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So here's the latest.
This this morning, the Senate failing to reach a deal to extend funding, plunging the US government into a shutdown, putting a slew of economic data in jeopardy. John Lieber of your Asia Group right in the following even a macro economically significant shutdown could have knock on effects that delayed data releases for the next several months. As federal workers get up to speed, John joins us now for more. John, Welcome to the program. I want to pick the language
of the president there that last line. We can get rid of a lot of things we didn't want. Is this going to be a different kind of shutdown.
Yeah, absolutely, I mean, I think the fact is that Trump is playing a different game, by a different set of rules than I think the Democrats on Capitol Hill are playing right now. And he's been playing that all year, and he's playing that for his entire political career. And I think that there's a lot of unpredictable effects that are going to come out of this shutdown that we
haven't seen before. If you look at the pattern this year, it's that Congress's authority has been usurped or even eliminated in many cases when it comes to decisions about what the federal government's doing, who they're funding, whether or not they're laying off workers, or even closing entire divisions, and Congress has been helpless to stop it. So part of the reason the Democrats are behind this shutdown, are rallying behind the shutdown, is because they want to force the
power of the purse back over to Congress. I don't think Trump cares. And again, he's playing a different game. He now has the power to choose who's essential who is and he's going to take that opportunity in a way I don't think we've ever seen in the United States before and deem the functions that he prioritizes as essential and then cut off the ones that he doesn't. So this is a very different type of shutdown than we've seen before, even the one that Trump oversaw in
twenty eighteen and twenty nineteen. The government was partially funded then, so you had the core defense functions and other security functions had an authorization from Congress to keep spending money. Right now, nobody does. So Trump's in charge, and he will be in charge until the Congress agrees to reopen the government.
Does this administration try to make furloughs actually permanent.
It could try, I mean, I think that's the decision that's up to the courts. I mean, one of the interesting phenomenon so far this year is that the courts are offully slow, and the Trump administration could be pretty quick, so they could use this as an excuse to try to furlough more workers. You know, there's been some resistance to those furloughs, even within the cabinet agencies that are run by Trump appoint because they want the people to
do the work they're supposed to do. But now they suddenly have an excuse and the Clearly the White House sees a political advantage in forcing more of these layoffs in order to bring Democrats back to the table, and I expect that.
They're going to use it well, John, three Democrats already back at the table last night in the sense that they voted for the Republican clean cr They only need to get five more Democrats to then reopen the government and keep it funding to the end of November. Do you think that Schumer is losing the moderate wing and potentially this is going to be a short shutdown.
It could be. I mean, you know your base rate here. Your expectation should be that this is a relatively short shutdown, you know, because of these political pressures on members of Congress who don't want to see this happen. And the only thing you need is exactly what you said, You need seven Democrats to say we've had enough. We already know the universe. Of those seven Democrats, they're the ones that voted to end to open keep the government open
this spring. And you mentioned Schumer. He's the one who's under the most pressure because he took just withering criticism for his decision to keep the government opened. But the fact and He's under a lot of pressure from the Democratic base to regain leverage over President Trump, leverage that simply doesn't exist through Congress right now. And so I think that he's in a really tough spot. Those other Democrats.
I think this is an easier calculation. People like John Fetterman from Pennsylvania see that this is a tough thing for the Democrats to win, and over the next week or so, I expect those numbers are going to grow, and you know that will help to end this shutdown, probably sooner rather than later.
That actually is exactly where I wanted to go John, this idea of in March what happened to Chuck Schumer when he what a lot of people, Democrats in particular, said, a cave to the Republican demands to keep the to keep the government open. Is this just performative to avoid that, to placate a certain side of the Democratic base. Is that how it's being read, at least in polls.
Yeah, I mean, I think he's in a tough spot, and you know, I feel bad for the guy. There's no way to win this thing. Like he's got to keep his eye on the Democratic members who elected him to be leader. He's got to keep his eye on the Democratic voters who elected him to his Senate seat, and they problem, the fundamental problem for the Democrats right now is they don't have a strategy to push back on Trump. That they've been unable to land any punches,
and they've been unable to draw any blood. His popularity is reasonably high for President Trump. He's hovering around the mid to low forties, which is much better than he was doing and is the entirety of his first term. And he's doing all kinds of controversial stuff that the Democrats hate, and they can't articulate the case against him.
And until they figure out how to do that, Schumer and the other leadership are going to be looking for things like this that allow them to kind of shore up their base on the left and placate them a little bit and try to land these punches that so far they've been unable to do. I think this is a prime example of that.
John. The markets flags they don't care, Do voters care.
Has there been anything in the voting or the polling that shows that this is swaying the needle in any capacity?
I suspect at some point the chaos will be enough and people will say, you know what, we don't like either of these jerks that are causing all these big problems. That's kind of where I think this ends up in the polling. I don't think it necessarily falls in the Republicans or Donald Trump. I don't think it necessarily falls in the Democrats. Maybe the president takes more responsibility because
he's the executive executive. But you know, if you look at the elections, there's no evidence of these shutdowns, as we talked about last week, there's no evidence that these shutdowns make any difference in the elections whatsoever. In twenty thirteen, the Republicans were solely responsible for at the time a very long shutdown over Obamacare, and in twenty fourteen they won back a majority in the Senate. So there's just
no evidence that this has lasting political effects. I think it could be a drag on the overall approval rating of lawmakers Washington. But I don't think either side is going to win or stands a lot to lose here, John, do you think it.
Is time for new dataship in the Democratic body?
Probably? I mean, I don't think there's anything. You know, I think that being a leader a tough tough job. I think it's a hard thing to do. They have a new leader in the House, and he's doing his best. I think in the Senate. You know, I wouldn't cast this persions on these guys. I used to work for the minority leader in the Senate and for the Republicans, and it's a tough job. It's a tough job keeping
everybody happy. But you know, there again, the Democrats are not articulating the case against Trump, and their leadership is not helping them do that. So I think looking to Congress for your leadership right now is a mistake. And if I were the Democrats thinking about the next leader of the party who's going to be running for president, I'd be looking out to the states, to the governors, to people that aren't currently playing on the national stage.
And the way Schumer is now, Schumer's got to do his own tough job managing his own caucus and playing the inside Washington game. And then these governors that are out in the states are the ones who I think will be the more effective messengers against Trump.
Eventually stay with US Multpleinberg surveillance coming up after this, And if you were concerned about the step down in payrolls growth. I think that's more feel for concern off the back of that report.
Yeah, at this point, we're looking at a ninety five percent chance that the FED is going to cut rates at the October twenty ninth meeting in at Washington, DC on the backs of this report. You also just saw the lowest reading on this ADP print going back to March of twenty twenty three, so definitely signaling some weakness. And essentially this gives ammunition to those you are saying the risk management tool here is catering to the labor market, not necessarily trying to tackle inflation.
Greg Daka of VY is with a surround a table corrected morning, Good morning, this is all we've got. How useful is this number and what are the limitations around it?
Well, I think it's useful in the sense that we don't have anything else. I would push back a little bit on the notion that the ADP is necessarily the best gauge of BLS reports when it comes to employment because it's just focused on the private sector.
It also does not.
Include all the details that we get out of the employment report, so it is a good reading in terms of having a perspective on the labor market, but it excludes some important parts of the labor market, including the public sector, where we're anticipating some further losses both at the federal level but also at the state and local level as we start the new year with less funding
for many state and local governments. So I think the weakness is apparent in terms of labor demand in the labor market more broadly, whether you look at continuing claims for unemployment, whether you look at yesterday's data on job flows, the JOLT report showing the hiring rate and the quits rate at a ten year low, not just a few months low, but a ten year low, showing there's very
little flow in the labor market. There is underlying softness in the labor demand components, and the labor supply, of course has been tremendously affected by the reduction and immigration.
So it's a combo.
But I think labor demand is weaker than labor supply at this juncture.
Are you saying that we've been sort of in this stasis slow higher low fire range for a while and now we're actually seeing the labor ma market break to the downside.
I think there are certainly risks to that the low higher low fire environment is not sustainable.
It's an uncomfortable balance.
You rarely stay in that balance for a prolonged period of time because either one of two things happens. Either you see employers starting to hire more that's the good story, that's positive story, or you see more layoffs because essentially there's a desire to manage costs. And let's not forget we are still in the midst of an environment where there are a number of supply shocks affecting the economy.
Too.
Many people are still reading the economy as if if we're guided by demand shocks. This is not the case. Supply shocks are increasingly important. Whether it's tariffs and trade disruptions, immigration disruptions, energy disruptions, capital disruptions, all of those factors are affecting economic trends in a way that we haven't seen before. Think of technological shifts as well, ai a big, big shock to the economy. We're not reading the economy in the proper way, and that's why many people are
confused about the economic signals. The mixed signals are the reflection of an economy that is impacted by a significant number of supply shocks.
Yeah, and essentially this is an economy and dramatic transformation. I just wonder how you square the idea of profits growing across Wall Street, across a lot of corporate America at the same time that we see this low higher low fire dynamic potentially breaking to the downside.
Because everybody's taking about the consumer, about the market, about the business environment. It's not like that there is a tremendous degree of polarization across businesses, across consumers, across the economy when it comes to how these shocks are affecting different actors in the economy. Take tariffs. Tariffs are not affecting everyone in the same way. Those that are very price sensitive are seeing the prices a grocery stores rising,
and they're pulling back on demand. They're seeing retail costs also rising. They're pulling back. Those that are at the higher end of the income spectrum, they're less concerned about an increase for a price ticket to go somewhere, to fly somewhere on vacation, but they're also gradually being more And the same applies to businesses, not all businesses, not all sectors are created.
Equal in the face of this supply shock.
If you're more heavily leaning towards the tech sector, then you're going to be benefiting from this AI boost. If you're a big corporation that is investing in AI, you're also going to be investing more in capex. We're seeing that in the GDP data. So it really depends on where you law on the spectrum of the economy and how exposed you are to these shocks.
Rag what if we get a prolonged government shutdown and this is all the FED has to go off of.
Unfortunately, this is not the best time to have a government shutdown. Of course, there is the immediate effect of essentially eight hundred thousand federal workers not being paid and being put on furlough that can have a notable impact on the economy. We estimate a drag of about a tenth of GDP growth for every week of government shutdown. But importantly, for business leaders, policy makers, and economists, this means we're flying blind in a highly foggy environment, and this is very risky.
Can we get a shutdown induced recession in some pockets of the US economy?
Perhaps in some pockets of the economy, but not necessarily. Broadly speaking, this is not significant enough to really bring the economy to its nees when it comes to a potential recession. But we are seeing some sectors that are seeing outsized declines in terms of economic activity. You look at the housing sector, for instance, a sector that is also hit by insufficient supply, but increasingly by the drag
of demand from a low affordability environment. If you start to see more segments of the economy affected negatively by government shutdown, think about the area around DC, think about contractors that depend on federal funding. Then that could put further downward pressure on a housing market that is already struggling.
So regionally and sectorally you could have these pressures that are outsized and that way on economic activity, not a broad based recession, but a more pronounced slowdown and potentially a contraction in some sectors some regions of the country.
If you actually John, I guess, welcome to the program. Just mymusica of the ADEPA report, of course, tanking on additional importance this way, because we might not get The payrolls report this Friday came in at negative thirty two K. Negative thirty two k We were looking for fifty one thousand in our survey.
That was the media estimate.
A revision to the previous month as well, that was fifty four. It's now negative three. Greg just got this question from a Bloomberg subscriber. They said, the cyclists always stop spending, stop hiring, then stop firing. And the question they've got is the natural progression always the same in a slowdown.
Is it any different this time?
I think it's very different this time around because we're affected by supply sharks. Supply side dynamics are very different this time around than they've been any time over the past few decades, and I think that's why you're seeing these unusual evolutions when it comes to the different sectors of the economy. We have rarely seen a loaf higher, low fire, or even no higher no fire type of environment.
That is not a comfortable balance.
Again, I think we are likely to see further weakness on the labor demand side that's going to weigh on economic momentum.
One key in the that I watch.
I know it's a lagging indicator, but it's income growth. If you look at real disposable income growth, it's only been growing at a two percent pace, consumer spending is still growing close to three percent at one point. The dip into savings is not going to be sufficient to sustain spending, and the majority or sorry, the minority of people that are still doing most of the spending cannot
do so forever. The higher income individuals are also gradually being impacted by higher prices and importantly by higher interest rates. If there starts to be some volatility in the equity market because of a government shutdown or because of other developments, then that could weigh on these individuals' desires and potentially means to spend.
Stay with us, mulplinbeg, Savanna's coming up off to this, Tiffany, want to get PIMCO join NAPA. Mall, Tiffany, welcome to the prim Let's say this is all we've got, and there's a lot still to play for in October. It's only just started. I've got no idea how long the shutdown goes on for. But let's say this is all we've got. Is there anything that would stop this fet A reserve from just kind of interest rights again at the end of the month.
No, I mean so, I think clearly this ADP report was weak and I think digging through the details of it, you know, I think there's an interesting bifurcation in large versus small and medium business sizes. This has been something we've been very focused on because we think that this economy is basically creating winners and losers.
The tariffs, the.
Technology improvements that we're seeing, the various tax cuts, all of that we think is benefiting somewhat more larger companies and it's a really really challenging environment for those small and midsized businesses. And that's where you saw the you know,
some more of the weakness. I think that in terms of the ADP report, can you know the fact that it contracted If you adjust the payroll survey, the government survey for the overestimation and that survey over recent years, you know, you can get to numbers that look like they were contractionary of the last three months as well. So I think these surveys are given a consistent signal that we are seeing some some more concerning weakness in the labor market.
And so right now you're seeing priced into the market one hundred and one percent chance of a twenty five basis point rate cut at the October twenty ninth press conference and meeting, and then in December again almost one hundred percent chance eighty eight percent chance of another cut. I just wonder, Tiffany, is that the solution to what essentially is the K shaped economy that's getting to be an even bigger K.
Yeah, I mean so I think that's right there, there is. You know, I think interest rate cuts as a result of the fact that the shock that we're going through right now is both a demand and supply side shock. Tariffs and both immigration will have supply side effects as well.
You know, of course central bank policy is not well suit did to deal with supply shocks, but nevertheless, policy is in restrictive territory, and you know, I think when you're in an economy that is going through this type of transition, given the policy U turns, arguing that it's
closer to neutral is certainly very reasonable. And I think the interesting thing that we're seeing, you know, since the implementation of tariffs, is that the adjustment that the economy is making to tariffs is not primarily through price adjustments, but it actually looks like it's happening through the labor market as well as companies are trying to cut labor and other costs. So that just means, you know, we think that means the funeral reserve has room to cut
interest rates. Here are they still have rates that are above neutral getting back to that is very reasonable in our minds, given the weakness of the labor market we're seeing.
This is really a strange moment where you're seeing companies adapt and adjust to the teriffs by potentially cutting workers. That's what you're saying, not just raising prices and yet continuing to report really good earnings, continuing to really deliver and highlight the strength of the consumer. Can you square that circle? I mean, how does that make sense? The fact that the consumer are strong, layoffs are happening because that's the way the companies are dealing with this. Uh,
and so that companies are profiting. At some point, does that flywheel stop going?
Yeah?
Well, I mean, I think it gets back to your point on the K shaped economy. So we see it on the business side as well. I think the largest businesses you know that you know that primarily make up the S and P index for example. You know, I think they're the relative beneficiaries of these various policies. So you have pretty large tax cuts that was that were also passed, and the one big beautiful bill that you know that will benefit companies that are relatively capital intensive.
They do a lot of cabecs. They'll get upfront expensing for all of that, you know. And if those companies, you know, can offset those tax cuts, offset the tariff tariffs that they now have to pay, they're in a pretty good position.
You know.
The smaller and mid sized companies that maybe have less capex will be in a worse off position. So, you know, I think those are the companies right now that are facing the most pressure. You know, the broader indices of smaller companies like the Russell for example, it's not done as well. Those equities have not done as well this year. I think very reflective of that theme, you know, and I think the real question for the broader economy is, you know, is how you know, I would actually argue
we're not seeing a huge amount of layoffs yet. What we've seen instead is that the gross hiring rates have declined, you know, very tremendously. So the question in our minds is, you know, how how how are these struggling businesses, how how much will they lay off labor over the coming months, you know, and will that cool off the broader economy.
So today, can you see Fed officials arguing that instead of tariff induced inflation, we can have labor market weakness that's tiff induced. And shouldn't those that are concerned about the tariffs actually be on board with now wanting to cut rates.
Yeah, I mean, I certainly think that is that's the argument that we're making, and I think that as you get more data that you will see more and more Federal Reserve officials coming around to that argument as well. I think Mary Daily in recent public comments, has made that data. Of course, Christopher Waller, Governor Waller has also come out with some pretty big concerns about the labor market.
So I think that, Yeah, certainly, as we get more information and you have more certainty within the FOMC, you know, we think they cut interest rates, you know, a couple
of more times this year as a result of that. Now, of course, the government shutdown, the fact that we aren't going to get potentially aren't going to get data releases or the data quality could be poorer over the next couple of months before we go into the November meeting could be problematic, you know, but again, of course the ADP data that we've gotten, some of the other private sources of data will be more important, and that's what they'll be using.
Besides the fact that we're not going to get economic releases. How concerned are you about the government shutdown?
Well, I mean, traditionally government shutdowns have just a temporary effect on the economy. The you know, the workers that are furloughed or that aren't paid Ultimately when the government opens will get back pay. So this is usually just a temporary effect, you know. Now it's possible that we could have a longer shutdown. We would argue that the effects start to get nonlinear after you get workers, contract workers and government workers that start to miss a couple
of paychecks. I think one paycheck probably okay, but as you get more that are missed than that's when you start to see a bigger impact on consumption. The other thing is is that there could be permitting delays. You know, the government you know, does you know, does does give out permits for investment, and the longer that those kinds of services are shut down, you know, you could see some delays in investment as well, so you know, ultimately
this this can get larger as time goes on. I think the largest government shut down historically has been, you know.
Maybe a couple of weeks.
We hope that the case again, but as of now, we think this is a temporary issue, but certainly we're monitoring the situation.
Stay with us.
More Bloomberg surveillance coming up after this. Let's stay on the trade story. The President Steve Tarris on pharmaceuticals, heavy trucks, and furniture going into effect today. Joining us now the former White House trade official ca Calukuwitz Kate, welcome back to the program. Let's think about this meeting, series of meetings that take place in Asia over the next month or so. How are you thinking about what can be achieved on that trip.
Well, when I listen to the predictions of Ambassador Greer, the US trade representative, I think I have to go on the side of these are deals with other Asian economies, probably not China, and I think if you remember back to Liberation Day, some of the highest heriffs were handed out to economies in Asia, and I think those countries, particularly the ones that have not gotten framework agreements yet, are still very anxious to hammer out some sort of deal.
Kate, does the US need to present some sort of larger framework for its relationship with China as part of these trade deals with in particular Southeast Asia.
Well, it's an interesting question.
I mean, I think what we've seen, of course, is the agreements that Trump administration has struck so far have included provisions directed at China. So some sort of framework, a global framework, if you will, around shared objectives toward China, higher tariffs, provisions that try to cut down on transhipment, economic security. This is the language they use when encouraging
trading partners to adopt similar measures to China. Now, what that means for the bilateral with China remains a bit unseen.
At this point, though, Kate, do you get some sort of cohesive sense of the relationship that the US wants both with China as well as with Southeast Asia, which makes a lot of goods for the United States and is frankly the basis of a lot of the fast fashion and other retail brands in particular.
Well, the reality for most of those economies, of course, is that the United States wants us to buy less from those economies, so Fast fashion, you know, furniture. We saw some moves this week on furniture. This is very impactful for that region. The President has been very clear about what he wants, and that is more production in the United States. So I think these agreements around the edges will be on items we can't make here. Critical minerals will be a focus, of course, with Taiwan trying
to incentivize more moves on semiconductors. The question about what he wants with China, I think remains really questionable. We don't know he wants a deal with China, of course, but another comment that Ambassador Career made yesterday seemed to signal a bit of a heightened posture, a threat that tariffs could go back up after November tenth if we don't continue to make progress. So I don't know that we're getting closer to a bilateral deal with China.
So what's going to come out of this meeting between President Trump and Shijipeg Because Trump says their meeting, yeah.
Well, look a meeting is not They're not going to want to have that meeting result in heightened postures that take us away from a deal in the future. President Trump has been very clear he wants a deal with China, so I think that both sides will find a way to maintain the status quo. Both sides, though frankly, have been increasing pressure. The Chinese themselves this week added new
provisions that will impact goods going to America. The United States added lists that impact the way we sanction and address foreign companies buying from China. So they're adding this is what we've seen. I think they add leverage and then they potentially negotiate that leverage away to keep the status quo.
It's a great point. With all the tariffs coming out, a lot was missed in terms of the US expanding the export blacklist the entity list when it comes to China. So do you expect more moves things like that before Trump sits down with.
Shi Well, I think this is this repeat that we have found ourselves in in this relationship. Until and unless we can articulate a grand vision for the trade relationship between the United States and China, I think we are going to create these false pieces of leverage that can then be negotiated back. So these are important moves that are being made. The United States as well, in a few weeks, will implement new tariffees on ships from China. This will be very dramatic.
So these are all new.
Things that can be negotiated in advance of a November tenth deal, while we retain everything else that's on the table.
Kate, just to give us more context, is that what you think the H twenty chip reversal was about getting leveraged to then just unwind it.
Well, I have to imagine that was part of it, because the Chinese made, you know, a seemingly big deal about getting access to that chip. The got access to the chip, and then they turned around and said we don't want it, and by the way, we're going to take action against Ynvidia. It all seemed sort of a false construct to me, so perhaps that was their intentional along.
This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, angiopolitics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app.