Goldman Sachs says the odds of a government shutdown are now 90%—and it could last two to three weeks

“A government shutdown this year has looked likely for several months, and we now think the odds have risen to 90%,” he wrote in a Wednesday note. “While there is still a chance that Congress can reach a last-minute deal to extend funding past Sep. 30, there has been little progress made and there is little time left.”

Hatzius argued that the shutdown will likely last two to three weeks because it will take political pressure from missed pay dates for active-duty military members on Oct. 13 and Nov. 1, as well as a deterioration in “essential operations” like airport screening and border patrol, to make Congress compromise on a funding bill. “If the government shuts down on Oct. 1, a quick reopening looks unlikely as political positions become more deeply entrenched,” he warned. 

A Nomura economics team, led by senior economist Aichi Amemiya, backed up Hatzius’ view in a Wednesday note, saying that they expect the government shutdown to last one to two weeks, but “a longer shutdown is possible.”  

“Shutdowns tend to be unpopular and short-lived; however, the narrow Republican majority in the House of Representatives makes it more difficult to reach a compromise,” they explained.

The only option lawmakers have to prevent a shutdown is to pass a short-term extension of funding—also known as a “continuing resolution” or CR. But Goldman’s Hatzius explained that both the Senate and House are attempting to push through CRs that include somewhat controversial provisions that make them unlikely to pass. And even if there is a short-term extension to prevent a shutdown, the economist warned that it won’t prevent these same budget issues from cropping up in the fourth quarter. 

A partial government shutdown occurs when the annual budget legislation that funds many federal programs and agencies fails to pass to Congress. The budget consists of 12 separate appropriations bills, and this year, lawmakers haven’t agreed on any of them. If that continues, as Hatzius and a number of other experts now believe it will, the government will shut down its non-essential functions on Oct. 1. This could affect the salaries of up to 4 million federal workers, including active-duty military members, and cut a variety of services, from nutrition benefits and small business loans to passport application processing and food safety inspections. However, Medicare, Medicaid, Social Security and other so-called “mandatory” spending programs won’t be impacted.

There have been 14 partial government shutdowns since 1980, but only three lasted longer than a single week—in 1995, 2013, and 2018-2019. Historically, the economy has mostly shrugged off partial government shutdowns without much lasting damage, but this time, the impact could be greater because of the potential for an extended shutdown. According to Goldman’s estimates, each week the government is shut down 0.2 percentage points will be subtracted from GDP growth. 

Beyond slowing the economy, Hatzius warned that the government shutdown could delay the release of key data that the Federal Reserve uses to determine monetary policy. 

Federal Reserve Chair Jerome Powell has promised to be “data dependent” when determining the path of interest rates in his quest to tame inflation, but that could be more difficult without the proper data. And Congress has yet to pass the appropriations bills that fund the Dept. of Labor, the Dept. of Commerce, the Dept. of Agriculture, or the Dept. of Energy, meaning reports from all of these agencies would be affected and possibly postponed in a government shutdown. 

Even worse, Hatzius warned that, this time, “more than one shutdown is possible” due to the intense political gridlock in Washington. 

“The two parties are far apart on spending proposals, and any agreement to reopen the government after the likely shutdown is likely to expire before year-end, potentially risking another funding lapse,” he warned.