Is the U.S. Shutdown Impact About to Hit?

While U.S. consumer sentiment has broadly held up, it may begin to crumble in certain segments, potentially impacting the sector at its most important time.

As the U.S. government shutdown moves into its sixth week, it is striking how unfazed domestic and foreign investors seem by it.

U.S. equities have continued to climb higher since the shutdown began, and U.S. Treasuries have so far barely flinched. Leaving aside the AI boom and moderating inflation, this would suggest investors are both at ease with the political paralysis and confident in earnings growth and the broader economic outlook.

Before the shutdown halted key data releases, most measures showed the U.S. economy to be in decent shape. And judging by last week’s quarterly earnings results, U.S. companies are broadly in solid financial health.

Among several reasons for that is the resilience of U.S. consumer spending. Making up about two-thirds of GDP, it has been critical, holding up well despite tight (though loosening) monetary conditions, tariff-induced inflation and a weak and jittery jobs market. Indeed, consumer confidence has generally withstood these forces throughout much of the year, including heading into the shutdown on October 1.

Yet, confidence can be hard to sustain, and it may be ebbing. Recent card data from Chase, for instance, shows a notable deceleration in discretionary spending between the first and second half of October. At the same time, the Conference Board’s consumer confidence survey for October dropped to a seven-month low, with expectations for the next six months falling to a low not seen since June.

Together with the state of the labor market and cost-of-living pressures, the shutdown—which at this point is threatening to become the country’s longest—is now in the mix as one of consumers’ chief concerns.

A swift resolution would help, but, at the time of writing, it looks unlikely. And as November begins, that means consumer resilience is likely to be tested further as a range of important federal support programs run out of money, thousands of federal employees miss their first full paychecks, and millions of Americans face the prospect of needing to pay significantly higher medical insurance premiums.

Low Blow

Low- to middle-income households are already under pressure from the cost-of-living squeeze. The temporary suspension of popular federal programs that provide food aid and nutrition assistance, early childhood education and essential air services will likely pressure these income groups more.

Worse still, this pressure could increase further should Congress fail to agree to extend expiring enhancements to premium tax credits under the Affordable Care Act, for which open enrollment started on November 1.

One key effect of this could be to further exacerbate the so-called K-shaped dynamic in the U.S economy, where high-income or wealthy consumers have maintained or increased spending at the same time low- to middle-income households, which are more acutely impacted by high rates and inflation, have cut back.

This dynamic has been playing out over the past couple of years, but it is now particularly striking as 20% of high-income consumers account for over half of the U.S.’s total consumer spend, highlighting just how reliant the economy is on this small but powerful segment of the population.

Most immediately, the worry is this bifurcation widens should the shutdown continue into the holiday season, potentially impacting sales during the consumer sector’s most crucial trading period. Looking out longer, the greater concern is that the trend continues to develop further into next year.

Clearly this has implications for consumer sector-related stocks and bonds, where margins are thin and tariff pass-through plus lower sales revenue could compress profitability, especially in staples and value-end retailers. Seen another way, such companies have little to no pricing power.

Importantly, we are already starting to see the effects of this across sectors exposed to lower-income consumers. At the most extreme end is a rising incidence of company earnings being hit—recent examples include third-quarter earnings misses from Chipotle, Starbucks and MGM Resorts—job cuts, store networks being closed, and bankruptcies rising, notably in the auto-related sector most recently.

To some extent, this more-challenging environment for consumer staples is why we downgraded our view on the sector to underweight in our most recent equity market outlook.

Too Little, Too Late?

Policymakers will be closely watching how consumer confidence and spending changes over the coming weeks and months, especially the downside risks that would undermine them, such as higher layoffs.

Even though the largest companies that drive the stock market are expected to be resilient, they don’t generate the most jobs. Small businesses are the largest employers, so if they struggle, that could lead to bigger cracks in an already stumbling labor market.

This is clearly a risk the Federal Reserve is focused on and a primary driver of its widely expected decision last Wednesday to cut interest rates by 25 basis points. While the Fed warned another cut in December is not guaranteed, our view is that another quarter point cut will come.

Lower rates should in turn help support the consumer and the consumer-related economy. But even as looser policy feeds through, some significant damage to low- and middle-income groups may already have been done.

What’s more, if the shutdown is perceived as an “assault” on these households, there could be political consequences in 2026 and beyond. That matters for risk markets insofar as it could influence the trajectory of fiscal choices ahead: the appetite for discretionary spending, the tolerance for deficit reduction vs. expansion, and the willingness to smooth shocks that may hit household cash flows hard.

Sharpening Selection

Such effects are worth considering, but it’s important to stress that we’re not there now. Indeed, there’s every hope and expectation the shutdown will end soon, potentially mitigating any lasting fallout. U.S. risk assets currently seem to be priced for that.

At this stage, however, increased vigilance around consumer dynamics and sharper, more selective, positioning across consumer-related stocks and bonds is warranted. Overall, the focus should be on consumer businesses with resilient cash flows—pricing power, disciplined inventories, flexible costs and diversified customer bases—rather than wholesale de‑risking across consumer-related sectors.

Just as important ahead of any post-shutdown macro data volatility is resisting headline‑driven reallocations. Instead of pivoting to the noise, investors should consider using any volatility to test investment theses, potentially adding exposure selectively.

After all, it’s the economy—and its translation into earnings and balance sheets—that ultimately drives returns, and over the coming quarters, we expect U.S. growth to hold firm and reaccelerate.