The Economic Impact of a U.S. Government Shutdown Would Be Modest and Temporary

With the U.S. congress struggling to pass funding bills and appropriations set to lapse on October 1st, the federal government could be headed for a shutdown. So far, congress has not enacted any of the 12 appropriations bills that make up the discretionary spending budget. The Senate passed a Continuing Resolution in a bipartisan manner on Tuesday that would temporarily fund the government until November 19th, but that legislation faces an uncertain fate in the House. In this commentary we discuss the economic implications of a potential government shutdown.

Key highlights include:

-- Congress has not passed any of the 12 appropriations bills that make up the discretionary spending budget, suggesting that a "full" shutdown could commence next week. However, mandatory spending, such as Social Security and Medicare, would not be impacted by a lapse in appropriations.

-- Overall, a shutdown would be disruptive but the hit to economic growth would likely be small and temporary.

-- We do not see any immediate credit implications to the AAA rating of the United States. Nevertheless, a shutdown would add to mounting headwinds already facing the U.S. economy going into the fourth quarter.

“Although we think the economic cost of a shutdown would be modest and temporary, it would come at a delicate moment for the United States,” says Michael Heydt, Senior Vice President, Global Sovereign Ratings. “Combined with the resumption of student loan repayments, striking auto workers, and tighter financing conditions, a prolonged shutdown would reinforce our expectations of a marked deceleration in growth over the next 2-3 quarters and increase the odds of a recession.”