Government Shutdown May Not Prompt Instant Recession, Say Economists

In the face of a potential U.S. government shutdown, financial experts from Wall Street and within the Biden administration asserted an immediate recession was unlikely. They do caution this risk could grow if the shutdown was prolonged.

What Happened: As stated in a recent New York Times article, economists concluded from past experiences that short-term shutdowns typically had a minor effect on the economy. Yet, if shutdowns were extended, they could detrimentally impact economic growth and possibly influence President Joe Biden's reelection chances.

Shutdowns can dampen growth and negatively influence consumer sentiment, which had already seen a decline for two consecutive months, partly due to surging fuel prices.

Analysts at Goldman Sachs pointed out consumer confidence typically fell seven points during the month when past shutdowns occurred, though most of this decline was counteracted in the month following the shutdown.

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Forecasts from Goldman Sachs economists implied a shutdown could reduce growth by roughly 0.2 percentage points per week. This was mainly due to federal workers not receiving salaries during shutdowns, which instantly withdrew spending power from the economy.

“We might be entering a larger data vacuum as the Federal government is likely to shut down starting this weekend,” Goldman Sachs’ analyst Alec Phillips wrote.

Goldman also predicted growth would rise by the exact amount in the quarter following the shutdown as federal operations recovered and furloughed workers were compensated for their lost wages.

Gregory Daco, chief economist at EY-Parthenon, remarked a government shutdown wouldn’t drastically affect the economy’s direction. Nevertheless, he commented that when combined with other economic challenges, it could significantly obstruct economic activity.

Why It Matters: Although an immediate recession was not on the horizon, the potential repercussions of an extended government shutdown should not be underestimated. It could dent consumer confidence and economic growth, further complicating an already challenging economic landscape.

While recovery is expected post-shutdown, the potential disruptions could leave lasting effects.

The rising risk of a government shutdown was sending shockwaves through markets. The SPDR S&P 500 ETF Trust SPY fell nearly 6% this month, marking the worst-performing month since December 2022.

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