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

The U.S. government shutdown has entered its 22nd day, becoming the second longest shutdown in the country's history. The deadlock between the Democratic and Republican parties over healthcare subsidies continues, and the shutdown may extend into November, surpassing the longest record of 35 days during Trump's first term.

As the shutdown continues, economic data will fall into a "black hole." According to Morgan Stanley's previous warnings, the release of key economic data will be paused, posing a direct challenge to the Federal Reserve, which relies on data for decision-making. If the shutdown persists, the Federal Reserve may not obtain the necessary decision-making basis at its monetary policy meeting at the end of October.

Labor market data will suffer severe distortions. Anna Wong, Chief U.S. Economist at Bloomberg Economics, stated that the shutdown will lead to a temporary slight increase in the unemployment rate, but it will fall back to 4.3% after the government reopens. Morgan Stanley estimates that 750,000 federal employees will be forced to take unpaid leave daily; although they will eventually receive back pay, they will be counted as unemployed statistically, potentially "technically" pushing the unemployment rate up by 44 basis points.

This Friday, federal employees will miss their first full paycheck, further deepening economic damage. The White House has warned that it may not be able to continue using special accounting measures to pay military salaries and prevent disruptions to federal food assistance next month.

Data "Black Hole" Troubles Fed Decision-Making

Morgan Stanley pointed out in its report that the government shutdown will lead to a pause in the release of key economic data. The absence of major data such as the non-farm payroll report poses a direct challenge to the Federal Reserve. If the shutdown continues, the Federal Reserve may not obtain the necessary decision-making basis at its monetary policy meeting at the end of October.

Labor market data will show severe distortions. The report estimates that 750,000 federal employees will be forced to take unpaid leave daily. Although they will eventually receive back pay, this group will be counted as unemployed statistically, potentially "technically" pushing the unemployment rate up by 44 basis points. Additionally, unemployment among government-related contractors will also increase initial jobless claims, creating a false impression of a sharp economic deterioration.

Anna Wong specifically noted that the Washington area is particularly affected due to its high concentration of federal employees, contractors, suppliers, and service industry businesses, which will not receive back pay.

Actual Economic Losses Relatively Controllable

Despite the chaos in data, Morgan Stanley believes that actual economic losses are controllable. The report estimates that the current shutdown will drag down GDP by about 0.25%, and most of the impact will be repaired in the next quarter after the government reopens. In terms of consumption, although employee furloughs will cause a daily income delay of $400 million, the larger impact lies in the short-term shock to confidence.

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

Bipartisan Deadlock Difficult to Resolve

The shutdown stems from the disagreement between the two parties over healthcare subsidies. The Democrats are demanding that Congress provide relief for the 22 million Americans who will face soaring healthcare premiums next January, which is a condition for restarting the government. The Republicans refuse to negotiate on this matter Trump stated, "Our message is very simple: We will not be extorted over their crazy conspiracy."

Senate Democratic Leader Chuck Schumer and House Democratic Leader Hakeem Jeffries requested to meet with Trump before his trip to Asia, but Trump later on Tuesday said he would only talk to them after the shutdown ends. The Senate needs at least 8 Democratic votes to overcome the obstruction of the temporary spending bill passed by the House, which is set to expire on November 21.

Senate Republican Leader John Thune publicly committed to voting on extending the expanded Affordable Care Act subsidies after the government reopens. However, Democrats are skeptical about whether the House will hold such a vote, believing it is not enough.

The core of the disagreement lies in the cost. These more generous healthcare subsidies were introduced during the pandemic in 2021 as an emergency measure and are set to expire at the end of this year. Democrats want to make them permanent, but the Congressional Budget Office estimates that extending the subsidies will add $350 billion to the debt over the next decade. Against the backdrop of massive federal debt, rising interest rates, and an aging population, the U.S. struggles to sustain the ongoing expansion of the welfare state.

Private negotiations among Senate moderates have made no progress. New Hampshire's key moderate Democratic Senator Jeanne Shaheen shook her head when asked on Tuesday if she saw any way out of the impasse: "I don't see any way out."