Goldman sees US shutdown over spending “more likely than not”

The United States government looks "more likely than not" to shut down later this year due to political differences on spending that could temporarily hit economic growth, Goldman Sachs analysts said in a research note.

The Goldman economics analysts said prior shutdowns - which occur if Congress fails to pass annual spending bills - have stemmed either from disagreement on the level or distribution of spending, or a dispute over other issues that one party wants to address in spending legislation.

"At the moment, both types of risks are in play," Goldman said in the note.

A broad government shutdown stands to directly reduce growth by around 0.15 percentage points for each week it lasts, while the reduction could be 0.2 percentage points a week when including a modest impact in the private sector, according to Goldman.

However, the analysts said, in the quarter following the government reopening, growth would rise by the same amount.

Markets have not had strong reactions to three past shutdowns, in 1995-96, 2013, and 2018-19, according to the note.

Equity markets were flat or up at the end of those shutdowns, though in each instance equity prices were lower at some point in the days following the start of the shutdown than when it began, the analysts wrote, while the 10-year Treasury yield declined more consistently after the start of the shutdowns.

The Goldman analysts said a shutdown is not a foregone conclusion, pointing to support for a temporary extension after the end of the fiscal year on September 30, 2023.

They also noted that compared to the severe macroeconomic impact of a failure to raise the US debt limit, the less dramatic economic effect of a shutdown also makes it more likely that Congress fails to act in time.

US approves record military spending

The US House of Representatives backed legislation on Thursday paving the way for the defense budget to hit a record US$858 billion next year, US$45 billion more than proposed by President Joe Biden.

The House passed the compromise version of the National Defense Authorization Act, or NDAA, an annual must-pass bill setting policy for the Pentagon, by 350-80, far exceeding the two-thirds majority required to pass the legislation and send it for a vote in the Senate.

The fiscal 2023 NDAA authorizes US$858 billion in military spending and includes a 4.6% pay increase for the troops, funding for purchases of weapons, ships and aircraft; and support for Taiwan as it faces aggression from China and Ukraine as it fights an invasion by Russia.

"This bill is Congress exercising its authority to authorize and do oversight," said Representative Adam Smith, the Democratic chairman of the House Armed Services Committee, in a speech urging support for the measure.

Because it is one of the few major bills passed every year, members of Congress use the NDAA as a vehicle for a range of initiatives, some unrelated to defense.

This year's bill - the result of months of negotiations between Democrats and Republicans in the House and Senate - needed a two-thirds majority in the House after disagreement from some House members over whether it should include an amendment on voting rights.

The fiscal 2023 NDAA includes a provision demanded by many Republicans requiring the Secretary of Defense to rescind a mandate requiring that members of the armed forces get COVID-19 vaccinations.

It provides Ukraine at least US$800 million in additional security assistance next year and includes a range of provisions to strengthen Taiwan amid tensions with China.

The bill authorizes more funds to develop new weapons and purchase systems including Lockheed Martin Corp's F-35 fighter jets and ships made by General Dynamics.

The Senate is expected to pass the NDAA next week, sending it to the White House for President Joe Biden to sign into law.

NDAA is not the final word on spending. Authorization bills create programs but Congress must pass appropriations bills to give the government legal authority to spend federal money.

Congressional leaders have not yet agreed on an appropriations bill for next year.