Update 897 – Trump’s Shutdown Threat:
Mass Gov’t Firings without Budget Deal
Congressional leaders remained at an impasse this week on federal government funding beyond October 1, leaving four days until a government shutdown kicks in, absent an agreement. Democrats want healthcare concessions in exchange for their votes – seven of which are necessary to reach the 60-vote filibuster threshold in the Senate. Instead of negotiating, Trump has turned to threats to use the “opportunity” of a shutdown to carry out yet another round of mass firings across programs inconsistent with the “President’s priorities.” The chances of a shutdown are high and mounting, as there is no clear off-ramp to compromise unless one side caves on its demands.
In other developments, the President announced a slew of fresh tariffs on pharmaceuticals and heavy trucks, among other products, while the OECD released its latest economic outlook. New data released this week shows that the Fed’s preferred measure of inflation ticked up again last month amid the Trump administration’s sweeping tariffs, while economic growth was stronger than previously estimated during the second quarter, but remained slower in the first half of the year than during the first half of last year. Additionally, Trump signed an EO clearing the way for a deal to sell (part of) TikTok to American investors.
Good weekends all..
Best,
Dana
Headline
Federal Funding at an Impasse; Shutdown Odds Grow
The likelihood of a government shutdown rose sharply this week as Democrats and Republicans refused to budge on their competing demands for a short-term continuing resolution (CR) that would keep the government’s doors open past the end of the 2025 fiscal year (FY25) on September 30. The standoff is only intensifying, as the administration signaled plans this week to carry out another round of mass government worker firings across a range of agencies in the case of a shutdown. With only four days left until a potential shutdown, there is no clear path to the bipartisan resolution necessary to avert it.
How We Got Here
Last week, the House approved a Republican-drafted CR that would fund the government for seven weeks, leaving appropriators more time to negotiate full-year spending bills. Democratic leadership released a competing proposal for a CR that would pair a shorter-term, four-week funding extension with healthcare priorities (an extension of enhanced Premium Tax Credits and a repeal of the OBBB’s healthcare provisions) and limits on the Executive’s ability to interfere with congressionally appropriated funding.
Following the passage of the Republican CR in the House last Friday, the Senate quickly considered both proposals, and each failed to get the 60 votes necessary to overcome the Senate filibuster. The Senate then left town for this week’s recess, no closer to a resolution. To make matters more difficult, the House – which was originally scheduled to return on Monday – adjourned until after the September 30 deadline in an attempt by House Republican leadership to jam the Senate with its approved proposal. Now, the House is considering staying out for the week of October 7 as well if the government does shut down, putting more pressure on the Senate to accept the proposal it passed last week.
Trump Withdraws from Funding Negotiations, Threatens Mass Firings
Amid congressional action last week, President Trump agreed to a meeting with House Minority Leader Hakeem Jeffries (D-NY) and Senate Minority Leader Chuck Schumer (D-NY), who have been demanding serious, bipartisan funding negotiations for weeks to no avail. On Tuesday, Trump pulled back this agreement, calling the Democratic demands “unserious and ridiculous” and stating he has “decided that no meeting with their Congressional Leaders could possibly be productive.” While the talks were unlikely to lead to progress anyway, given that Trump himself has directed the GOP not to negotiate with Democrats, this move intensified shutdown fears across the country and enraged congressional Democrats, who feel little reason to give away their votes without concessions.
Adding more fuel to the shutdown fire, Trump’s Office of Management and Budget (OMB) on Wednesday sent a memo directing agencies to prepare for mass layoffs in the case of a government shutdown beginning on October 1. Specifically, the memo directs that agencies use the “opportunity” of a shutdown to “consider Reduction in Force (RIF) notices for all employees in programs, projects, or activities (PPAs)” for which funding expires on October 1 and that are “not consistent with the President’s priorities.”
The move was widely seen as a threat by the Trump administration, which is signaling that it will intentionally make a shutdown more painful in an attempt to scare Democrats into conceding. This OMB directive/guidance marks a significant and dangerous departure from normal order, as non-essential federal workers are typically furloughed in the case of a shutdown. Government workers, who give years of their lives to civil service, often working long hours for less pay than they could get in the private sector, have already been the target of a barrage of assaults by the Trump administration. Now, Trump is using them as a pawn, choosing to threaten their careers and livelihoods as opposed to engaging in negotiations necessary to reach the Senate’s 60-vote threshold.
Headed for Shutdown?
While Congress has narrowly avoided funding lapses since the last government shutdown during Trump’s first term, FY26 funding is shaping up to be a different story. Whether Republicans and Trump like it or not, there are not enough GOP Senators to clear the filibuster with a partisan proposal. To reach 60 votes, Senate Republicans need to convince seven Democrats to drop their demands. Yet, they have completely refused to negotiate with Democrats and threatened to inflict as much pain on the American people as possible unless enough Democrats give away their votes for free.
Senate Democrats are almost entirely remaining united in their demands for concessions, especially after suffering a blunder in a similar situation this past March. But, with the GOP’s lack of willingness to engage in bipartisan negotiations and the House not even planning to return next week or the week after to consider a compromise if one were to pass in the Senate, the chances of a shutdown remain extremely high. At this point, there is no clear off-ramp unless one side caves – which doesn’t seem to be in the cards for either party.
Other Developments
Inflation Ticks Up to 2.7% in August
Prices rose 2.7 percent over the twelve months ending in August as measured by the Federal Reserve’s preferred measure of inflation, the personal consumption expenditures (PCE) price index, according to the August PCE report released by the Bureau of Economic Analysis this morning. This is the highest annualized increase in PCE prices since February. Inflation, as measured by the annualized increase in PCE prices, has been ticking up over the past several months, from 2.3 percent in April, to 2.5 percent in May, to 2.6 percent in each of June and July, to 2.7 percent in August.
Core PCE prices – which strip out food and energy prices – rose 2.9 percent over the twelve months ending in August. Core inflation, as measured by the annualized increase in core PCE prices, has also been ticking up over the past several months, from 2.6 percent in April, to 2.8 percent in each of May and June, and to 2.9 percent in each of July and August.
On a monthly basis, headline PCE rose by 0.3 percent last month. This is fairly consistent with the rise in prices on a monthly basis in each of the four months prior. Food prices rose by 0.5 percent on a monthly basis in August, after falling by 0.1 percent on a monthly basis in July. Energy prices rose by 0.8 percent on a monthly basis in August, after falling by 1.1 percent on a monthly basis in July. Core PCE prices rose by 0.2 percent on a monthly basis in August, consistent with the rise in core prices on a monthly basis in July.
As inflation is rising, the labor market is weakening, putting the Federal Reserve’s dual mandate of price stability and maximum employment in tension. The new data shows that inflation continues to rise amid the Trump administration’s sweeping tariffs, but likely not by enough to push the Fed’s interest-rate-setting committee to hold rates steady at its next meeting in late October. The committee is likely to instead cut rates by 25 basis points once again.
U.S. Economy Grows by 3.8% in Second Quarter
The United States economy grew by 3.8 percent on an annualized basis in the second quarter of this year, according to the third estimate of second quarter GDP released by the Bureau of Economic Analysis (BEA) yesterday morning. Real GDP was revised up 0.5 percentage points from the second estimate released in August and 0.8 percentage points up from the advanced estimate released in July. The third estimate is based on more complete data.
The upward revision of 0.5 percentage points from the second estimate reflects an upward revision to consumer spending and a downward revision to imports, which are a subtraction in the calculation of GDP. These upward revisions more than offset a downward revision to investments.
GDP growth during the first quarter of the year was revised down by 0.1 percentage point, from a previously estimated 0.5 percent contraction to a 0.6 percent contraction.
The new data shows that growth slowed to 1.6 percent over the first half of this year, down from 2.5 percent last year. Considering growth over the first half of the year as opposed to growth over individual quarters allows us to smooth over volatility caused by swings in net exports, which continue to affect incoming data amid the Trump administration’s sweeping tariff-related policy changes.
The advanced estimate of third quarter GDP will be released on October 30.
Sectoral Tariffs, Ag Bailout Announcements
On Thursday, President Trump announced his latest slate of tariffs on certain imported goods. These new duties will take effect on October 1:
- 100 percent on branded or patented pharmaceuticals unless a company “IS BUILDING their Pharmaceutical Manufacturing Plant in America”
- 50 percent on kitchen cabinets and bathroom vanities
- 30 percent on upholstered furniture
- 25 percent on heavy-duty trucks (trucks that weigh more than 10,000 pounds)
The sectors have been under a Section 232 investigation, which investigates “the effects of a specific import on U.S. national security.” The President alleges these products are “FLOODING” into the country and are “unfair” to domestic manufacturing. Unlike the bilateral and fentanyl-related tariffs under the International Emergency Economic Powers Act (IEEPA), which are set to be reviewed by the Supreme Court in November, these tariffs are under the legally-sanctioned authority of Section 232.
Source: Reuters
In a Truth Social post, President Trump announced an exemption for any company that is “breaking ground” or “under construction” in the United States. Foreign drugmakers prepared for this inevitable tariff news by announcing billions of dollars in investments in American facilities. It remains unclear whether the President will follow through with his preliminary “handshake” agreement with the European Union to cap pharmaceutical tariffs at 15 percent.
In the Oval Office on Thursday, the President also signaled his intention to put together a bailout package for farmers using revenue collected from his tariffs. Farmers have been hit with higher prices for tractors and fertilizers, as well as a hostile export market in China, a retaliatory measure in response to the President’s tariffs. Once the President announces the details of the relief, it will likely need to be authorized by Congress.
OECD Sees Resiliency, Warns of Uncertainty
The Organization for Economic Co-operation and Development (OECD) released its Economic Outlook this week. The United States’ effective tariff rate rose to its highest rate since 1933 at 19.5 percent, and the economy has yet to feel the full effect of these duties. Growth in the United States is expected to fall from 2.8 percent in 2024 to 1.8 percent in 2025 and to 1.5 percent in 2026. The report points to higher tariff rates but also mentions the net drop in immigration as the principal reasons for America’s growth projections.
The organization found that global growth has been more resilient than anticipated in 2025. The revisions for global GDP growth in 2025 rose from 2.9 percent to 3.2 percent. However, its projections for 2026 remain unchanged at 2.9 percent. Front-loading by companies that either chose to absorb some of the costs or rushed to stockpile goods in anticipation of higher tariffs later in the year accounts for the upward revision in 2025. The OECD makes clear that uncertainty remains as economies begin to feel the brunt of Trump’s trade agenda.
Trump Paves Way For TikTok Deal via Executive Order
On Thursday, Trump signed an Executive Order (EO) that effectively gave his seal of approval to a deal that would have Chinese company ByteDance partially divest from its signature product, the social media app TikTok, and create an American version run by a cadre of wealthy American investors. Specifically, the EO designates the pending deal as a “qualified divestiture,” meaning that the app is no longer under the influence of a “hostile foreign actor” as designated by the 2024 law that initially led to TikTok’s prospective ban.
The EO would also extend the deadline for finalizing the deal by an additional 120 days. If it takes the full 120 days for the deal to be ironed out, it would mean that Trump’s legally dubious postponement of the TikTok ban would have lasted nearly a year. While the details are still in flux, the deal itself would essentially make American investors the curators of the American version of the app, while ByteDance would license the algorithm to them for $14 billion and, according to Bloomberg, approximately 50 percent of the US operation’s profits.
Critics have already questioned whether the putative deal genuinely addresses the national security issues that originally led to TikTok’s prospective ban. The deal would leave ByteDance largely in control of its algorithm, which it still owns. The aforementioned investors would get a copy of the algorithm and serve as “security providers” for it, overseeing how the algorithm works and how its data is used, among other things. That said, major issues remain unresolved, such as how this deal prevents Americans’ data from being collected and used by ByteDance and, by extension, the Chinese government.
The new venture that would purchase the American operations of TikTok consists of several of Trump’s wealthiest supporters, including Larry Ellison of Oracle, Lachlan Murdoch of News Corp, and Michael Dell of Dell Inc. Not too long ago, Larry Ellison’s son, David Ellison, bought Paramount in a controversial deal that saw Paramount pay $16 million to settle a dubious lawsuit by Trump against 60 Minutes. Now, with Larry Ellison’s financial backing, David is looking to purchase Warner Bros in a multi-billion-dollar buyout bid that, if it succeeds, would put the Ellisons in control of CNN in addition to their ownership of CBS News. If the TikTok deal goes through, that would leave conservative Trump backers with an unprecedented level of control over America’s media landscape.
Trump’s Attacks at the U.N.
In a fiery speech at the 80th Session of the United Nations General Assembly on Tuesday, President Trump, to no one’s surprise, touted his domestic economic agenda while bashing the U.N. itself and the international community. He spoke of the United States as having the “strongest economy, the strongest borders, the strongest friendships, and the strongest spirit.” Speaking to a room full of leaders whose countries Trump has assigned punishing tariff rates and decried, saying their “countries are going to hell,” it is hard to imagine many friendships remain.
He touted “historic” trade deals with the U.K., the E.U., Japan, South Korea, and others. However, it is worth noting that these are preliminary deals, some of which are little more than a handshake agreement announced to appease the president for the moment. In these deals, he refers to $17 trillion worth of investments since he took office, most of which have been announced by countries in these framework deals that have no enforcement mechanisms.
President Trump spoke of immigration as “destroying a large part of the free world.” Specifically, he referred to “uncontrolled migration” as the “number one political issue of our time.” Throughout his campaign and since taking office, the President has made sweeping efforts to carry out a mass deportation plan and to revoke the legal status of thousands of lawfully residing people. This speech underscores the hostility the President holds towards immigrants and the concept of immigration around the world.
Look Ahead
Friday, October 3
- September jobs report