(Bloomberg) — The White House has escalated tensions regarding a potential government shutdown scheduled for October 1st, suggesting it may lead to mass firings of federal employees. This has raised both political and economic stakes, especially as Democrats refuse to accommodate President Donald Trump’s demands.

The last significant shutdown occurred during Trump’s initial term, lasting over a month from late 2018 to early 2019. Since then, last-minute negotiations have typically averted closures. This year, however, both parties seem entrenched, making a shutdown increasingly likely.

Political Standoff and Economic Implications

The White House has issued a memo indicating that a shutdown would trigger widespread layoffs in various government programs that do not align with Trump’s agenda. Democratic leaders are firm in refusing to pass a spending bill unless their health care concerns, including extending Affordable Care Act subsidies and reversing Medicaid cuts, are addressed.

On the Republican side, the focus has shifted to a particular aspect of the Democratic proposal that could allow states to provide health insurance to undocumented immigrants. Trump’s administration aims to mitigate this by reducing Medicaid reimbursement rates for these states. This has sparked accusations from Trump, claiming that Democrats are advocating for health care access for “illegal aliens,” which Democrats contest.

The Economic Landscape amidst Shutdown Fears

The high-stakes political maneuvering is intensifying the risk of disruption in a U.S. economy already facing challenges. Investors are tracking the Washington impasse closely, mindful of its potential impact on unemployment and key economic indicators. Andrew Hollenhorst, Citi’s chief U.S. economist, cites that layoffs could create a significant short-term economic drag.

He noted, “The most apparent effect for markets would be delays in critical economic data releases, including the September jobs report.” This uncertainty has weighed on equity markets, leading portfolio manager Vikram Rai to predict that stocks will likely trend downwards until a resolution to the “shutdown mess” is achieved.

The Stakes for Federal Workers

The looming threat of mass layoffs has put investors on high alert. With unemployment rising in key areas such as Virginia and the Washington D.C. region, the job market is becoming increasingly competitive for newly unemployed federal workers.

Everett Kelley, president of the American Federation of Government Employees, is calling for dialogue, emphasizing that “the only path forward is compromise.” Both Trump and congressional leaders need to engage in good faith negotiations to avert a funding gap that could devastate federal employment and disrupt public services.

Legal and Political Ramifications

There are risks for Trump as well, should he proceed with large-scale layoffs or cuts to popular services. He may face backlash if the economy deteriorates further, especially considering legal implications around mass firings without congressional approval. Budget expert Bobby Kogan mentioned that such dismissals could violate regulations and collective bargaining agreements.

As the situation develops, Senate Democrats are holding firm, contrasting their previous concessions during the last shutdown. The division over health care policy remains a significant barrier to reaching a compromise.