International_U.S._Capitol

Update on Jan. 22, 2018, at 2 p.m.: A Senate agreement has reopened the U.S. federal government.

The U.S. government has been shut down since midnight on Friday—and that could negatively affect growth in Q1, says TD senior economist Leslie Preston in a weekly economics report.

The last 16-day shutdown lowered real GDP by 0.3 percentage points (annualized) in Q4 2013, she says.

“If the shutdown were to drag on, for example, for four weeks, it is estimated it would lower real GDP growth by 1.5 percentage points (annualized),” she says. “Right now, first quarter growth is tracking just shy of 2.5% annualized—strong enough to withstand the hit.”

Markets could rally

Further, the market rally shouldn’t be affected: past shutdowns haven’t been catalysts for market downturn.

“On average, markets have shown modest weakness, with the S&P 500 down 0.6% over the period of the closure,” says Preston. “However, the index rose in 44% of past government shutdowns.”

For example, during the last three shutdowns, under Clinton and Obama, markets rallied.

“Given current market optimism on strong global growth, it seems unlikely that a shutdown would derail the rally,” she says.

Read: End-of-cycle positioning for portfolios

About the shutdown

The U.S. government shut down at midnight Friday, as Senate Democrats blocked a House-passed temporary funding bill to reopen the government through Feb. 16. A pending Senate measure would last through Feb. 8.

“Dems are opposed to the bill because they want it to deal with the fate of “Dreamers”—people who were brought to the U.S. illegally as children—whose protection from deportation expires in March,” says Preston, referring to the original bill.

The result of the shutdown is that non-essential services are are closed, like the IRS and statistical agencies.

“The Federal Reserve is not funded by Congress, so it […] remain[s] open for business,” says Preston.

Also read:

Global economy shows signs of ‘virtuous cycle,’ El-Erian tells CFA Calgary

What happens if bonds become more appealing than stocks?

Originally published on Advisor.ca
Add a comment

Have your say on this topic! Comments are moderated and may be edited or removed by
site admin as per our Comment Policy. Thanks!