Economic Outlook
By: Russ Colbert
Fall 2025 (Vol. 43, No. 3)
The government shutdown has thrown a curve ball into the data calculation of the stock and bond markets, as well as the Federal government. It is possible that it may be over by the time you read my article, but since they come along every so often you should know how they really affect economy and our government’s daily operations. Now that the shutdown is in effect, we will miss some data releases such as jobless claims and job reports until the Federal government reopens. Government shutdowns tend to have minimal and short-lived effects on economic activity. The bigger risk is the vacuum of data effected by the interruption to the collection and release of official economic data. In most cases the risk is overstated.
Economic data is all over the place. GDP continues to grow in spite signs of weakness in the labor markets. The tariff policy is volatile, immigration has slowed, monetary policy tightened in 2023-2024, with the M2 measure of money declining and real short-term interest rates consistently higher than any time since 2010. We know M2 grew 4.8% in the past year, but this is slower than the pre- covid trend of about 6.0%. Currently the value of the stock market is expensive. It keeps moving up and higher, and the investors continue to show no signs of worrying about anything. Even with the government shutdown markets don’t seem to be worried at all despite talking media heads and analysts warning it could cause a recession. But there is no evidence of a link between shutdowns and recessions. In other words, the U.S. economy has been less likely to be in a recession when the government has been shut down than when it has been open.
The closest recession following these shutdowns was fourteen months after the 2018-2019 shutdown, and that recession was due to COVID. Of course, in my opinion, it is not impossible that a recession could possibly not follow on the tail end or closely behind a government shutdown just because it hasn’t happened before. But if we get a recession it is going to be due to other factors such as tighter money (higher interest rates) and volatile tariffs, not the shutdown.
I don’t believe the shutdown is going to lead to some type of emergency. The Treasury Department will still receive revenue and entitlement payments will continue to go out for Social Security, Medicare, and Medicaid. Treasury bond holders would get paid in full, both principal and interest. The military, border control, weather services, FAA, and the Post Office, among other operations, would continue.
What is making this shutdown different is the posture of the Trump Administration. Normally the essential federal employee continues to work, and the non-essential federal employee stays home. When the shutdown ends, everyone gets back pay. This time President Trump is playing hardball. The Administration is telling agencies and departments to make a list of non-essential workers who can be permanently let go. This means that these workers would have no job to go back to.
Democrats are being forced to make a choice between a reduction in government workers and using the budget battle and the potential shutdown to boost spending. Government Jobs have already declined due to the Supreme Court recently backed cuts to foreign aid. The Federal government has been way too large and growing for a long time, reducing long-term economic growth. Shrinking the government boosts our long-term economic growth potential. That is good news for the stock market if the economic news continues this overall positive trend.
If you have any questions or need a free portfolio review to keep you on track with your investments or retirement plan, please call me.
Russ Colbert
Senior Portfolio Manager
1-888-878-0001
Advisory services offered through Royal Palm Investment Advisors, Inc., a Registered Investment Advisor.