Our analysis suggests that a one-week shutdown in October would reduce real federal government consumption and gross investment by 1.6% q/q saar and real GDP growth by 0.1pp in Q4.
This consistent with the CBO’s estimate that the approximately four-week shutdown in 1995-96 reduced growth by 0.5pp in Q4 95. Thus, a short federal government shutdown is unlikely to dampen real GDP growth significantly. A longer shutdown, however, could have negative indirect effects on private sector activity.
Our baseline outlook is that policymakers avoid the negative consequences of further fiscal brinksmanship, but brinksmanship in the recent years has led to increased uncertainty and sizeable fiscal drags in the resolution (eg, sequestration). These remain a risk to our baseline outlook.