The possibility of a US government shutdown has raised concerns among economists and credit rating agencies about the country's credit rating and overall economic stability. Moody's, the last major rating agency to rate the US with a AAA rating, has warned that a shutdown could be negative for the country's credit rating. While the actual economic impact of a shutdown may be limited if it is short, it would highlight the weakness of US institutional and governance strength compared to other AAA-rated sovereigns.[0] It would also demonstrate the significant constraints that political polarization is placing on US fiscal policy making.[0]
If a shutdown were to occur, Moody's response would be closely watched, as a downgrade of the US's credit rating could have significant implications. Fitch Ratings already downgraded the US in August, triggering a selloff in equity markets. Moody's has expressed reservations about the country's institutional and governance strength, emphasizing that a shutdown would be credit negative for the US sovereign.[1]
A government shutdown would have direct impacts on government spending and would also affect the consumption and spending of federal workers and contractors.[0] Additionally, it could disrupt the flow of government statistics, making it more difficult for the data-dependent Federal Reserve to make decisions. An extended shutdown could further support the call for no additional rate hikes.
The potential shutdown comes at a time when the US economy is already facing other challenges. Inflation has been a concern, with the personal consumption expenditures price index rising by 0.4% in August, higher than expected.[2] The University of Michigan's consumer sentiment index for September also rose to 68.1, surprising analysts.[3]
The impact of a shutdown on the economy would be worsened by the resumption of student loan repayments on October 1st, which would leave consumers with less discretionary income.[4] This has already led to downgrades for companies like Footlocker and Nike, as consumers have less money to spend on boutique retailers.
The uncertainty surrounding the potential shutdown has led to a liquidation of long dollar positions, with the dollar becoming a haven for investors. The US dollar index has reached a fresh high since last November, benefiting from safe-haven inflows if the shutdown is short-lived.[5] However, the longer a shutdown lasts, the greater the impact on the economy and the US's creditworthiness, which could eventually have a negative effect on the dollar.[5]
Overall, the potential government shutdown poses risks to the US economy and its credit rating. The response from credit rating agencies, particularly Moody's, will be closely monitored. The impact on government spending, consumption, and the flow of economic data could further complicate an already challenging economic environment.
0. “Core Bonds Fell Off a Cliff” Action Forex, 26 Sep. 2023, https://www.actionforex.com/contributors/fundamental-analysis/520303-core-bonds-fell-off-a-cliff
1. “McCarthy Under Pressure As Clock Ticks To Avert Shutdown: Treasury Yields Mirror Market Jitters – iShares” Benzinga, 26 Sep. 2023, https://www.benzinga.com/government/23/09/34924068/mccarthy-under-pressure-as-clock-ticks-to-avert-shutdown-treasury-yields-mirror-market-jitters
2. “Stock Market Today: Stocks Swing Lower as Government Shutdown Nears” Kiplinger's Personal Finance, 29 Sep. 2023, https://www.kiplinger.com/investing/stocks/stock-market-today-stocks-swing-lower-as-government-shutdown-nears
3. “US close: Stocks slip into the red as shutdown looms large” ShareCast, 1 Oct. 2023, https://www.sharecast.com/news/market-report-us-close/us-close-stocks-slip-into-the-red-as-shutdown-looms-large–14838352.html
4. “Stocks On Pace For First Consecutive Monthly Decline This Year” Forbes, 25 Sep. 2023, https://www.forbes.com/sites/jjkinahan/2023/09/25/stocks-on-pace-for-first-consecutive-monthly-decline-this-year/
5. “US yields rise, Dollar gains on another US government gong show” FXStreet, 26 Sep. 2023, https://www.fxstreet.com/analysis/us-yields-rise-dollar-gains-on-another-us-government-gong-show-202309260552
