Back in August, Goldman Sachs said that a government shutdown was “more likely than not,” a customer note by the firm’s chief US political economist, Alec Phillips, said. That was supposed to be for a likely two to three weeks in the current quarter.
But things have apparently changed and a shutdown is “mush less likely,” and a combination of geopolitical strife and domestic political turmoil is the reason, according to a Reuters report quoting Goldman Sachs economists led by Jan Hatzius.
In August, multiple factors played into the likelihood of a shutdown, including but not necessarily limited to the following, as the news reports and GlobeSt.com analysis suggested:
- There was clear political turbulence going into a presidential election year and both major parties sought advantage going out of 2023 and into 2024.
- The GOP had a thin majority in the House and Speaker Kevin McCarthy had to appeal to some extremely conservative factions to keep this position and power.
- When Congress doesn’t pass annual spending bills, it’s generally over the level of spending, its distribution, or issues one party wants to include in spending bills and the other does not. All three are true at the moment.
Things have changed. First, McCarthy was tossed out of power and, after multiple attempts over a long stretch where people wondered how anything might function, the GOP portion of the House settled on Mike Johnson. The outcome saw the attempt and failure of multiple politicians to gain power. The Goldman economists thought that meant a reduced chance of a shutdown, presumably because Republicans would want to regroup and avoid actions that could stress divisions within the slim majority.
Also, the Goldman economists pointed to conditions in the Middle East. Since the first take in August, a full-scale war has broken out between Israel and Palestinians in the Gaze Strip. There are concerns that other groups and countries could side with Hamas and escalating the fighting, creating a potential for regional strife. Congress would be less likely to allow a government shutdown, which could hamper U.S. military readiness, in theory.
Even so, the likelihood is that the House would only be able to pass a continuing spending resolution by November 17, creating “some risk” of a shutdown in early 2024 as political differences would not disappear.
The question is whether the Goldman read of political forces in Washington are right in treating them as so pragmatic. The House is effectively controlled by a small highly politicized group of Republicans within the House. They had insisted on the rule change allowing them to dump McCarthy in the first place and it is unclear that they would see paralysis as bad.