As discussions in Washington over federal spending continue, the potential for a government shutdown is growing.
A shutdown would probably have a modest effect on the economy, which may also make a sustained impasse over spending more likely, according to Goldman Sachs Research.
Commenting on this, Goldman Sachs chief US political economist, Alec Phillips, said: “Unlike the debt limit, where Congress reached a deal because the potential hit to the economy from an impasse would have been so severe, a shutdown would be much more manageable from a macroeconomic perspective.
“However, 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.”
A government-wide shutdown would directly reduce growth by around 0.15% for each week it lasted, or about 0.2% per week once private sector effects were included, with growth rising by the same cumulative amount in the quarter following reopening, Phillips wrote in a team report.
While federal spending is equal to almost a quarter of gross domestic product, the impact of a shutdown is much smaller, in part because only discretionary spending (about a quarter of federal outlays) would be affected.
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