Yields on very short-dated T-Bills are up notably over the last week hinting at the potential tonight's Cromnibus Bill to fail and the potential for government shutdown therefore looms. Whatever the outcome, Goldman does not expect a prolonged shutdown like the one that occurred in 2013...
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As Goldman explains,
Attempts to pass full-year funding legislation for almost all of the federal government appear to be unsuccessful this evening, increasing the risk of a short-term partial shutdown of the federal government for the second time in just over a year. Whatever the outcome, we don't expect a prolonged shutdown like the one that occurred in 2013, because (1) the issues in dispute are not central to the bill and can be more easily addressed, and (2) there appears to be sufficient political support for a short-term (e.g., three-month) measure, even if the year-long measure stalls.
Separately, following a review of the Monthly Treasury Statement (MTS), we are reducing our Q4 GDP tracking from 2.6% to 2.3% in light of lower-than-expected defense spending.
Q: The federal government runs out of funding at midnight, but neither chamber has passed spending legislation. What's going on?
House and Senate leaders had negotiated a spending package that provided funding for nearly all federal agencies through fiscal year 2015 (FY2015), with a temporary spending bill to fund the Department of Homeland Security (DHS) only through February due to Republican concerns regarding President Obama's recent executive actions on immigration. This combination "omnibus" funding bill for nearly every agency combined with a "continuing resolution" (CR) for DHS has become known as the "CRomnibus."
The package had the support of several key Republican and Democratic leaders in the House and Senate, but faces opposition from some members of both parties. Several Democrats and a few Republicans have concerns regarding a provision related to derivatives regulation, pension law changes, and a few other items. Several Republicans oppose funding DHS even through February and prefer a shorter extension or a provision to block the President's executive action on immigration. Some members of Congress have also expressed more general dissatisfaction with the process used to negotiate the bill and the short time the details of the bill were public before the vote was scheduled.
Q: Will the government shut down?
It still seems unlikely. While there is a possibility that there could be a short-term lapse in spending authority, the more likely outcome is a last-minute extension of funding lasting a few days to a week. This would give lawmakers time to either modify the existing full-year bill or pass a shorter-term (e.g., three-month) extension if no agreement on the full-year bill can be reached.
Q: If a shutdown does occur, how long would it last?
Probably not long. Unlike the 2013 shutdown, which lasted for more than two weeks, any shutdown as a result of the current impasse seems more likely to last hours than days, for two reasons: first, the disputed items in the bill are not directly related to funding the government. Instead, they were added because the spending bill was seen as the most likely vehicle to get them passed. But if it becomes clear that the bill will not be able to pass with those items added, they can be removed. Second, even if the full-year legislation does not pass due to concerns over other policies that have been attached or the duration of funding for the Dept. of Homeland Security (DHS), there is broader support for at least a short-term extension of funding until these issues are worked out.
Q: Does it make any difference what method is used to fund the government?
It makes a small difference in two ways. First, providing funding under continuing resolutions can be disruptive for federal agencies, because starting new construction or projects is often restricted under CRs and because there is less certainty regarding funding levels. Second, a failure to enact long-term funding would create another fiscal deadline in early 2015, which could increase uncertainty ahead of that next date. That said, the overall funding level (not including emergency spending) for the current fiscal year is capped by sequestration at $1.014 trillion. So while there could be minor changes regarding how funding is distributed under a short-term extension compared with a long-term bill, the overall path of federal spending is likely to be similar regardless of which method is used.
Q: What happened to federal spending in Q4?
After a sharp increase in defense spending in Q3, federal spending in Q4 looks likely to reduce GDP growth by more than expected. The Monthly Treasury Statement (MTS) for November released yesterday (December 10) showed very weak defense spending in November, following a very high number for October. There were complicating factors in both months--retirement-related payments in October, and one fewer than normal pay periods in November--but after normalizing for those factors and making neutral assumptions regarding December, federal spending is tracking at -12% for Q4 at an annual rate. We had already assumed a 5% decline due to the unusually high level of defense spending in Q3 and residual seasonality in BEA's estimate, which tends to produce lower-than-expected growth in Q4 and Q1 and higher-than-expected growth in Q2 and Q3. As a result of federal spending through November, we are reducing our Q4 tracking estimate from 2.6% to 2.3%
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Two words... Not Again!!
