The resultant hit to consumer spending—which fuels roughly 70% of the world's biggest economy—could shave roughly 0.15 percentage point from U.S. GDP for each week the shutdown lasts.
What We're Watching
As another deadline for Congress to approve a budget for the fiscal year that began Oct. 1 approaches, the focus has again turned to whether legislators can avoid a partial shutdown of the U.S. government. The election of new Speaker of the House Mike Johnson, a four-term Republican from Louisiana, was a necessary first step in what could still be a contentious process.
If an agreement can't be reached in time, all federal agencies and services that aren't deemed "essential" will close and thousands of federal workers will be furloughed.
And while essential services (namely the Postal Service, Medicare, and Social Security) would continue to function, many Americans would likely be without other government benefits—including food and housing support. Additionally, many essential workers would go without their paychecks, at least until Congress passes legislation to fund the government, when staff would receive retroactive pay.
What We Think And Why
Historically, government shutdowns have varied in length, with some lasting as few as five days. The longest spanned 35 days, from Dec. 22, 2018, until Jan. 25, 2019, when Senate Democrats opposed then President Donald Trump's request for $5.7 billion to build a wall along the U.S.-Mexico border.
How long another shutdown could last may depend on public perception of blame as much as on how quickly legislators in the House and Senate can pass an appropriations plan that President Joe Biden would sign.
A group of conservative House Republicans insist on widespread spending cuts that have little chance of passing the Senate, which is currently controlled by Democrats, and are also opposed by Republicans.
In his bid for the speakership, Johnson laid out his plan for governing that included passing a myriad of business-as-usual appropriations bills. Given the short time to do so ahead of the Nov. 18 expiration of current funding, he included reference to passing another stopgap spending bill lasting until either Jan. 15 or April 15 (depending on party consensus) while legislators hash out differences on a dozen delayed spending bills.
We assume Congress will eventually pass legislation to fund the full fiscal year ending Sept. 30, 2024, largely in line with spending caps that were agreed upon earlier this year as part of a deal to raise the debt ceiling. This is not likely to happen before Nov. 18. In the meantime, we expect passage of another short-term funding bill as Congress did on Sept. 30—a resolution that ultimately cost Speaker Kevin McCarthy (R. Calif.) his job—or potentially a series of short-term bills pending approval of full appropriations.
What Could Go Wrong
The biggest near-term risk, naturally, is that the government will shut down if the new speaker is unable to negotiate a short-term deal over the coming week ahead of the Nov. 18 deadline. This would likely mean that consumer spending—which fuels roughly 70% of the world’s biggest economy—would take a hit, with the potential to shave about 0.15 percentage point from GDP for each week the shutdown lasts. S&P Global Ratings previously estimated that the 16-day shutdown during the Obama Administration in 2013 caused by a dispute over implementation of the Affordable Care Act trimmed 0.6 percentage point from fourth quarter GDP growth, or $6 billion in lost output.
But unlike the political noise surrounding negotiation of the debt ceiling, failure to fund the government and avoid a shutdown doesn’t constitute a credit event. It does reinforce the challenges of policymaking and contentious nature negotiations in Congress we highlight in our U.S. sovereign rating (AA+/Stable/A-1+).
Writers: Joe Maguire and Molly Mintz
This report does not constitute a rating action.
|Primary Credit Analyst:||Lisa M Schineller, PhD, New York + 1 (212) 438 7352;|
|U.S. Chief Economist:||Satyam Panday, San Francisco + 1 (212) 438 6009;|
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