As the longest government shutdown in U.S. history endures, the J.P. Morgan Research team pinpoints the impact on U.S. economic growth, asset classes and sectors. While some fallout may be short-lived, the impasse over President Trump’s $5.7 billion demand for a U.S.—Mexico border wall raises wider questions on consumer and business sentiment and what this means for another looming flashpoint: The U.S. debt ceiling that is set to expire on March 1.
J.P. Morgan has lowered its U.S. growth forecast from 2.25% to 2.0% in the first quarter due to the economic fallout from the shutdown. News reports indicate some 400,000 government workers are not working at all during the period and J.P. Morgan predicts this will reduce annualized growth by 0.12% for each week the government remains closed. However the direct repercussions are not yet expected to be felt by the second quarter and J.P. Morgan is not revising projected Q2 GDP of 2%.
An analysis of 18 shutdowns over the past 40 years reveals equity markets fell by around 2% on average, with longer shutdowns accompanying a steeper fall in share prices. While the stock market has staged a recovery since the lows of late 2018, the historical data suggests the rally would be stronger without the drag of the shutdown. Furthermore, the SEC says it is operating with “a very limited number of staff members” and a protracted impasse is expected to delay the IPO pipeline as well as M&A activity, injecting uncertainty into the markets.
With no sign of compromise, the political deadlock in Washington also raises greater concerns over the ability of the White House and lawmakers to resolve future crucial areas of public policy. The U.S. debt ceiling was extended until March 2019 and the prospect of a standoff on the issue presents a potential economic flashpoint. While the U.S. Treasury is expected to be able to borrow through the summer or early fall, historic research shows equity markets decline by as much as 4% when a shutdown is accompanied by the need to raise the debt ceiling. In addition, Fitch has warned such a scenario would mean it would reconsider its AAA rating for U.S. debt.
Concerns over the political paralysis evident in the shutdown are also weighing on the U.S. dollar and exacerbating the greenback’s recent weakness, with J.P. Morgan models suggesting the USD has undershot by around 2% due to the closure. Tied into this are anxieties over the debt ceiling as well as the ratification of NAFTA’s successor, USMCA.
With other challenges also facing the White House including the Robert Mueller investigation, U.S. domestic politics has replaced international politics – such as U.S.-China trade tensions – as a volatility generator for U.S. and potentially global markets.
An analysis of previous shutdowns in 1995, 1996 and 2013 reveals 10-year Treasury yields fell by an average of 16bp in the lead up as risk-adverse investors moved towards the safety offered by U.S. government bonds. The behavior of the Treasury market in recent weeks has been consistent with this dynamic, but the decline has been more severe due to other factors including slowing global growth and dovish signals from the U.S. Federal Reserve.
Delta Air Lines has warned that reduced government travel will hit January revenues by $25 million and tourism will likely decline in subsequent months as government workers miss paychecks. In terms of service, Delta has delayed the launch of its Airbus A220 due to delays in approvals while Southwest Airlines has postponed launching flights to Hawaii as FAA employees remain on furlough. Wait times in airports are expected to rise with the TSA reporting high levels of absenteeism and some travelers may opt to drive to short-haul destinations.
Global Research
10 years after the financial crisis
December 07, 2020
A decade after the collapse of Lehman Brothers, J.P. Morgan takes a look back at the response to the financial crisis that reshaped financial markets and the global economy.
Global Research
Global Research
Leveraging cutting-edge technology and innovative tools to bring clients industry-leading analysis and investment advice.
This communication is provided for information purposes only. Please read J.P. Morgan research reports related to its contents for more information, including important disclosures. JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively, J.P. Morgan) normally make a market and trade as principal in securities, other financial products and other asset classes that may be discussed in this communication.
This communication has been prepared based upon information, including market prices, data and other information, from sources believed to be reliable, but J.P. Morgan does not warrant its completeness or accuracy except with respect to any disclosures relative to J.P. Morgan and/or its affiliates and an analyst's involvement with any company (or security, other financial product or other asset class) that may be the subject of this communication. Any opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This communication is not intended as an offer or solicitation for the purchase or sale of any financial instrument. J.P. Morgan Research does not provide individually tailored investment advice. Any opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. You must make your own independent decisions regarding any securities, financial instruments or strategies mentioned or related to the information herein. Periodic updates may be provided on companies, issuers or industries based on specific developments or announcements, market conditions or any other publicly available information. However, J.P. Morgan may be restricted from updating information contained in this communication for regulatory or other reasons. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.
This communication may not be redistributed or retransmitted, in whole or in part, or in any form or manner, without the express written consent of J.P. Morgan. Any unauthorized use or disclosure is prohibited. Receipt and review of this information constitutes your agreement not to redistribute or retransmit the contents and information contained in this communication without first obtaining express permission from an authorized officer of J.P. Morgan.