Goldman Sachs Warns of Impending Government Shutdown and Economic Impact

Goldman Sachs is predicting an impending government shutdown in Washington, indicating a collision course with the first shutdown in five years. The banking giant’s economists outlined the factors driving this potential scenario in a recent report, citing a thin House majority, disputes over spending levels, and political issues as catalysts. They assert that the ingredients for a shutdown are present, making it “more likely than not” to occur later this year. The report identifies brewing conflicts concerning aid for Ukraine, funding for Justice Department investigations, and border security as potential stumbling blocks.

While Wall Street seems relatively unfazed by potential dysfunction in the nation’s capital, the looming shutdown raises concerns about the economy. Although the impact of a government shutdown may not be as severe as a US debt default, Goldman Sachs economists emphasized that it could still be detrimental, particularly due to the recent sovereign downgrade.

The current macroeconomic landscape, characterized by high inflation and a robust economy, presents a contrasting backdrop to the possibility of a government shutdown. While the debt ceiling impasse led to a deal due to the severe potential consequences, a shutdown could be relatively more manageable from a macroeconomic perspective. This perspective, however, takes pressure off politicians to reach compromises on challenging decisions.

The differences in impact between a shutdown and a debt limit increase the likelihood of the former occurring. Goldman Sachs suggests that while a shutdown isn’t a foregone conclusion, it’s more probable given the factors at play.

During the previous government shutdown in 2018-2019, which lasted 35 days, several disruptions affected everyday life. Federal workers’ pay was delayed, immigration hearings were canceled, and economic reports faced delays. Despite these disruptions, the shutdown didn’t cause severe market or economic damage.

Goldman Sachs estimates that during past shutdowns of more than one business day since the 1990s, economic growth suffered an average reduction of 0.16 percentage points. A shutdown this year could potentially detract 0.2 percentage points from growth per week.

The impact on growth would primarily arise from the delayed payment of federal workers, with little effect on investment or purchases of goods and services. Consumer confidence might dip, but assuming “modest” economic and market consequences, a government shutdown is unlikely to greatly affect central bank policy.

However, a “prolonged” shutdown, beginning in October, could influence the Federal Reserve’s stance on interest rates. Additionally, the potential delay in federal economic reports due to a shutdown could render investors and the Fed partially blind to crucial economic indicators.

In conclusion, while a government shutdown might not be as severe as a debt default, its potential impact on the economy and financial markets warrants careful consideration.