Market Implications of a US Government Shutdown

With the House not even voting on a continuing resolution to fund the government, a shutdown is now a reality. This implies some 800,000 federal employees will stay at home this morning since they are no longer getting paid. The government shutdown also prevents any federal agency from committing any payments in the future. Some exception is allowed for federal employees who are involved in security such as air traffic controllers etc. What does a shutdown imply for the economy and financial markets: 15 bps drag on fourth quarter GDP for every week of shutdown. Estimations are around at least US$300 million a day in lost economic output at the start and the impact is likely to grow over time as skittish consumers and businesses stay on the sidelines. Data releases will be delayed including non-farm payrolls (large implications for volatility trading) Data collection will also be affected and therefore future data may be less reliable when it does get released. What to look out for next: October 17th - the Treasury continues to manage cash using 'extraordinary measures' to keep funding existing programs. Even with these in place the debt limit will be reached 'no later than October 17th' according to Secretary Lew. November 1st - the specific date when the treasury runs out of cash is an area of uncertainty as revenue and expenditure can be volatile. The US may be able to stretch the extraordinary measures to instruct the Fed to make some payments (such as coupon and principal) which may push the actual date the Treasury runs out of cash to early November. At this point the debt ceiling is reached. Market Impact - while there has not been a government shutdown in the past 17 years, there have been 8 in the past 30 years, with most lasting just 1-3 days. Short term government shut-down tends to have limited long term impact on credit markets assuming they last at most a week or so.