Unemployment rate may temporarily rise! U.S. government shutdown enters its 22nd day, setting the second longest record in history.

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The U.S. government shutdown has entered its 22nd day, becoming the second longest in the country's history. The deadlock between Democrats and Republicans over healthcare subsidies continues, and the shutdown may last until November and surpass the 35-day record from Trump’s first term.

As the shutdown continues, economic data will fall into a "black hole." According to a previous warning from Morgan Stanley, the release of key economic data will be suspended, posing a direct challenge to the Federal Reserve, which relies on data for decision-making. If the shutdown continues, the Fed may not have the necessary information for its policy meeting at the end of October.

The labor market data will be seriously distorted. Anna Wong, chief U.S. economist at Bloomberg Economics, said the shutdown will cause a temporary slight rise in the unemployment rate, but it will fall back to 4.3% after the government reopens. Morgan Stanley estimated that 750,000 federal employees will be furloughed daily; although they will eventually receive back pay, they will be statistically counted as unemployed, which may “technically” push up the unemployment rate by 44 basis points.

This Friday, federal employees will miss their first full paycheck, deepening the economic damage. The White House has already warned that it may no longer be able to use special accounting measures to pay military salaries and prevent federal food assistance from being interrupted next month.

The Data "Black Hole" Troubling the Fed's Decisions

Morgan Stanley pointed out in a report that the shutdown will halt the release of key economic data. The absence of important data like the nonfarm payroll report poses a direct challenge to the Fed. If the shutdown continues, the Fed may not have the necessary information for its policy meeting at the end of October.

Labor market data will be seriously distorted. The report estimates that 750,000 federal employees will be furloughed daily. Although they will eventually receive back pay, this group will be statistically counted as unemployed, which may “technically” push up the unemployment rate by 44 basis points. In addition, contractors related to the government losing their jobs will also push up the number of initial jobless claims, creating a false impression of a sharply deteriorating economy.

Anna Wong specifically pointed out that the Washington area is especially affected due to its high concentration of federal employees, contractors, suppliers, and service sector businesses, while these contractors and service sector businesses will not receive back pay.

Actual Economic Losses Remain Manageable

Despite the chaos in the data, Morgan Stanley believes the actual economic losses are manageable. The report expects that the shutdown will drag down GDP by about 0.25%, and most of the impact will be reversed in the next quarter after the government reopens. In terms of consumption, although furloughs will lead to $400 million in daily delayed income, the greater impact is the short-term hit to confidence.

This Friday, federal employees who earlier this month only received partial pay will miss their first full paycheck, deepening the economic damage. The White House also warned that it may not be able to continue using special—and possibly illegal—accounting measures to pay military salaries and prevent federal food assistance from being interrupted next month.

No End in Sight for Partisan Deadlock

The shutdown stems from disagreements between the two parties over healthcare subsidies. Democrats demand that Congress provide relief for 22 million Americans who will face soaring health insurance premiums in January next year, as a condition for reopening the government. Republicans refuse to negotiate. Trump said: "Our message is very simple: we will not be extorted by their crazy scheme."

Senate Democratic Leader Chuck Schumer and House Democratic Leader Hakeem Jeffries requested a meeting with Trump before his Asia trip, but Trump said later Tuesday he would only meet after the shutdown ends. At least eight Senate Democrats are needed to overcome obstruction of the House-passed stopgap spending bill, which expires on November 21.

Senate Republican Leader John Thune publicly pledged to vote on extending expanded Affordable Care Act subsidies after the government reopens. But Democrats are skeptical that the House will vote on such a measure, believing it’s still not enough.

The main divide is over costs. These more generous healthcare subsidies were introduced in 2021 during the pandemic as an emergency measure and are set to expire at the end of this year. Democrats want to make them permanent, but according to the Congressional Budget Office, extending them would add $350 billion to the debt over the next decade. Amid high federal debt, rising interest rates, and an aging population, the U.S. cannot bear the continued expansion of the welfare state.

Private negotiations among Senate moderates have made no progress. When asked Tuesday if she saw a way out of the deadlock, New Hampshire’s key moderate Democratic Senator Jeanne Shaheen shook her head, “I don’t see any solution.”

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