Government shutdown would have 'modest impact' on economy: Expert

Lawmakers eye down a federal spending bill deadline at the end of the month, raising the likelihood of a government shutdown if legislative negotiations aren't successful. Jeannette Lowe, Strategas Securities Managing Director of Policy Research, examines the stalemate between House Democrats and Republicans, and the economic implications of a government shutdown.

"Our current odds are very high as well — 75% chance as of today that we do have a government shutdown on October 1," Lowe states. "One of the problems with having [lawmakers] pass a continuing budget resolution — which they have done many times in the past — is that the House conservatives are currently asking for other policy provisions to be attached to it."

Video Transcript

- The countdown is on to avert another government shutdown with less than 12 days left on the legislative calendar to clear a spending bill. But with House Republicans divided and a split Congress, it's looking more and more likely that we could see a shutdown. Joining us now is Jeanette Lowe, Strategas Securities Policy Research Managing Director. Jeanette, good to talk to you today. So where do you put the odds of a potential shutdown right now?

JEANNETTE LOWE: Hi. Well, thanks for having me. So our current odds are very high as well. So 75% chance as of today that we do have a government shutdown on October 1st. Because the House and the Senate are coming at government spending for the current fiscal year for FY-24 at different levels, there's only a couple of weeks before they have to pass the budget by September 30th, and they could pass a continuing budget resolution or to continue current funding, or we would go into a government shutdown.

And one of the problems with having them try to pass a continuing budget resolution, which they have done many times in the past, is that the House conservatives are currently asking for other policy provisions to be attached to it. Things like border security that are just not going to pass on a bipartisan basis. And because of the stalemate, we do think it's more likely currently that we will have that shutdown.

- Jeanette, if we do see a shutdown, what are the economic implications of that?

JEANNETTE LOWE: So we have looked historically at government shutdowns in the past. They've varied in how long they have lasted. But in general, the government shutdowns have not had a significant impact on economic growth or on the stock market. So the last six government shutdowns have occurred in quarters with positive economic growth. Usually, they do last a little while. The government reopens. That spending that was supposed to be done during those weeks does come back out. So it's had a very modest impact.

The one thing that we're watching for with this current shutdown is would Moody's potentially put the US on a credit ratings watch during the shutdown because of it? They've been saying, the credit agencies have been saying that process is becoming more important with things like the January 6th event, with the debt ceiling fights that we continue to have, and the government shutdowns. And that's the potential where we see more risk, is if we do actually have that credit watch come into play. That would be a much more significant event for financial markets in our view.

- Would that have any bearing though you think on negotiations in DC? I mean, certainly, that doesn't seem to have made an effect when you consider what Moody's did, what the credit downgrade has meant for how lawmakers in DC have been watching this. I mean, there have been warnings about the political gridlock that's been existing.

JEANNETTE LOWE: Right. And to your point, it hasn't actually led to much action yet out of Congress. There is a lot of talk on both sides about having to now address this, but it hasn't really moved it forward. The one thing that I do see is that if we go into a government shutdown, they usually, let's say, last about two weeks. In this case, like looking back, it's very similar to what we saw in the October 2013 government shutdown. That one lasted 16 days. This one's kind of setting up to be a very similar situation.

So if Moody's were to do that, that actually could be a catalyst for the government to at least reopen because usually, shutdowns end as political pressure continues to build on both sides to then reopen the government. And so that's where we could see it really being a catalyst to have some action. And then it's still up to Congress to decide how they actually want to deal with some of the larger fiscal issues that the US is facing. But that is where it could actually play a role in actually helping to reopen the government, even though it's not exactly the best catalyst to have that effect.

- Jeanette, what's the risk to the Biden administration on one hand? And then on the other hand, when you take a look at Speaker McCarthy and the pressure that he's under, a number of Republicans want him to reach a deal, and you have the far right saying that they want him to hold that hard line. What's at risk here when you take a look at those two parties?

JEANNETTE LOWE: Yeah. So it's interesting. So presidents generally in the third year of their presidency, they hit a low in August of that year in their presidential approval ratings. And President Biden has had very low approval ratings, hovering around 40, 41%. We actually do think though that if there is a government shutdown and it allows President Biden to kind of retake the bully pulpit, and stand up every day, and say that he wants to have the government open and that Congress is standing in his way, that actually could be a benefit to his approval rating and give him a boost going into the re-election cycle in 2024.

On the other side of that though, you do have some risk here for Speaker McCarthy. There is definitely some House conservatives who are quite disappointed in what he's been able to accomplish as Speaker if he were to cross and go with the Democrats in order to pass a measure to keep the government open, that would definitely cause people to want to move to remove him as Speaker. There certainly don't see an alternative for the speakership as of yet, but that is definitely a risk that he faces. So he needs to thread this quite carefully. Now he has exceeded expectations in the past, but it could be that the government shutdown, one of the main consequences is that it does hurt his ultimate power in the House.