Commentary

Learning to Fly, Blind

Douglas Porter, CFA

BMO Chief Economist

It’s pretty tough to know today where the economy will be tomorrow when we won’t know where it was yesterday until the day after tomorrow. Or the month after tomorrow.

The U.S. federal government shutdown, which began Wednesday, will likely be a small irritant for the economy. It could result in some job losses and be largely ignored by the markets, but will cause some real issues for the Fed. While it’s early days yet, this shutdown has the feel that it could challenge the record five-week episode in 2018. And going a month without official data will force monetary policymakers to make a crucial decision on rates at the October 29 FOMC meeting on the thin gruel of private-sector data. All at a time when there are still many questions over how the economy is dealing with the multitude of policy changes seen in 2025.

After all, it was precisely six months ago that stocks were in full retreat in the moments after “Liberation Day” and all its reciprocal tariff rates. There has been a nonstop series of back and forth announcements on the issue since then—mostly forth—which has left the average U.S. tariff rate around 18%, up from about 2% at the start of the year. And the full impact of that massive shift has yet to land, with only a small share of the increase so far passed on to consumers. That helps to explain why the economy has proven to be resilient in the face of intense uncertainty, as it now looks like GDP growth will be above 2.5% in Q3 following the 3.8% snapback in Q2.

The other reason why growth has held up is a good old-fashioned tech spending boom on all things remotely related to AI. However, even while business investment in equipment has been solid, firms remain highly reluctant to add to payrolls; the no-hire, no-fire economy, as it were. While we did not get the September employment report as planned this week, the ADP release found a 32,000 job loss last month after a 3,000 setback the prior month (revised down from an initial +54,000). This emerging divergence between headline GDP growth and jobs may be a tantalizing hint thatproductivity is sparking higher, thanks to AI. However, before getting too carried away, note that U.S. productivity growth has averaged just a bit above 2% in the past three years (roughly since ChatGPT burst onto the scene), almost exactly in line with its 30-year average growth rate.

Investors are shrugging off such details, and were quick to look past the shutdown, driving equities to yet new highs this week. The S&P 500 is now up a scorching 35% since the lows hit less than six months ago in early April. And lest you think it’s just the mega tech companies driving the bus, the Russell 2000 small cap index is up by nearly 40% over the same period. True, that’s a very specific starting point, and the year-to-date gains of 14% and 12%, respectively, are much less eye-popping. Even so, a double-digit advance at a time of deep policy uncertainty, rapidly cooling job growth, and somewhat sticky core inflation is quite impressive.

The glue that is holding the market together is the prospect of further rate cuts. Even with the official data void, market pricing is assigning a 97% chance of a 25 bp trim at the upcoming Fed meeting, with heavy odds of a follow-up in December. We largely concur. If anything, the shutdown may have slightly bumped up the odds of a cut, since it will likely clip growth and further dent household sentiment. One of the few major reports that was produced this week saw the Conference Board’s consumer confidence index retreat for a second consecutive month and is well down from a year ago.

As well, the combination of the two ISM reports (arguably the most important and well-respected private economic releases going) pointed to soft activity, with the factory survey nudging up to 49.1, while the services version dipped two points to 50.0 on the button. The latter saw the business activity measure drop below the 50 waterline for the first time since the pandemic shutdowns in 2020, but also saw prices rise further to an uncomfortably hot 69.4. Neither measure is at an extreme, but both are cruising in the general direction of stagflation land, or at least to firm underlying inflation and soft growth. With the shutdown underway, it will be a long time before we know for sure, given the data void. Ending on a positive note, the good news is we won’t hear many more complaints about poor data quality for quite some time!

Auto Sales +3.7% y/y (Sep.).

‘Very mean squirrel’ seeking food has sent at least 2 people to the ER in a California city

SAN FRANCISCO (AP) — Residents of a San Francisco Bay Area city are on the lookout for an aggressive squirrel that has sent at least two people to the emergency room for medical treatment.

Joan Heblack told ABC affiliate KGO-TV that she was walking in the Lucas Valley neighborhood of San Rafael when a squirrel seemingly came out of nowhere and attacked her leg, clawing and biting.

“It clamped onto my leg. The tail was flying up here. I was like, ‘Get it off me, get off me!’,” Heblack said.

Isabel Campoy also said she was attacked while walking in the same area. The squirrel launched itself from the ground to her face and wound up on her arm, leaving it bloody, she said.

Both women went to the emergency room, the TV station reported in its Monday story.

Flyers have now been posted, warning residents that the squirrel is no joke and that more than five people have been attacked by a ”very mean squirrel” that “comes out of nowhere.”

Lisa Bloch with Marin Humane says they have had no reports of squirrel attacks since mid-September. If the squirrel crops up again, the nonprofit will coordinate with the state to remove the animal, she said.

“We’ve seen this kind of behavior before,” she said. “It’s almost always because someone has been feeding the animal.”

The good thing is that squirrels are not vectors for rabies. She says people should never feed wildlife.

San Rafael is in Marin County, about 20 miles (32 kilometers) north of San Francisco .