If Congress can’t agree on a budget soon, we may witness a government shutdown.
But that doesn’t mean all hell will break loose.
“In the event of a government shutdown, functions of the federal government considered “non-essential” cease while “essential” functions continue,” write Barclays’ Michael Gapen and Michael Gavin. “Our economists estimate that for every week the government is shut down, real federal government consumption and gross investment falls 1.6% q/q saar and quarterly real GDP growth declines 0.1pp. This is consistent with the CBO’s estimate that the approximately four-week shutdown in 1995-96 reduced growth 0.5pp in Q4 95. Thus, a short federal government shutdown is unlikely to dampen real GDP growth significantly and adverse market reactions are more likely to be short-lived.”
“The market reaction to the relatively short 1995-96 government shutdown was mild (Figure 1),” they added. “A longer shutdown, however, could have negative indirect effects on private sector activity and market sentiment.”
The 1995-96 shutdown was actually the longest of the 17 government shutdowns since at least 1976.
Regardless, it would be important for the any shutdown to be resolved quickly.