On the heels of a temporary deal to fund the government until 15 February, a bipartisan committee is working towards a resolution on border security. Elevated uncertainty is likely until a final agreement is reached.
After a five-week partial shutdown of the US government – the longest in history – President Donald Trump recently agreed on a temporary deal to re-open the government until 15 February.
This three-week reprieve means furloughed employees will receive back pay, and US government agencies should return to full operations. If history is an indicator, US economic growth will likely rebound once the government is opened again, although we will wait to see how the shutdown will affect consumer confidence and small-business optimism.
According to the Congressional Budget Office, the total cost of the shutdown over the 35-day period was USD 11 billion, including lost productivity, delayed spending and private-sector loss of business. However, as the accompanying chart shows, economic growth has typically rebounded after previous shutdowns ended, as employees receive back pay and government spending fully resumes. The estimated permanent loss is therefore lower – at USD 3 billion, or about 0.2 percentage points of GDP.
S&P 500 Index returns during and after historical US government shutdowns
|Begin date||End date||Number of days||Return during shutdown||Return 6 months after shutdown||Return 12 months after shutdown||President||Senate||House|
|22/12/2018||25/1/2019||35||10.3%||-||-||Trump (R)||Republican||Rep/Dem (changed control)|
Source: Allianz Global Investors, Congressional Research Service. Data as at 25 January 2019.
We think the downside may ultimately be minimal if the government continues to function beyond 15 February. We could see GDP dip slightly below 2.0% in the first quarter and, depending on the lag effect of this rebound, we could see some positive spillover into the second quarter of this year, with GDP expected to be 2.4%. We will watch closely for any lingering negative impact on consumer and business confidence, which may have economic and market implications.
Beyond the wall
The 2019 political calendar is front-loaded with many key dates and events that will likely be affected in some way from the shutdown:
- The Fed: The Federal Reserve held its first 2019 meeting on 30 January. Each meeting will now be accompanied by a press conference with Fed Chair Jerome Powell. Notably, investors will keep listening for any commentary from the Fed on the impact of the shutdown (on both growth and employment).
- China/US trade negotiations: On 1 March, the 90-day “truce” in the US-China trade war is set to end. Despite recent comments from Secretary of Commerce Wilbur Ross on a deal being “miles and miles” apart, the pre-work for a final deal seems to be in motion. This includes a delegation from China visiting the US towards the end of January. Notably, President Trump was able to open the government ahead of this visit, which should help reduce political uncertainty in the US – particularly as the US and China continue negotiations on US soil.
- A newly divided Congress: If the divisiveness we have seen over the five-week shutdown is any indication, odds seem lower that a divided Congress will compromise on new legislation such as infrastructure or health care.
Political fallout and implications
We remain cautiously optimistic in our base case that the US government will remain open after 15 February, and that the government will not shut down again. We believe that if President Trump is not satisfied with proposals from the Congressional budget committees, he will take unilateral executive action to make amends, including either re-appropriating funding from the defense budget for funding for a wall, or declaring a national emergency to fund the wall.
More broadly, the bitter divide between Democrats and Republicans grew more pronounced during this five-week shutdown period. When the new Congress was sworn in on 3 January, there were increased hopes for potential bipartisan deals around infrastructure and drug pricing, but we think this kind of compromise is now incrementally less likely. Both parties continue to seem reluctant to give the other a “win” as the 2020 presidential elections come to the fore.
Against this domestic political backdrop, we think it’s more likely that President Trump will be inclined to get a win in trade, since he can do this more unilaterally. An initial trade deal may be more focused on the US-China trade imbalance, while the more complex structural issues of intellectual property rights and technology-transfer practices may become part of later negotiations.
From an investor perspective, the urgency from the president and his administration to keep the US economy afloat and perhaps get a trade deal done – or at the very least not exacerbate the situation further – may provide a positive backdrop for risk assets. Depending on the ultimate economic effects of the shutdown – hopefully the impact on the US consumer will be constrained, US economic growth will remain near 2.5% and earnings growth will stay near 4%-6% – we anticipate a positive, albeit modest, return environment in 2019.
To learn more about the history of US government shutdowns – and their economic impact – read Mona Mahajan’s full report: “US government shutdown: deal or no deal in three weeks?”
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