around $15 Billion per week. The government shutdown delays access to data from the third quarter, but we are still able to draw from key events of the quarter to determine overall economic health.

Monetary Policy:

The FED lowered interest rates by 25 bps on September 17, from 4.25-4.50% down to 4.00-4.25%. With interest rate cuts recently going into effect, we can expect that the market of loanable funds will react positively to that. Bond prices will go up, as the demand for loans will also increase. FED chair Jerome Powell continuously cites his “wait-and-see” approach with monetary policy amid the trade war and stagflation we dealt with earlier this year.

The FED prioritized stimulus over inflation control with the rate decrease and moving forward they will adjust according to market response. Now, with the government shutdown, the FED will not have access to federal economic data, namely from the Bureau of Labor and Bureau of Economic Analysis. That creates additional hurdles for their monetary policymaking, as the Federal Open Market Committee (FOMC) is set to meet next on October 28. The duration of the shutdown remains unknown, and the economic implications only grow worse as the shutdown extends.

GDP and Labor Market:

The idea behind the FED cut was to spur economic growth, especially considering the momentum we had entering Q3; we saw 3.8% annualized growth, with a large decline in imports driving that growth. The decrease in imports is a result of trade tensions and rising import costs. It is also important to note that businesses imported in excess during Q1 to anticipate hiking tariff rates: “imports soared 41.3% for the quarter” (Nasdaq).

The U.S. added 22,000 nonfarm jobs in August, which posted below analysts’ predictions of 80,000; this was also a drastic drop from the 79,000 jobs added in July. The rate cuts will enhance economic activity, and the FED’s hope is that we add more jobs back to our economy. When interest rates drop, demand for loanable funds increases. Financing cash flow expenses decrease, and when a business can lower its interest payments, that will improve their operating income, leaving room for businesses to funnel that extra money into capital expenditure; thus, lower interest payments are good for the labor market.

Price Levels:

The Consumer Price Index (CPI) increased 40 basis points in August, after rising 20 basis points in July, the U.S. Bureau of Labor Statistics reports. This increase is largely driven by the increase in price levels for food and energy. The index for food rose 50 basis points in August, with items like tomatoes and apples rising in price the most at 4.5 percent and 3.5 percent, respectively. The index for energy increased 70 basis points in August, after falling 110 basis points in July. Gasoline saw the largest price swing, rising by almost two percent. Price levels need to remain closely monitored as price pressures for manufacturers may heighten due to the nature of our global trade policy.

Conclusion:

Congress will look to renegotiate the spending bill, but in the meantime, folks are losing out on income. Entrepreneurs are forced to sit idle, unable to pursue small business loans for their start-ups, union workers likely to be furloughed, and overall uncertainty of the future of the market are all consequences of this shutdown. In the meantime, we must monitor the financial health of the companies we invest in, as the systematic risk of the shutdown is unfortunately a hurdle we cannot jump over for now.

Akili Kelekele is as an Investment Analyst at Allen Trust Company. Akili is a Quantitative Economics graduate from Tufts University. Before joining Allen Trust Company, Akili worked as an Equity Research Associate for D.A. Davidson in New York City.  

Disclosure: The information provided in this writing is for general informational purposes only and does not constitute as financial advice from Allen Trust Company and Allen Capital Management. Readers are encouraged to consult with a qualified financial advisor to assess their individual circumstances and make informed decisions based on their specific situation