Policy: Economy

No signs of government shutdown worries in stock markets

By |
Congress,Finance and Banking,Debt Ceiling,PennAve,Joseph Lawler,Economy,Budgets and Deficits,Government Shutdown,Financial Markets

Fears about the federal government shutting down appear not to have reached Wall Street.

Stock markets opened higher Tuesday morning after Congress failed to authorize spending overnight. The S&P 500 and Dow Jones Industrial Average gained over the first half of the day, and the Nasdaq composite index also increased by over a percentage point.

To some extent, those gains reflected the fact that markets had already priced in the impact of a shutdown, which was viewed as likely by Monday afternoon when Republicans and Democrats remained far from a deal, if not by the close of business Friday before Congress' weekend deliberations.

Nevertheless, said Craig Alexander, the chief economist for TD Bank Group, the morning showed "very sanguine movement, so clearly no deep fear in the markets."

Private-sector economists have said the lapse in government spending could modestly reduce economic output for the quarter, and that a shutdown of longer than a month could start to disrupt the broader economy more significantly as government services were missed.

Before that point is reached, however, there's another major threat to the economy that could shock stock markets, namely the deadline to raise the debt ceiling.

Treasury Secretary Jack Lew has said he will run out of extraordinary measures with which to pay the government's bills while staying under the debt ceiling by Oct. 17. At that point, the Treasury will only have income revenues and cash on hand to pay the interest on the debt and all other federal obligations. A government default would prove catastrophic for the economy, and even the fear of such a remote possibility could spook markets more than the economic effects of a shutdown could.

It was not clear how long the government shutdown would last. But, Alexander told the Washington Examiner, markets would begin worrying about further economic harm from the shutdown at "about the same time" that a failure to raise the debt ceiling would become a cause for concern. "Every day that goes by is one day closer to the deadline," he said.

In other words, the shutdown adds to market anxieties over crises coming out of Washington, but the debt limit is already the major worry.

View article comments Leave a comment