Jack Janasiewicz, Portfolio Strategist, Natixis Investment Managers Solutions, has commented on the potential US government shutdown tomorrow.
A potential US government shutdown looms as the October 1st deadline to reach an agreement on government funding fast approaches. What might we see regarding markets and the impacts to investor portfolios? Keep in mind that many government funding battles have in the past also included debt ceiling impasses – this one doesn’t. Government shutdowns affect the ability to spend money but do not impact the Treasury’s ability to issue debt or pay interest. Debt limit issues are binding and these can impact the Treasury’s ability to issue debt and service their obligations – a much bigger risk. Today, since we are only dealing with a shutdown, we are less likely to see an impact on markets and portfolios but there could be some tangential effects.
Historically speaking, government shutdowns have been a rounding error in terms of their impacts to GDP growth. Shutdowns are more apt to be a temporary disruption rather than a permanent drag where the short-term economic impacts are often recouped over time. However, the length of any shutdown can impact the collection and release of important economic data, especially at a time when the economy is at a crucial juncture with regards to growth and inflation.
With investors keenly aware of the risks to a softening labor market and simultaneously laser focused on the signs of tariff pass-through to inflation, any delay in the collection of economic data resulting from the shutdown could lead to increased uncertainty. And with that increased uncertainty we often see a pick-up in financial market volatility. Adding to the uncertainty is the threat from the Office of Management and Budget calling for permanent layoffs of some non-essential federal employees if a shutdown occurs. Considering that the US has never gone down this path before, there will likely be legal challenges to the move.
So, while the economic ramifications of a shutdown will likely prove to be limited, the increased uncertainty coming from the adverse impacts to economic data collection as well as the legal challenges likely associated with permanent layoffs present the biggest challenges to investors and sentiment, likely in the form of increased uncertainty and heightened volatility in the near term. Could such uncertainty be large enough to dent the economic backdrop and along with it risk assets? Probably not a lasting impact but the longer the uncertainty drags out, the greater the risk.
