When we discussed Goldman's preview yesterday of what to expect should the government shutdown tonight at midnight, we highlighted that according to Goldman, "the odds of a lapse in spending authority after Friday, January 19, stand at around 35%."
One day later, and with the Senate set to vote on a stopgap bill which appears unlikely to pass, Goldman has nearly doubled its shutdown odds, and as of this morning, the bank's chief economist Jan Hatzius said that there is now "a 60% of a government shutdown, in our view, lasting anywhere from a few days to a few weeks." There is one alternative to a government shutdown that may last into February:
The alternative, which is almost as likely, appears to a short-term extension lasting several days. Each week of government shutdown would reduce Q1 GDP by 0.2pp (qoq ann.), but this would be reversed in the subsequent quarter. We expect any negative impact on financial markets from a shutdown to be very modest.
In this context, here are the latest observation points from Goldman's political economist, Alec Phillips:
1. The outlook for the extension of federal spending authority has become murkier and the chances of a shutdown have increased. There appear to us to be three possible outcomes at this point:
- 4-week extension: Yesterday (Jan. 18) the House-passed a 4-week extension, to February 16. The first procedural vote on this bill passed in the Senate, but at this point there appears to be firm Democratic opposition to voting for the bill itself.
- Short-term extension: An extension of a few days to as long as two weeks has been discussed as a possibility, and appears to be the most likely way to avoid a shutdown. Senate Democratic Leader Schumer indicated some openness to this on Jan. 18. That said, some Republican senators have indicated they would oppose it. It is also not yet clear whether Senate Republican Leader McConnell will allow a short-term extension to come up for a vote.
- A partial government shutdown: If Congress fails to approve an extension of spending authority today (Jan. 19), a partial shutdown will come into effect. We would expect congressional leadership to work over the weekend to try to work out an agreement on immigration policy and the DACA program, which has been at the center of the debate.
2. A shutdown seems more likely than not because both sides appear to think they could gain from a shutdown. Democratic leaders appear to believe that a shutdown would highlight the DACA immigration issue, which a large share of the public, including a majority of voters who supported President Trump in 2016, generally support according to most public opinion polling (87% of the public and 79% of Republicans according to a CBS News poll released January 18). Republican leaders appear to believe that Democrats, who are in a good political position going into the midterm election according to generic ballot polling and other metrics, would suffer from a shutdown. If both sides believe the other side will be blamed, neither has the incentive to avoid a shutdown.
3. A shutdown would have a modest impact on markets and the economy, we believe. We estimate that each week of shutdown would reduce real GDP growth in Q1 by 0.2pp, qoq annualized. The effects would be reversed in Q2, assuming the shutdown has ended by then. Markets have also tended to react mildly to shutdowns. In shutdowns since 1981, the median change in the S&P 500 on the first day of a shutdown is -0.9%. Most shutdowns haven't lasted longer than a day or two, but of the three longer shutdowns (Nov., 1995, Dec. 1995-Jan. 1996, and Oct. 2013) the average change in the S&P 500 from the day before the shutdown to the lowest point during the shutdown was -1.5%; the average change from the last day before the shutdown to the last day of the shutdown was +1.2% in those three experiences.
4. A shutdown starting tomorrow would probably create less risk for financial markets than another extension of several weeks. The main risk around the funding deadline is that it could eventually interact with the debt limit, which will need to be raised in March, we estimate. By resolving the DACA issue in the near term, this would reduce the risk that the issue comes back into play around the much more important debt limit deadline. Unlike government shutdowns, which financial markets tend to shrug off, markets could have a stronger negative reaction if the upcoming debt limit increase became entangled in the current set of issues.
5. Economic data releases could be delayed due to a shutdown. In the event of a shutdown, we would expect most economic data releases from federal agencies to be delayed. Next week, this would likely include the reports on the trade balance, wholesale inventories, and new home sales (Jan. 25), and durable goods and Q4 GDP (Jan. 26). In the prior shutdown, jobless claims data continued to be released as the data is reported by state agencies and simply consolidated at the federal level. The Richmond Fed manufacturing survey (Jan. 23), the FHFA House Price Index (Jan. 24), and the Kansas City Fed survey (Jan. 25) should be reported on schedule, as neither the FHFA nor the Fed rely on congressional appropriations. Private-sector surveys, such as the Markit PMI (Jan. 24) and NAR existing home sales (Jan. 24) would be unaffected.