Congressional Democrats have limited influence over President Trump’s policy agenda, but government funding requires 60 votes in the Senate, giving them leverage since Republicans hold just 53 seats. Votes will be used as leverage, putting the US government into a shutdown at midnight tonight.
Democrats' Position: ACA Subsidies
Democrats are pushing to extend enhanced Affordable Care Act (ACA) tax credits, which expire at the end of 2025. They view this as an important policy priority and are willing to tie it to the funding bill. Republicans oppose including the extension, citing both the precedent of keeping short-term funding measures narrow and the nearly $400bn cost over 10 years. Any extension, even temporary, would need to be paid for.
The Threat Of A Shutdown And/Or An Actual Shutdown. Will It Force Compromise?:
Senate Leader Schumer believes either: 1) Trump will blink ahead of the shutdown or 2) the ACA extension will be made a condition of reopening the government. Much of this strategy is predicated on the belief that the Democrats will win the messaging war on the shutdown and Republicans will compromise to get the government reopened. This argument mirrors the shutdown strategy in 2013, which backfired. Republicans made a similar bet in 2013 that a shutdown would force President Obama to water down the ACA subsidies before they were implemented. Instead, they were forced to cut a deal to reopen the government, which led to spending caps being removed.
Government Could Be Shut Down With Major Events Circulating This Week:
What is missing from the leverage analysis is that hurricanes are approaching the East Coast, Russia is prodding NATO boundaries, and there were two more mass shootings over the weekend. And all of this could be taking place with a government shutdown.
Republicans Are Likely To Make The Shutdown Painful For Democratic Constituencies:
Republicans will have a lot of authority to make wholesale changes to government agencies and employment once government funding expires at midnight on October 1. We learned from previous shutdowns that the largest source of pressure on Congress comes from its own congressional staff not getting paid once the first pay period ends. Do not discount the pressure this creates internally for Congress. There are some painful consequences to Democratic constituencies, particularly the longer the shutdown goes on.
Expect Moderate Senators And House Members To Seek A Solution As The Shutdown Drags On:
Both parties' House and Senate members are vulnerable in the 2026 elections. For now, these members are sticking with their parties. But as the shutdown drags on, we expect these members to find one another to find a solution to reopen the government. This pressure will intensify as the first paycheck period passes, and federal employees/congressional staff are not getting paid. Getting out of a shutdown is more difficult than entering one, and it has been found that the party demanding items usually does not get what they wanted when the shutdown started. As the shutdown drags on, the issues moderate members try to solve become greater than the initial ask.
Fiscal Policy Boost From OBBBA (One Big Beautiful Bill Act) Dwarfs Any Negative Hit From A Shutdown
A government shutdown is not an optimal policy event. However, the OBBBA payments to companies for investment in capital goods and research and development are being made simultaneously as the government closes. These payments are helping to sterilize the tariff impact and provide some cushion to the initial drag of a shutdown.
Could Be At A Positive Turning Point For the Labor Market, But The Shutdown Puts Data On Hold
April tariffs were a shock to the system, and a case can be made that companies were frozen in place for the past several months until there was better clarity on tariffs and fiscal policy. As such, there was not much firing with initial unemployment claims steady, but there was a lack of hiring with increasing unemployment claims. Nongovernment-related employment went negative over the past few months, a real danger sign for the US labor market. However, we have been encouraged by the turn in continuing claims, which peaked as Trump's trade policy normalized and OBBB passed into law. Unfortunately, data releases for employment and inflation are unlikely to be released during the government shutdown.
Temporary Hits To GDP Are Restored When The Government Re-Opens
Our experience with shutdowns is that the economists issue their estimates of the weekly drag on GDP that the shutdown will have. The average is about 0.2 points off GDP per week. However, shutdowns have had little impact on GDP historically because lost funding is restored long before the quarter ends. As such, the shutdowns have been timing differences that net themselves out.
S&P 500 Has Increased During The Last Five Government Shutdowns
The S&P 500 has increased during the last five government shutdowns. This may not have been true at the shutdown's start, as we initially saw some risk-off. But over time, the equity market senses the shutdown's unsustainability and moves on. This has helped propel stocks even while the government is trying to figure out a compromise to reopen the government.
Equity Market Has Moved On Quickly Post-Shutdown
Stocks are generally higher three months after the government re-opens. The exception was the January 2018 shutdown, which was followed by the launch of Trump's trade war with China and concerns about labor inflation.
Source: Strategas
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