US: Risk of government shutdown increases but remains unlikely – Nomura

Research Team at Nomura suggests that the probability of a shutdown on 29 April has increased, but remains low, in their view.

Key Quotes

“Although the same political party controls the White House, Senate and House of Representatives, we once again approach a deadline to approve a budget to keep the government open. That deadline is 28 April. However, changes being pushed by the Trump administration for the remainder of FY17 (29 April - 30 September) raise the possibility that an agreement may not be reached by 28 April, resulting in a government shutdown.”

“The administration advocates increased funding for the border wall and $33bn in supplemental spending for the Department of Defense. In contrast, Office of Management and Budget (OMB) Director Mick Mulvaney is calling for a large swath of cuts totaling $18bn for the rest of the fiscal year. The proposed cuts are especially deep in foreign aid, research, and social programs. It must be emphasized that the cuts and increased defense spending are the president’s priorities, not necessarily Congress’s.”

“The primary challenge in passing the remaining FY17 budget lies mainly in the Senate, where 60 votes will be needed to pass the spending bills (the Republicans have a 52-48 majority). Senate Minority Leader Chuck Schumer has said that the Democrats would only approve a budget that does not include spending for the border wall and other provisions that Democrats would object to (such as defunding Planned Parenthood). Further, any increases in discretionary spending on defense would have to be accompanied by spending cuts elsewhere.”

“We believe the most likely outcome is that Congress will pass a continuing resolution (CR) for the rest of FY17 before 28 April. CRs have become the norm in federal budgeting.”

“In the current circumstance, there is a possibility that the Republicans will propose changes that the Democrats in the Senate will object to. However, the Republican leaders are likely to want to avoid a government shutdown as they have proven unpopular with the public.”

“The direct economic effects of a shutdown would be limited, in our view. For the most recent government shutdown (30 September through 17 October 2013) the Bureau of Economic Analysis estimated the direct impact on real GDP growth for Q4 2013 was 0.3 percentage points at an annual rate, mainly reflecting the furloughing of federal workers.1 In addition to the direct economic disruption, a shutdown would also affect the release of key economic data. For instance, on 1 May, personal income and spending data are set to be released, including PCE inflation. The FOMC meets later that week (2-3 May) and although the Fed would not be directly affected by a shutdown (it does not rely on appropriations from Congress), the FOMC would not have the most recent PCE inflation data at hand for its meeting.”

“That said, perhaps the largest effect would be the market’s reaction to the Republican’s inability to successfully govern, leading to further questions about their ability to deliver on their promises.”