Washington could be barreling towards yet another spending crisis, but the initial reaction from economic watchers was to focus on the notion that perhaps not all self-inflicted wounds are equal.
The rising odds of a shutdown came after a deal to avert a government stoppage fell apart dramatically on Wednesday afternoon amid opposition from Elon Musk followed by President-elect Donald Trump.
The revolt led House Speaker Mike Johnson to pull back on a deal he had negotiated with Democrats. Lawmakers are now starting anew, less than 48 hours from when a shutdown would begin.
A shutdown would have varied economic effects — and will definitely be taken note of by rating agencies looking at US creditworthiness — but analysts late Wednesday and early Thursday often focused on how the damage could be limited if it comes to pass at all.
“While the latest developments raise the odds of a government shutdown, a protracted shutdown looks unlikely in our view,” wrote analysts at Goldman Sachs late Wednesday in one example.
“We do not expect a near-term increase in the debt limit,” the analysts added, referring to Trump’s late demand to also address America’s borrowing limit this week.
Raymond James analysts, in their own note, listed a long government shutdown as the fourth of four possible paths ahead.
They instead focused more on ideas that could avert or quickly end a shutdown, such as “a mostly ‘clean’ CR” that lawmakers have been discussing. It would pare back most of the provisions in Johnson’s initial bill but maintain the most politically popular ones, such as disaster relief funding.
The most expensive government shutdown in history led to about $3 billion permanently taken out of the US economy, according to the Congressional Budget Office. The reason: that 2018/2019 standoff spanned 34 days.
Other stoppages have been much shorter, with economic analyses after the fact often showing that the lost money is then returned to the U.S. economy in nearly equal measure after the government re-opens.
Goldman analysts this week projected that this time around a shutdown would reduce GDP growth by 0.15 percentage points for each week of stoppage — but then boost GDP growth by the same amount after reopening.
The open question, of course, is whether at least parts of Trump’s camp might be fine with a long shutdown.
Musk led much of the opposition to the 1500+ page deal and argued at one point Wednesday that “No bills should be passed….until Jan 20, when @realDonaldTrump takes office.”
He called a shutdown “infinitely better than passing a horrible bill,” in another post.
The approach from Trump and Vice President-elect JD Vance (who is on Capitol Hill involved in the ongoing talks) is somewhat different.
They are demanding an entirely new bill that removes provisions popular with Democrats and also addresses the debt ceiling, which is set to be an issue in 2025. They say of that issue that “we’d rather do it on Biden’s watch.”
In another post, Trump said he opposed any “clean” bill that simply averted the debt ceiling.
Any of these approaches have a very difficult path to passage, with Democrats likely to be unified in their opposition to the fractious House Republicans unlikely to find a bill that they all can support.
Whether or not House Speaker Mike Johnson and his colleagues can find a way out of this standoff, the economic costs also could already be real in the world of credit ratings.
It was last year that Fitch downgraded the US government’s top credit rating and cited government dysfunction as a key reason for doing so.
The move made it the second major agency to downgrade the US after the S&P did so back in 2011.
A third credit rating agency, Moody’s Investors Service, has retained its top AAA credit rating for US securities for now but lowered its outlook last year on the U.S. government debt from “stable” to “negative,” also citing issues like political polarization in Congress.
Ben Werschkul is Washington correspondent for Yahoo Finance.
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