US market calm following Federal shutdown – for now at least

No deal has been reached yet to re-open the US federal government.  And while the financial impact of the impasse on markets and the economy is minimal so far – things could change if it drags on much further.

As Ian Shepherdson, chief economist at Pantheon Macroeconomics explains: “At this point the shutdown is a political event, which will have little immediate impact on the macro economy. 

“Things are different at the micro level; contractors awaiting payment for government work will have to wait longer, for example, and federal employees, including military personnel, won't be paid on time.  These micro effects will become visible at the macro level, though, if the shutdown last for more than a few days.”  

GDP growth stifled

Shepherdson also points out that The Council of Economic Advisors calculated that the October 2013 shutdown, (which lasted 16 days) depressed private sector employment growth by about 120,000, while the drop in hours worked by government workers alone depressed quarterly GDP growth by 0.3%. 

The aggregate hit, probably was in excess of 0.5%.  He suggests a similar effect this time around seems a reasonable bet in the event of an extended shutdown

With regards to impact on the stock market, James Knightley, chief international economist at ING references the 1995 debt ceiling crisis and the Republican-controlled house refusing to back Democrat President Clinton’s budget. Despite two shutdowns during this period, the impact on the economy and the market was relatively minor. However, a similar crisis in 2011 led to much greater volatility.

“A deal was eventually made, but the fall out led to the US losing its AAA rating with the S&P and the S&P and the S&P 500 equity index falling 17% between 22 July and 8 August.” 

A swift compromise?

If the shutdown is short while a compromise is bashed out, then the impact on the market may well be negligible. The question is, given the accusatory environment prevalent in Washington right now, how swift is any compromise likely to be?  

Chief economist at Natixis, Joseph LaVorgna said investors were not concerned at this stage. “Government shutdowns are not uncommon, so markets look past the temporary political squabbles,” he said.

He added: “The current debate does not involve the need to increase the debt ceiling, so there is no concern regarding the possibility of a technical default.”

So far key US indices have witnessed a slight fall before recovering lost ground – at close on Friday the S&P 500 was 2,810.30 having slipped to 2,798.08 at one point.