Developments in Washington - Nomura

Analysts at Nomura explained that developments in Washington negotiations are to extend authority for federal spending beyond midnight tonight stalled this week. 

Key Quotes:

"As of writing, negotiations are ongoing.

There are positive signs, but at this point there are only a few hours to left to avoid a shutdown starting at midnight tonight. 

That said, three points are worth keeping in mind. First, any government shutdown may be quite short. Press reports suggest that the Congressional negotiators are not far apart on the set of issues that are holding up a long-term agreement, including an extension of the DACA program, increases in the caps on defense and nondefense discretionary spending, additional funding for border security, an extension of the Children’s Health Insurance Program (CHIP), and possible incorporation of the Alexander-Murray health care stabilization bill. If an agreement on the long-term issues can be reached it may be easier to reach a short-term agreement that would avoid a lengthy shutdown.

Second, the economic impact of a government shutdown is likely to be minimal. In Q4 2013 when a government shutdown lasted for 16 days, the BEA estimated about a 0.3pp reduction in the q-o-q annualized real GDP growth during the quarter due to the furlough of approximately 800,000 federal workers. This suggests that a one-week shutdown would reduce economic growth by 0.2pp at most. 

Finally, we continue to believe that regardless of how the next few weeks play out, the ultimate outcome of this fiscal policy impasse is a likely substantial increase in federal spending. As we have written before, Republicans want a substantial increase in defense spending over the next couple of years, and they seem prepared to accommodate demands from Democrats for a comparable increase in non-defense spending to reach a long-term agreement on spending."