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Fast Comment USGovernment shutdown still unresolved

  1. Efforts to end government shutdown continue
  2. Economic impact of short-lived shutdown should be limited
  3. Larger, more serious issues loom
Stand-off in Washington continues
The partial government shutdown that officially began at 12:01 on Saturday has now dragged into its third day, as lawmakers failed to make ends meet on Sunday despite bipartisan efforts to broker a short-term spending bill. Work is still in progress to secure a temporary funding plan and it is expected that the Senate will vote today at noon New York time to advance a plan that would fund the government through February 8, but it is still uncertain whether there will be enough votes given that immigration and the protection of young undocumented immigrants (DACA) are still causing a major divide. In our view, it still appears most likely that a short-term spending plan will be implemented soon. With a midterm election looming and 'the blame game' intensifying, the political will from both sides to end the shutdown should be strong.
Limited economic impact from short-lived shutdown; Fed still on track
Since the 1970s, there have been 18 government shutdowns in the US. The most recent was in 2013, which lasted for 16 days. At the height of that shutdown, around 850,000 federal workers were effectively furloughed per day and thus were not receiving pay. According to the Bureau of Economic Analysis (BEA), the lost output from this event lowered GDP growth by around 0.3 percentage points annualised in Q4 2013, even though the full effects cannot be precisely calculated. However, as the furloughed employees can be expected to receive their pay back in full when the shutdown ends, the overall effect on the economy is limited. Thus, even if the shutdown drags on for a while longer, the total effect on GDP growth in 2018 should be relatively benign. As such, we do not believe that the current impasse will influence our outlook for the Fed. The January 31 meeting has been considered a non-event, so the real question is whether our (and the market's) call for a March rate increase is in jeopardy. With effectively full employment, robust underlying growth and some evidence of a firming inflation trend, the impact from a short-lived government shutdown should not be sufficient to lower the chance of a March rate increase, in our view. If the shutdown were to drag on for longer, thereby inflicting greater pain on spending and confidence, this picture might change. This would also be due to the reduced near-term clarity of the economy. During shutdowns, the BLS and BEA will cease to report key data releases, such as employment, CPI and GDP, and if the government stays shutdown, the Q4 GDP data scheduled for Friday will not be released. However, data such as initial jobless claims, ISM, consumer sentiment, ADP and vehicle sales will still be reported. A longer shutdown beyond the official opening of the tax filing season on January 29 would also impose risks of a delay for tax refunds, with an added negative effect on consumer spending. However, we think that a shutdown would probably need to last more than two weeks in order for the Fed to become overly concerned.
Debt ceiling is a larger headache
Even if the can is kicked down the road via a new short-term continuing resolution, this newest political impasse still highlights the dysfunctional state of the US government, particularly as there are other issues looming on the horizon that might cause larger reactions on financial markets than the current shutdown has done so far. Most pressing is the need to raise the debt limit following the expiration of the debt limit suspension on December 8. It is estimated that the Treasury will have exhausted its options for keeping total debt unchanged at some point in the beginning of March. If the debt ceiling issue is not resolved at that point, the US will be forced to default on its debt, which is potentially a much larger problem than a government shutdown. We still consider it unlikely that we would end in a situation where the government allows the US to default. However, with Congress struggling to find common ground on even a short-term deal to keep the government funded, we are of course a bit worried that it will be even more difficult to reach agreement on a longer-term deal that also raises the debt ceiling. The longer it takes to solve the debt limit issue, the larger the impact might be on the bond market with yields already backing up, and it could also cast more doubt on the outlook for a March 21 rate increase. It could also cast doubt with regard to the credit rating for the US, which in August 2011 was lowered from AAA to AA+ by S&P. This current quote from S&P's global chief rating officer seems to sum it all up in a perfect way: "When we lowered the US rating in 2011, this was on the back of our re-assessment that we think the political institutions in the US are such that timely, effective policy-making is more questionable than what you would see at with other AAA-rated sovereigns, and this [the government shutdown] is just another reincarnation of that".


Jes Asmussen

Chief Economist Denmark

Denmark and The Netherlands

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