Threat of mass job cuts raises economic stakes of US government shutdown

WASHINGTON – The White House’s threat to leverage an Oct 1 government shutdown to conduct mass firings of federal employees – and Democrats’ refusal to cave in to President Donald Trump’s demands – raise the political and economic stakes of a perennial event that markets have grown to ignore.

The last shutdown – the longest in US history – occurred during his first term, spanning more than a month in late 2018 and early 2019. Since then, last-minute compromises have averted disruptive government closures. 

This year, however, a shutdown appears nearly certain as Democrats and Republicans harden their positions ahead of the deadline. 

The White House issued a memo on Sept 24 saying a shutdown would trigger widespread dismissals of employees in government programmes that do not align with Mr Trump’s priorities.

Democratic leaders insist they will not accept a spending Bill without concessions on healthcare, like extending Affordable Care Act insurance premium subsidies and cancelling Mr Trump’s Medicaid cuts.

The hard-ball tactics worsen the potential disruption to a US economy with an already weakening labour market. 

Investors are closely watching the stand-off and the effect it could have on unemployment and key economic data releases. Mr Andrew Hollenhorst, Citi’s chief US economist, said layoffs during the shutdown could increase the “amount of near-term economic drag”.

“The most apparent effect, at least initially, for markets would be the delay of key data releases including the September jobs report,” he wrote in a note.

Typically, many federal workers are temporarily sent home during a shutdown and receive back pay once it ends. Workers deemed essential for functions like national security work without pay until the shutdown ends.

The White House memo, however, makes clear the administration would instead use a shutdown to gut programmes it does not support. That could lead to large numbers of federal workers losing their jobs. Even if courts ultimately reverse the firings, those workers could face a long period without pay.

Newly unemployed federal workers would face a tough hiring environment. Job growth has slowed sharply in recent months, and in the Washington area, earlier efforts to shrink government spending have made it particularly difficult for many people to find jobs that match their skills.

The unemployment rate in Virginia, where many federal workers and contractors live, has climbed nearly every month in 2025. The jobless rate has risen in both Washington and Maryland.

Democrats have argued Mr Trump has already engaged in illegal mass firings without congressional approval. He could face political risks of his own if he were to fire large numbers of federal workers and slash popular public services. And he could be blamed if the US economy tips into recession.

Budget expert Bobby Kogan of the Centre for American Progress said reductions in force are governed by regulations and collective bargaining agreements, and spending money to carry out permanent dismissals might also violate laws governing shutdowns.

The administration might argue that the preparation for the reduction in force took place before the actual shutdown and no violation occurred. It might also argue in court that statutory minimum staffing – like that in place to keep a stripped-down version of USAID functioning – no longer applies in a shutdown.

Senate Republican leaders will hold another vote on a no-strings stopgap through Nov 21 after senators return to Washington on Sept 29. They will need at least seven Democrats to pass the Bill. BLOOMBERG