Shutdown threatens economic stability as other challenges mount


Shutdown threatens economic stability as other challenges mount

Washington and Wall Street economists spent more than a year fretting about a recession that never arrived. Now they're barely worried about the prospect.

As threats pile up across the economy — a rolling auto strike, surging borrowing costs, the end of the student loan moratorium, climbing gas prices — the response, from Capitol Hill to New York, has mostly amounted to a collective shrug.

But with lawmakers struggling to avoid a government shutdown, leaders from both parties face potentially steep consequences by betting against the arrival of an economic slowdown between now and November 2024.

“The good news is that the economy is internally robust,” said Mohamed El-Erian, president of Queens' College, Cambridge and chief economic adviser at Allianz, who thinks skeptics have been “sidelined” in the growing economy. “The bad news is it can be derailed by mistakes, from a politically driven shutdown to another Federal Reserve policy error.”

Fed policymakers, who have raised interest rates to a 22-year high to kill inflation, offered a surprisingly optimistic view on Wednesday that the economy can avoid a recession. And Jared Bernstein, a top adviser to President Joe Biden, said at a POLITICO event this week that the economy is in “a good place,” with low unemployment, continued job growth and strong consumer spending. “The idea that anyone would throw any size wrench … into that equation is political malpractice,” he said.

But little by little, the odds of a mistake are starting to mount.

JPMorgan Chase CEO Jamie Dimon has repeatedly argued in recent weeks that a combination of geopolitical tension, fiscal challenges, and elevated energy and borrowing costs have put him in a “heightened edge of caution." Economists at Goldman Sachs — which lowered the chances of a recession in the next year to just 15 percent — recently identified a government shutdown, a prolonged auto strike and the resumption of student loan payments as a “pothole” that could drag down growth.

While stock markets have fallen in recent days, that's largely a reflection of Fed Chair Jerome Powell signaling on Wednesday that rates will stay higher for longer amid signs that the economy remains on solid footing and inflation isn't yet beaten.

A government shutdown would likely cast even more of a cloud over consumer sentiment, which has remained chilly since the emergence of Covid-19 in 2020, according to researchers at the University of Michigan. And while Americans have benefited from a resilient labor market and wage growth, business owners increasingly expect conditions to deteriorate.

“I’m very concerned,” said Sen. Kevin Cramer (R-N.D.), citing the pressure that inflation and the Fed’s high interest rates are placing on businesses and consumers. “I don’t think that there’s an adequate appreciation for how challenging times are right now,” he said in an interview.

Rep. Jim Himes (D-Conn.) on Thursday said he was nervous that “any number of things that are outside our control” — from the United Auto Workers strike to the reemergence of Covid — could damage the economy. That’s one reason why a government shutdown would be “sad,” he added.

“When you're at a moment of some peril, you ought to be not inflicting wounds on yourself. But that appears to be what we're about to do,” he said.

Sen. Jon Tester, a Montana Democrat who faces a tough reelection fight in 2024, said the combination of economic headwinds against a government shutdown would deal a blow to policymakers from “both sides.”

And while voters have given Biden low marks for his performance on the economy, former Republican House Majority Leader Eric Cantor has warned Republicans that a shutdown is unlikely to yield political gains.

For now, Wall Street traders aren’t particularly concerned about how self-inflicted political wounds caused by a shutdown could ripple through markets. They're more focused on the Fed.

The impact has been muted, historically, although a lengthy shuttering of government offices coinciding with the UAW strike and other headwinds like high energy prices add “a little more uncertainty” to how Wall Street might react this time, Wells Fargo strategist Gary Schlossberg told POLITICO this week.

Larry Summers, a former Treasury secretary with close ties to the White House, identified rising health insurance costs, tight labor markets and housing costs as factors that could cause inflation to rebound in the coming months.

“The news has been relatively good for the last few months, but there are still substantial risks— both on the overheating side and for a possible slowdown towards recession,” Summers said in an interview. “Declarations of victory are substantially premature.”

To wit, the Consumer Price Index for August showed an increase in both monthly and annual inflation amid rising gas prices. Monetary policy plays less of a role in shaping energy prices — and some sectors of the economy that are more sensitive to rates reported slower price growth — but that doesn’t mean American households didn’t feel the pinch as prices rose at the pump.

That puts a strain on how households spend their money. And as more challenges accumulate for households, some Wall Street economists are cautioning that spending could fade in the coming months.

That’s why Republicans have continued to hammer Biden on the economy despite a bevy of indicators that suggest the U.S. is on stable footing. The unemployment rate is near historic lows, there are more job openings than available workers and wage growth has been outpacing inflation for months.

But that’s not what Americans “feel every single day,” Georgia Republican Rep. Drew Ferguson said at the POLITICO event on Wednesday. “It’s not what American families and people feel when they’re having to decide which activities and which things they’re going to have to cut out of their budgets."

But if Fed economists are proved correct and inflation comes down without significant job losses or market strain, Democrats are hopeful that outcome will be reflected at the ballot box.

“The American public, it takes some time to catch up with who’s doing what and who’s been impacted by it,” said Rep. Maxine Waters, a California Democrat who is the ranking member of the House Financial Services Committee. “I know some of the polls have shown that they believe that Trump has done better with the economy, but Biden has done really good,”

Jasper Goodman, Eleanor Mueller and Zachary Warmbrodt contributed to this story.

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By: Sam Sutton
Title: `Derailed by mistakes’: Shutdown poses economic threat as other headwinds mount
Sourced From: www.politico.com/news/2023/09/22/shutdown-poses-economic-threat-headwinds-00117474
Published Date: Fri, 22 Sep 2023 04:00:00 EST

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