Analysis-Potential US government shutdown could dent investor confidence

Published Sep 08, 2023 06:08AM ET
© Reuters. FILE PHOTo: U.S. dollar banknotes are seen in this illustration taken March 10, 2023. REUTERS/Dado Ruvic/Illustration/File Photo
US500 -0.32% Add to/Remove from Watchlist GS +0.26% Add to/Remove from Watchlist WFC -1.44% Add to/Remove from Watchlist
By David Randall
NEW YORK (Reuters) – A potential U.S. government shutdown at the end of September could add to worries about the economy going into year-end and beyond, investors said.
Current funding for most government programs expires on Sept. 30. If lawmakers are unable to pass a new budget by then, large swathes of government functions would shut down, an event strategists at Goldman Sachs estimate would reduce U.S. economic growth by 0.2% for each week it lasted.
A partial closure of the government, which will not interfere with essential functions like the military or Social Security payments, is not seen to be as toxic to the economy as a failure to increase the government’s debt limit, an outcome lawmakers narrowly avoided earlier this year.
Past shutdowns’ impact on U.S. stocks, meanwhile, has been slight: the has fallen by an average of 0.4% in the week before a shutdown, and gained a total of 0.1% over the length of all shutdowns since 1976, according to CFRA Research data.
Investors might be more sensitive to a shutdown this time around, however. Failure to pass a budget would highlight the gridlock and political instability that ratings agency Fitch cited as a reason for its downgrade of the U.S. credit rating in August, a move that roiled markets last month.
At the same time, a shutdown could lead to spending cuts that may dampen the economy at a time when other factors, including the Federal Reserve’s monetary policy tightening and the resumption of payments on student loans, loom as a threat to growth, analysts said.
Resilient growth in the face of higher interest rates has helped power the S&P 500 to a nearly 16% gain this year, though the index is off some 4% from its July highs following a surge in Treasury yields that has spooked some investors.