The Breakdown - Government Shutdown Hits as Politics Markets and AI Collide

Episode Date: October 2, 2025

As of midnight, the U.S. government has officially shut down after Democrats and Republicans failed to reach a last-minute deal. In today’s Breakdown, NLW explores the political brinkmanship behind the shutdown, how the White House may use it to reshape federal programs, and the macroeconomic fallout as millions of workers go unpaid. From consumer confidence and labor market risks to gold at all-time highs, Bitcoin resilience, and AI’s outsized role in holding up U.S. growth, we examine whether this shutdown could be the shock that tips the economy into recession—or just another political spectacle markets shrug off. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/@TheBreakdownBW Subscribe to the newsletter: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://blockworks.co/newsletter/thebreakdown⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownBW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Wednesday, October 1st, and we're kicking off the month with a government shutdown. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right, friends, it's official. As of midnight last night, the U.S. government has shut down. Democrats and Republicans failed to reach a last-minute deal on government funding on Tuesday, leading to the first shutdown since early 2019. Hundreds of thousands of federal workers will see

their paycheck stop and government services will be suspended until a deal is struck. While this is the first shutdown since the last Trump administration, it's hardly an unprecedented or unexpected occurrence. This is now the sixth shutdown since the Clinton presidency when the move was cemented into the playbook of political brinksmanship. Similar to debt-sealing negotiations, threatening to shut down the government has become a staple of Washington politics. Now, there are always layers to the politics, and it's often not entirely clear which demands are genuine and which are merely a pretense for staging a big political display. This time around, Democrat leaders are taking a stand on health care cuts. In June, the budget slashed Medicaid spending by almost $800 billion

over the coming decade. Another provision of the budget was set to remove tax credits on health insurance premiums for millions of people. That change was set to kick off. at the end of this year. Republicans argued that these changes were purely about removing illegal migrants from subsidized health care programs. House Speaker Mike Johnson said in a Tuesday interview, they want to restore taxpayer-funded benefits, American taxpayer-funded benefits to illegal aliens. We're not doing that. Below that talking point, however, subsidies would also have been stripped away from millions of middle-income citizens. In an interview on the steps of Congress on Tuesday, Democrat leader Maxine Waters, rejected the idea that the party was purely fighting for health care for illegal aliens,

stating, Democrats are demanding health care for everybody. Alongside the health care battle, there is also a broader political fight underway. Government shutdowns are always about specific budgetary issues, but they're also about which side can score political points. In September of 23, Republicans came within hours of forcing a shutdown. The House Freedom Caucus had demanded deep budget cuts and a reform on how government spending is approved. Their position fizzled out over the final days and hours as it became clear the public was not on their side. Polling showed the Republicans would be blamed for shutting down the government rather than President Biden. This time, time, Democrats are making a solid attempt at winning the narrative. Their side of Congress was completely

filled on Tuesday night while there wasn't a Republican in sight. In addition, the White House appears to be leveraging the moment and preparing to take full advantage of the shutdown. Referring to Democrats on Tuesday, Trump said, the last person that wants to shut down is us. Now, with that being said, we can do things during the shutdown that are irreversible, that are bad for them, and irreversible by them like cutting vast numbers of people out, cutting things like that, cutting programs that they like. In other words, government shutdowns give the executive branch extensive power. Technically, all paychecks stop and all government program shut down. However, the White House can pick and choose which programs and workers to deem essential and

keep them going during the shutdown. During the 2013 shutdown, President Obama famously shut down the national parks. This was a very visible sign of the shutdown and caused a huge uproar, with the public overwhelmingly blaming Republicans. However, the shutdown of the parks was entirely a political choice and didn't occur during previous shutdowns. During this shutdown, the administration is reportedly looking to slash federal workers and wind down federal programs in a way they weren't able to do during the doge cuts. Last week, the Office of Management and Budget shared a memo with Politico that called for permanent reductions in the government workforce if the shutdown goes ahead. Federal agencies were told to identify programs where discretionary

spending will lapse and make plans to permanently eliminate related jobs. Former House Speaker New Gingrich, one of the architects of shutdown politics, said, remember Rahm Emanuel's great quote, You should never waste a crisis. Ram Emanuel should be proud of the Trump team because they're prepared to say, every day this is shut, we will find ways to pay for everything we want. We'll find ways to eliminate everything you want and will do it legally. Polling currently suggests that Republicans are winning the shutdown. The most recent New York Times-Cianna poll had 65% of respondents stating that Democrats shouldn't allow a shutdown even if their demands aren't met.

That included 43% of Democrats. Another big political narrative is that Democrats need to be seen to be putting up a fight. Leadership took a lot of heat over the summer for rolling over to Trump's budget demands, so this shutdown is an opportunity to show a little gumption for their base. Ultimately, the political intrigue is a little academic. Having a good picture of the motivations and current sentiment can help predict if this is going to last a day or a month, but for the broader economy, the main point is that the federal government, one of the largest employers in the country, has stopped paying people as of last night. The administration plans to designate immigration and military officials as essential,

and it's a fairly safe bet that most of the bureaucracy will be sent home, given the administration's view on their contributions. Notably, this means the Bureau of Labor Statistics is unlikely to publish their data for the duration of the shutdown. There was a payrolls report that may or may not arrive as scheduled on Friday, but we are unlikely to get the August inflation print in two weeks' time. That could throw off data-driven decision-making at the Fed meeting to end the month. Gregory Deco, the chief economist at E.Y, said, you don't want to be flying blind in a foggy environment. A cut is currently priced in at 95%, rising from 85% at the end of last week, so maybe this won't

be that difficult a decision for Powell and the FOMC. Elsewhere in the Commerce Department, the U.S. Trade Representative's office is likely to be deemed essential. During other shutdowns, the office which administers tariffs was clearly non-essential and basically shut down for the duration. Around half of the staff are expected to stay on at this time, which could still be a large enough drop to slow down trade approvals. Zooming all the way out, the shutdown is a macroeconomic shock due to the loss of wages. There are around 3 million federal employees, around 1.5 Walmarts. That number of missed paychecks is going to leave a dent, especially if the shutdown is prolonged. The Obama-era shutdown only lasted a little over two weeks,

while the shutdown during the first Trump presidency stretched over a month. It is very difficult to know how long this one will last, given that both sides are entering it, feeling like they have a strong hand to play. And we've also never seen a government shutdown where the administration is explicitly looking to conduct permanent layoffs. The shutdown comes at a moment when the U.S. economy was already showing a few cracks. Last month, the Fed cut rates on the back of weak labor market data and a concern it would continue to get worse.

On Tuesday, the BLS released the job openings in labor turnover survey, otherwise known as Jolt. It showed a mild increase to 7.23 million open positions across the economy. While that level is stable, it's still down around 5.5% from this time last year. Boston Fed President Susan Collins said on Tuesday, My baseline outlook doesn't see the labor market softening much further, but there are risks. In particular, I see some increased risk that labor demand might fall significantly short of supply, leading to a more meaningful and unwelcome increase in the unemployment rate. More concerning is extremely weak consumer confidence data from the conference board.

Their data also released on Tuesday showed that confidence, confidence fell to a five-month low and the second lowest point since the pandemic. Sixth-month expectations fell even more sharply. Callie Cox, a market analyst at Ritzhold Wealth, noted that shutdowns really do a number on consumer confidence writing. Shutdowns are rare and impactful, enough to rattle our psyches every time they happen. Five out of the 10 shutdown since 1981 have led to sharp drops in consumer confidence. Odd Lotz, host Joe Wisenthal, ran through all the recent data in his Tuesday newsletter writing. It's hard to get clear, objective insight into the economy right now. The data has been very noisy and trends seem to change by the weak. Also, a lot of

the soft data may be marred by partisanship or other blurring factors. However, he continued, it's pretty clear that from the public's perspective, the labor market continues to weaken. Alongside labor market weakness, various sections of the financial economy are also showing acute signs of distress. Auto loan delinquencies are currently above 5%, but in the subprime end of the market, delinquencies have reached 9.3%. Earlier this month, Tricolor Holdings, one of the largest subprime lenders in the market, filed bankruptcy after defaults put their books deep underwater. Meanwhile, commercial real estate continues to go from bad to worse. Recent data from Moody showed the national office vacancy rate has surged to a record

high of 20.7% in the second quarter. That sector had already seen a ton of writedowns and restructurings over recent years, but there are still another $290 billion worth of loans set to mature by the end of 2027 in a very cold market. Home sales saw a significant uptick last month, rebounding by 4% year over year after the Fed cut rates. However, sales volumes are still in Nemic. The latest data showed that this was the lowest volume August since 2010. At the current pace, this will be the slowest year for home sales since 1995. All of these trends have been building for years, so it's difficult to view them as an acute problem, but they are still signs of building stress in the system. Now, one of the big themes in markets over the past few years

has been that AI stocks have carried the entire index forward. Each stumble since 2023 has been met with another monster earnings call from Nvidia or the rest of the Mag 7 to kick off a renewed rally. In a research note last week, Deutsche Bank said that it isn't just the stock market being propped up by the AI industry, it's the entire U.S. economy. Analysts George Daravelos wrote, AI machines in quite a literal sense appear to be saving the U.S. economy right now. In the absence of tech-related spending, the U.S. would be close to or in recession this year. The Kobayisi letter had a similar take. Sharing a chart of AI CAPEX going parabolic over the last three years, they wrote, this is unprecedented. Software and technology investments contribution to U.S. real

GDP growth surpassed one percentage point for the first time in history. The contribution has doubled over the last several quarters. It has also exceeded the previous peak reached during the dot-com bubble in 1998. However, after the bubble popped, software and technology businesses were the biggest drag on GDP during the 2001 recession. Deutsche Bank estimates that without technology spending, the U.S. economy would have been close to or in a recession. The AI boom is driving economic growth. So will a government shutdown knock the economy into a recession and bring a premature close to the market? The economist noted that during the last shutdown, the S&P 500 bottomed on the third day and ended 10% higher. That's a huge gain, considering that Washington was only closed for a month.

Goldman Sachs analysts have found that shutdowns are also correlated with a weakening dollar, which makes a lot of sense. The Dixie is down 0.8% since Friday, but the medium-term trend is relatively flat. One market that's seeing a ton of activity is precious metals. Gold made a new all-time high this week, topping 3,800 on Tuesday. It's up almost 45% year-to-date, on track for its strongest performance since 1979. Silver is also starting to catch up, chalking its highest ever quarterly close on Tuesday. There's a little more to go for an all-time high, but after a hot quarter, Silver's year-to-date returns are now at 64%. Macro-analyst Capital Flows writes, we are in a melt-up. I would not be surprised to see SPY move another 5%

higher from here into the end of the year. Crazy things are supposed to happen. As for Bitcoin, meanwhile, momentum seems to be building. The price was up 3.3% on Tuesday and had almost completely recovered from last week's stumble. A new all-time high isn't being threatened at this stage, but it wouldn't take much from here. We don't really have a lot of history on how crypto performs during a government shutdown. The past two major shutdowns occurred in early 2019 and 2013, when Bitcoin was still a very nascent asset. During the 2019 shutdown, Bitcoin tanked by 10%, but Bitcoin is now a macro asset to be considered

right alongside gold, the S&P 500, and government bonds. In 2019, it would have been insanity to seriously suggest that for most people, Bitcoin could hedge government dysfunction, but now that's the major selling point for Black rock's Bitcoin ETF. Maybe it's a coincidence, but Bitcoin had its strongest day in over a month when the government shut down. At the very least, crypto is firmly in the zeitgeist as we enter a new cycle about government spending. Earlier this week, Jim Kramer published a picture of the national debt clock that went viral. The caption was, buy crypto. So friends, that's the view from here. We will keep an eye on this shutdown, of course. Appreciate you listening, as always,

and until next time, be safe and take care of each other. Peace.