What a government shutdown really costs the US economy

Economic Outlook - The US economy is expected to experience a modest reacceleration, supported by a strong equity market and significant investments in AI and data call centers [4][5]. - The economic data, excluding hiring metrics, has shown improvement recently, indicating a positive trend [4]. Government Shutdown Impact - A government shutdown could lead to the suspension of essential services and key economic data releases, which would create uncertainty in the markets [6][10]. - The potential impact on GDP is estimated to be a drag of one-tenth of one percent per week, manageable in the short term, but could increase significantly if the shutdown extends beyond 20 to 30 days [8][9]. - The timing of the shutdown is critical, particularly around October 12th to 18th, as it may affect the collection of important labor market data [11][12]. Federal Reserve and Monetary Policy - The independence of the Federal Reserve is crucial for maintaining market stability and preventing excessive volatility, especially in fixed income markets [33][34]. - Current discussions suggest that the Fed may be pressured to lower rates, which could pose risks for inflation in the near to medium term [35][36]. - There is a growing belief that the de facto inflation target may be moving towards 3%, reflecting current economic conditions [51][55]. Bond Market Insights - The term premium, which compensates investors for the uncertainty of future interest rates, is rising, indicating increased risk perception in the bond market [24][26]. - The bond market's response to inflation expectations suggests a disconnect between market pricing and public sentiment regarding long-term inflation risks [41][42]. AI and Investment Trends - There is a bullish outlook on AI, with expectations that it will enhance productivity and living standards over time, despite potential short-term market volatility [30][31]. - Major financial institutions are integrating AI into their investment strategies, indicating a significant shift in how investment decisions are made [30].