Gov't Shutdown Macro Drag Considerations (2/2)

If the (likely) upcoming shutdown starting Oct 1 is like most in recent history, it won't have much of a lasting macro impact but could cool growth in Q4 vs Q3 and keep the Fed on hold in November.

• Firstly the impact depends on the type: if it's a partial one (in which some parts of government spending remain unaffected) then the impact will be more muted. If it's a full shutdown - which we last saw in 2013 - the impact will depend how long it goes on for. It would probably have to last at least a couple of weeks for a full impact. The 2013 full shutdown became a partial one within a week, after the Defense Department was funded, muting the impact.
• Ultimately the main drag on the economy comes from the hundreds of thousands of federal workers not getting paid during the shutdown. 2013's shutdown brought an estimated drag of around 0.3-0.6% of GDP over 2+ weeks, with the immediate impact partially reversed when federal employees received back pay.
• 2018-19 was the last shutdown and was partial though over a month long.
• Unlike the debt limit standoff such as that earlier this year, there is no impact on Treasury's issuance remit, while essential payments/revenue agencies continue (Social Security, the IRS).
• As we noted last week, the key upshot from a markets perspective will be the potential delay of key data released by federal agencies, including CPI and Employment reports.
• One impact of this would be to tilt toward no Fed hike on November 1, due to the lack of data and wariness of the economic damage wrought by the shutdown.