Weekly Update - United States: an economy that holds up despite the shutdown

The U.S. Congress reached an agreement this week on temporary funding for the federal government, ending the longest shutdown in U.S. history. The suspension of non-essential activities throughout October and early November is expected to weigh on growth in Q4 2025, but the impact should be offset as early as the first quarter of 2026. Meanwhile, surveys and private data confirm the economy's resilience, supporting the markets while encouraging the Federal Reserve (Fed) to remain cautiousin itsrate-cutting cycle.

A historic shutdown, but a temporary impact. The agreement reached on November 12 funds the government until January 30, 2026, ending 42 days of paralysis. During this period, non-essential functions were suspended, federal salaries and payments to contractors were frozen—but these are expected to be paid retroactively. The effect on activity will therefore be temporary: a slowdown in Q4, followed by a rebound in Q1. According to the Congressional Budget Office, six weeks of closure would reduce Q4 GDP by 1.5 percentage points, before a 2-point rebound in Q1 2026. The main economic consequence of the shutdown remains the absence of official statistics, notably the October employment and inflation reports.

Activity holds up well. Private indicators suggest positive momentum despite the partial paralysis of the administration. The October ISM services index shows robust sub-indices: activity at 54 and new orders at 56, levels indicative of expansion. Private consumption remains well oriented, with nominal growth above 5% in October. On the labor market, state data on new unemployment claims do not show a significant increase (although they exclude public sector employees). Finally, Q3 2025 corporate earnings confirm this strength: S&P 500 profits rose nearly 12% year-on-year, with still favorable outlooks.

Supported markets, a more cautious Fed. This resilience and strong corporate results continue to drive equities higher: the S&P 500 has gained 2.3% since early October. Credit spreads remain contained, around 50 basis points for investment grade issuers and 335 basis points for high yield issuers, close to historic lows. Paradoxically, the shutdown has mainly changed the Fed’s tone, now more cautious especially given uncertainties linked to the absence of official employment and inflation data. Indeed, several Fed members have indicated that, in the likely absence of employment and inflation reports before the Fed meeting on December 10, the best decision would be to “pause” the ratecutting cycle. This caution adds to the restraint shown at the last Fed committee regarding the continuation of rate cuts, in a context where economic activity still appears resilient, the labor market shows no job losses, and core inflation remains above the 2% target. Markets have thus significantly lowered their probability of a rate cut at the December meeting. We continue to expect a final Fed rate cut at the end of this year or early next year before a prolonged pause

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