US: Fiscal showdown and government shutdown fast approaching – Goldman Sachs

US Congress returns in September facing two near-term deadlines: the debt limit must be raised by September 29, and a spending bill must be approved by September 30 to avoid a government shutdown, points out the research team at Goldman Sachs.

Key Quotes

“We believe the odds of a brief shutdown are 50%. There are several arguments against a shutdown, particularly that Congress simply kicks the can with a temporary extension, delaying the real debate until later this year.  However, with little chance that Congress will fund the border wall, a fractured Republican majority in Congress and a decision that ultimately rests with the President, the outcome is hard to predict.”

“We are less concerned regarding the debt limit, simply because most lawmakers and the White House generally agree it must be raised and it can always be addressed separately from the more contentious spending bill, if necessary. Our base case is that a long-term extension will be enacted in the first few days of October if not late September, though a short-term extension is also a clear possibility.”

“Both deadlines are likely to be somewhat disruptive, although the effects are likely to be modest under most foreseeable scenarios.  In the past, federal shutdowns have had only minor economic implications, and we expect that a shutdown lasting one week would shave around 0.2pp off of real GDP in Q4.The financial market implications of a shutdown have been fairly minor historically.”

“The implications of failing to raise the debt limit could potentially be more severe but this appears unlikely.  That said, the Treasury market has already started to demonstrate some aversion to holding bills maturing just after the debt limit deadline, and this pattern seems likely to continue over the coming month.”

“While there is no direct linkage between these fiscal debates and the broader agenda, these deadlines will consume additional time and energy and distract from other issues like tax reform. There is also a chance that congressional Democrats will seek to add fiscal reforms to the debt limit increase, potentially including new restrictions on tax cuts.  It is far from clear any such effort would be successful, however.”