- A US government shutdown is more likely than not to happen in 2023, Goldman Sachs warned.
- Lawmakers have been sparring over government spending and are unlikely to agree on a budget in time.
The US government looks on track to shut down at the end of next month, and that's set to weigh on stocks and the economy, according to Goldman Sachs.
"The federal government looks more likely than not to temporarily shut down later this year," the bank's team of strategists warned in a note Sunday evening. "This has looked fairly likely since the debt limit deal, in light of the thin House majority and a lack of consensus on spending levels."
Politicians have been sparring over government spending constraints and the US's rising debt load for months, leading markets to fret over a potential US debt default earlier this year.
Those fears were soothed after President Biden and House Speaker Kevin McCarthy struck an agreement in June to suspend the national debt limit through 2025, but lingering disagreements have still raised the odds that Congress will fail to agree on a budget for the coming fiscal year. That's been exacerbated by Fitch's recent downgrade of the US credit rating, the bank said, which has stoked even more concerns on the government's growing debt balance.
Still, a government shutdown wouldn't be as catastrophic as a debt default. A shutdown—which has happened around 20 times since 1976, with previous shutdowns lasting as little as a few hours—would be "manageable" for the US economy, Goldman said, though that in itself spells bad news:
"Compared to the debt limit, the less severe economic effect of a shutdown also makes it more likely that Congress fails to act in time," strategists added.
A shutdown could usher in a small headwind to economic growth and to stocks. Including the private sector, growth could be lowered by 0.2 percentage points a week, the bank estimated.
Meanwhile, stocks have also always traded lower in the days following a government shutdown, the bank said, meaning near-term downside for equities is likely this time around. In 2018, for instance, the S&P 500 slumped around 8% in the week following the government shutdown, though the index rebounded within the next month.
Lawmakers are currently on recess and will be back to hash out the terms of the government budget in early September. At that point, they'll have less than a month to settle on a budget before the government could potentially run out of money to fund itself.
McCarthy told other House members that Congress may need to pass a short-term government funding bill to buy policymakers some more time, two people familiar with the matter told NBC last week. Meanwhile, Senate Majority Leader Chuck Schumer has said he is open to exploring such a deal in talks with McCarthy.