fxs_header_sponsor_anchor

Analysis

US – Government shutdown unlikely to derail the economy

  • While the US government is likely headed towards at least a short-term shutdown on 12.01am ET on Sunday, it is unlikely to derail the economy on its own.

  • The Fed pays closer attention to signs of weakening consumption and tighter financial conditions. We expect no further hikes irrespective of the risk of a data blackout in October.

Government shutdowns arise from the congress failing to pass 12 appropriations bills covering the annual funding needs for government agencies. Non-essential federal workers will be furloughed, while employees on 'essential' sectors, such as law enforcement or military, will continue working without pay. The shutdown disrupts several public services, and even some essential services, such as air traffic control, have been affected in the past.

The impact depends on how many appropriations bills have been passed by both House and Senate, which at the time of the writing is zero. For example, while the previous shutdown in 2018-2019 was the longest on record, it affected less workers than the 2013 shutdown, as 5 out 12 funding bills had been passed.

Historically, while the delayed spending and wages have an immediate negative impact on the economy, most of it will reverse as wages and other payments will be completed retroactively. The CBO estimated that the 2018-2019 shutdown, which left 800 000 workers without pay and delayed USD18bn worth of federal payments, had a permanent negative impact of only 0.04% of the annual 2019 GDP.

While rating agencies have warned that the shutdown could weigh on the US's creditworthiness, it is still significantly less serious issue than a failure to lift the debt ceiling. The worries mostly reflect rising polarization in the congress at a time when budget deficits are projected to remain elevated, rather than the immediate impact of a shutdown. On the downside, less negative consequences lower politicians' incentives to compromise.

The shutdown could also delay publication of key economic data from the BLS, BEA and Census Bureau, which are now set to be included in the shutdown. In 2018-2019, the Department of Labor had already been funded before the shutdown begun, but this time August JOLTs (3 Oct), September Jobs Report (6 Oct) and September CPI (12 Oct) will not be released until a resolution is found.

We expect the Fed to remain on hold in November irrespective of the data blackout. On the margin, lack of data could make the participants slightly more cautious about further tightening, but the Fed has several alternative survey measures available for judging the course of the economy, as well as plenty of anecdotal evidence from business contacts.

The latest September data has been consistent with our expectation of cooling private consumption growth towards winter. We highlight leading services PMI components falling to contractionary territory and a downtick in weekly retail credit card transactions. Higher real yields, stronger USD and rising oil prices have all contributed to clear tightening in financial conditions. 

Download The Full Research US

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.


RELATED CONTENT

Loading ...



Copyright © 2024 FOREXSTREET S.L., All rights reserved.