by Chris Becker
The record US government (partial) shutdown moved into its 25th day overnight, with both sides digging in as Senate Leader McConnell blocked another continuation vote in the Senate to re-open the government. The impact is being felt at a micro level by the near 1 million US government employees who haven’t been paid in nearly a month, but there are macro rumblings that as each day turns into another week, the effects will be felt dearly at the macro level.
First at CNBC, where the White House has doubled its estimate of shutdown on GDP:
…the original estimate that the partial shutdown would subtract 0.1% from growth every two weeks has now been doubled to a 0.1% subtraction every week, citing an unnamed official.
While the administration had initially counted just the impact from the 800,000 federal workers not receiving their paychecks. But they now believe the impact doubles, due to greater losses from private contractors also out of work and other government spending and functions that won’t occur.
Up to 0.5% has been considered if the shutdown last’s til the end of January, pushing the usually subdued first quarter GDP print into recession territory. Of course, there’s no estimate available particularly on retail sales data which is due today, since the part of the government that collects the figures is in shutdown.
Meanwhile at the Vampire Squid HQ, Goldman Sachs doesn’t see a recession just yet, but at least a “pretty sharp” slowdown even though they think the Fed will raise rates two more times this calendar year, according to CNBC:
“At the end of last year, there was a particularly sharp downgrade in expectations for the U.S. and while there has been a big tightening of policy and financial conditions in the U.S. … We don’t see a recession, but we do see a pretty sharp slowdown,” Goldman’s Peter Oppenheimer said, adding that markets had “got too far into pricing a deeper downturn than we expect.”
“Although we do see downside risks to that (forecast) because the growth environment in the U.S. is slowing and financial conditions have tightened and the global growth environment is more subdued in 2019 than it was in 2018.
The Fed has signaled a pause in the rate-hiking cycle in the near-term and I think that’s in response to the sharp tightening in financial conditions that we saw towards the end of last year. Also some of the inflation numbers have been a little bit softer and so the Fed has indicated more patience in the normalization process.
“But at the same time we don’t think the Fed hiking cycle is over and we do think that markets have overshot somewhat because markets are now pricing cuts in the U.S. rather than hikes.”
Markets are definitely pricing in good times ahead with the S&P500 share market on a tear since bottoming as the government shutdown:
If the shutdown goes on for another week or even a month, particularly as the US corporate reporting season gives some sort of insight into 4Q 2018 retail sales and consumption, I’m pretty sure the Fed will ease off on the next interest rate hike.
Luckily there’s no other global catalysts out there to upset the US economy, like a trade war with China, a hot war in Syria or the breakdown of the European grand experiment.