Evening Brief – 09.26.23
T-minus 4
The US government flirted with a shutdown what feels like decades ago, but it was only this spring that Washington circled the drain. A repeat performance is on the horizon as political infighting in Congress leads to another impasse, with a September 30 deadline for passing a spending bill.
According to some online betting markets, the probability of a federal government shutdown is 79% today compared with 25% on September 7.
As the political battle rages within the House Republican caucus, the threat of a shutdown grows by the day. Yet, with only four days remaining to pass legislation, analysts are split on the risks involved.
According to Morgan Stanley, “a government shutdown may cause only modest losses in gross domestic product (GDP)” and that “The 20 government shutdowns that have occurred since 1976 appear to have had limited impact on the economy.” History also suggests that a shutdown would be brief, lasting “on average… just over a week.”
However, the possibility of a lack of economic data could be troublesome. This is especially true at this stage in the business cycle, when the Federal Reserve continues to focus on monetary policy in the face of uncertainties about inflation and economic growth.
“Given the current state of the economy and numerous uncertainties on the horizon, the absence of data could carry a significant cost for private sector economists, investors and Fed policymakers who would fly partially blind as they assess the US economy’s performance,” wrote Greg Daco, chief economist at EY-Parthenon, in a research note.
Although history implies that a shutdown would be brief and have little impact, some analysts believe this time may be different.
After accounting for minor private-sector effects, Goldman Sachs estimates that a government shutdown would cut quarterly annualized GDP by roughly 0.2% for each week it continued. Goldman estimates that a shutdown might last 2-3 weeks (the longest in history, the Trump government shutdown, lasted 35 days from December 22, 2018, to January 25, 2019).
The Federal Reserve is already in a difficult position as it strives to keep inflation under control while having little impact on economic activity. A government shutdown would make that job more difficult and raise the likelihood of a policy error by halting federal data reports.
In the case of a prolonged government shutdown, the FOMC will face a uniquely uncertain economic situation at its October 31-November 1 meeting, which may persuade officials to hold rates steady rather than raise them.