Fra Commerzbank:
US Congress has so far failed to pass a spending bill to keep the federal government funded for the fiscal year 2016 starting on 1 October. If no agreement is reached in the days ahead, another government shutdown may loom. The release of key data, particularly the employment report scheduled for 2 October, is at risk. Moreover, the increase in the debt ceiling is still pending.
The US federal government has not yet been granted a continuing resolution from Congress for the new fiscal year starting next Thursday, as the Republican majority in Congress is seeking to strip federal funds from Planned Parenthood, an organisation which provides reproductive healthcare and abortions at its hospitals, together with the implementation of the resolution. This has met with opposition from the Democrats in Congress. If no compromise can be reached in the days ahead, the US federal government has to close down “non-essential“ agencies as of the beginning of the new fiscal year starting on 1 October, and their employees have to be put on furlough.
One agency likely to be shut down is the Bureau of Labor Statistics, which collects the employment data. In this case, the release of the employment report scheduled for Friday, 2 October would be postponed. As was discussed during the most recent shutdown in 2013, however, the White House could authorise the release of these anxiously awaited figures – but this is not certain. Using the 16-day shutdown in 2013 as a gauge, the economic cost of a federal government shutdown can be roughly estimated. Various analyses came to the conclusion that the direct impact on GDP was an annualised USD 8 to 24 billion in 2013, which reduced economic growth by 0.2 to 0.6 percentage points in the corresponding quarter. Should no agreement be reached at the first attempt – which is likely – the Republican majority leader could propose a short-term resolution in the Senate which is tied to no conditions (a socalled clean resolution).
Together with the Senate, the House of Representatives would have to approve this resolution. However, with the deadline at midnight on Wednesday, time is running out. Of course, US authorities will not be closed down permanently, even if no timely agreement can be achieved. Against the backdrop of increasing public protest, a compromise seems likely within a few days. US debt approaching ceiling Even if the parties agree on a continuing resolution, the political risk for the economy has not ended as the debt ceiling was reinstated in March this year following a one-year moratorium.
As a result, US federal debt may not exceed USD 18,113 billion, and this limit was hit in March. The US Treasury Secretary has already launched the usual “extraordinary measures“. Thus, for instance, several public pension funds are no longer allowed to issue new bonds. According to an analysis from the Congressional Budget Office, these measures should be exhausted between mid-November and early December. After that the debt ceiling will have to be raised – or the federal government can no longer pay all its bills. However, it is unlikely that Congress will push it to the limits. Whilst it may again be a last-minute deal, Congress will seek to avoid a government default.
This above all holds because the November 2016 presidential election campaign is already running at full speed. The risk of a political disaster for US government finances is therefore limited. But the dysfunctional budget process creates a lot of avoidable uncertainty. Together with the global slowdown, particularly the weakness in the emerging markets, the environment for the US economy has deteriorated. Bernd Weidensteiner Tel. +49 69 136 24527 25 September 2015 7 Economic Research | Week in Focus Product idea: Forward Extra in EU
