How a government shutdown would affect Wall Street and the economy
With just two weeks before Congress' deadline to fund the government, Wall Street is gaming out how a shutdown could hit the economy.
Why it matters: Federal government spending amounts to roughly a quarter of U.S. GDP.
State of play: The House of Representatives needs to pass 12 appropriations bills to fund the government by Sept. 30 — and it hasn't yet passed a single one.
- With just 10 working days left, that means Congress would need to pass a stop-gap "continuing resolution" to keep the government funded past the deadline.
The intrigue: Internal rancor among House Republicans — who control the lower house — is preventing the passage of a resolution to keep the government funded.
- Some on the far right have said they won't vote for a stop-gap measure without concessions to priorities such as deep cuts to spending and commencing an impeachment inquiry into President Biden.
- House Speaker Kevin McCarthy announced just such an inquiry on Tuesday, though it remains to be seen if that will improve the odds that a continuing resolution is passed.
The big picture: Such a shutdown would in theory be a headwind for a U.S. economy that has surprised many analysts with its resilience this year.
- A shutdown might also throw a wrench in the market rally.
🗣 What they're saying: Most analysts seem pretty relaxed about the risks.
- "A government-wide shutdown would directly reduce growth by around 0.15 [percentage points] for each week it lasted; including modest private sector effects, the hit to growth could be around 0.2 [percentage points] per week. In the quarter following reopening, growth would rise by the same amount," Goldman Sachs economists wrote in August.
- "Shutdowns tend to be very short-lived and have a negligible impact on economic growth," UBS fixed-income analysts wrote early this month.
- "Rising odds of a government shutdown and associated uncertainty, along with the resumption of student loan repayments are additional downside risks to the outlook," wrote EY economists.
- "Shutdowns have not had profound effects on markets in the past, and we do not think it will be any different this time," Barclays municipal bond analysts wrote.
Yes, but: Several analysts did note that a shutdown could conceivably delay the dissemination of crucial economic data, such as the September jobs report due on Oct. 6.
The bottom line: A government shutdown wouldn't be great. But it's not as big a worry for the market and the economy as a U.S. government debt default was a few months ago — since that had the potential to deliver a major shock to the overall financial system.