Heightened Risk of Government Shutdown : Goldman Sachs

Markets have not responded strongly to past government shutdowns, it said

The U.S. Capitol building in Washington on Aug. 18, 2023. Madalina Vasiliu/The Epoch Times

Goldman Sachs recently predicted that a U.S. government shutdown was more than likely this year, in a recently published report.

The international lender said that the GOP House majority, a Democrat-controlled Senate, and a lack of agreement on key spending issues, heightened the risk.

“The ingredients for a shutdown—a thin House majority, a dispute on spending levels, and potential complications from various political issues—are present,” wrote Goldman Sachs economists on Aug. 20.

In reference to Fitch’s downgrade of the United States’ credit rating, they wrote, “the spotlight that the recent sovereign downgrade shines on the fiscal situation adds to the risks.”

On the other hand, the report pointed out that the economic consequences of Congress failing to pass a budget before the end of the fiscal year on Sept. 30, would be manageable and that markets have not responded strongly to past government shutdowns.

Goldman believes that the economic consequences would be less severe, compared to if there was no agreement to suspend the debt limit by the end of May.

Wall Street Not Too Worried Over Potential Shutdown

The government last shut down during the winter of 2018 to 2019, but many investors are not too worried about one this time.

At the end of each previous shutdown, Wall Street historically has been flat or higher than at the start of the shutdown.

Although a government shutdown could cause financial stress for certain individuals, such as government workers, it would not cause much damage to the wider American economy, especially compared to the greater threat of the previous debt default.

“Unlike the debt limit, where Congress reached a deal because the potential hit to the economy from an impasse would have been so severe, a shutdown would be much more manageable from a macroeconomic perspective,” said the report.

“However, compared to the debt limit, the less severe economic effect of a shutdown also makes it more likely that Congress fails to act in time,” it said.

During a government shutdown, federal authorities will continue to pay benefits like Social Security, along with interest and principal on U.S. debt.

“The differences between a shutdown and the debt limit that make a shutdown much less damaging also make it more likely to occur,” they wrote.

The team added that a less severe impact on the economy was not a “foregone conclusion” and that the timing was uncertain.

House Republicans Argue Over Budget Stop Gap Measure

Less severe economic predictions could actually increase the likelihood of a shutdown, by encouraging political struggles over spending.

The apparently milder consequences of a shutdown, may also remove pressure on Washington to reach a compromise on certain decisions, said the analysts.

The Fiscal Responsibility Act, which suspended the debt ceiling in exchange for some spending caps and other provisions demanded by House Republicans, “should have ended the debate on spending levels,” said the report.

Conservatives in the House are currently opposing the length of a short-term budget fix being pushed by House Speaker Kevin McCarthy (R-Calif.) and are pushing for additional cuts.

“We refuse to support any such measure that continues Democrats’ bloated COVID-era spending and simultaneously fails to force the Biden Administration to follow the law and fulfill its most basic responsibilities,” said the Freedom Caucus, in a post on X, previously known as Twitter.

They stated that any short-term bill that continued funding at current levels, was something they “vehemently opposed” months ago.

Speaker McCarthy argued that he wants it passed to buy time to avert a shutdown, but many in his party are comfortable with the idea of a shutdown if it leads to reduced spending and a lowering of the national debt.

“House Speaker Kevin McCarthy gets credit for keeping his troops in line, but his good fortune may end soon,” Greg Valliere, Chief U.S. Policy Strategist at AGF Investment, said earlier this month and put the chance of a government shutdown by December at 60 percent.

Goldman listed several policy conflicts with the Biden administration, which are likely to make it even more difficult to pass a spending bill by the end of September.

The White House has asked Congress for a $40 billion supplemental spending package, which includes $24 billion for Ukraine, $12 billion in disaster relief, and only $4 billion in border and migration efforts.

Funding for the additional aid to Ukraine has become more unpopular in Washington and at least 70 House Republicans recently voted against it and would likely do so again, said the report.

“A government shutdown looks more likely than not later this year. At the start of the year, we noted a good chance of a government shutdown and made it the base case following the debt limit deal in June, in light of the thin House majority and disagreement on spending levels,” the report said.

“The odds of a shutdown appear at least as high now as they did then,” it said.

Economic Impact of a Shutdown Expected to Be Mild

Meanwhile, a possible government shutdown at the end of 2023, is projected to reduce U.S. economic growth 0.2 percent a week, according to Goldman Sachs.

“The quarter following the shutdown, growth would increase by the same amount as federal work rebounds,” the economists said.

The majority of losses to growth would be caused by a delay in pay to some federal workers, but this would have “little impact on investment” or on the purchase of goods and services, but consumer confidence may take a hit.

If the shutdown has only a “modest” economic and market impact, the situation would have “little effect” on Federal Reserve interest rate policy, according to the study.

The central bank is unlikely to significantly alter its interest rate strategy for a government shutdown lasting a few weeks, but a “prolonged” shutdown starting in October, may lead the Fed to hold steady at its November meeting.