Government Shutdown Imminent, But History Shows Not Likely

Consumer Debt Still Rising. Delinquencies Rising Faster.

Government Shutdown

The U.S. government is on the brink of a shutdown as lawmakers struggle to agree on appropriations bills needed to fund the government. The House of Representatives has only managed to pass seven out of the 12 required bills, with two being pulled due to a lack of votes. This dysfunction around spending have led Moody's Investor Service to lower its outlook for U.S. government debt, citing concerns about the growing deficit. While it is highly unlikely that the U.S. would actually default on its debt, Moody's warning reflects the sentiment of many bond traders who fear higher bond yields.

If a shutdown occurs, approximately 800,000 federal workers would be furloughed, and hundreds of thousands would work without pay. Government subcontractors would also be out of work, without the guarantee of back pay. Economists estimate that each week of a shutdown would result in a 0.2 percentage point reduction in economic growth, although growth would rebound once the government reopens. The timing of a potential shutdown is particularly concerning as it coincides with the full effects of the Federal Reserve's aggressive monetary policy tightening cycle over the past 18 months.

House Speaker Mike Johnson has proposed a Two-Step Continuing Resolution to avoid a shutdown. This plan involves extending government funding for some agencies and programs until January 19, and for others until February 2. This proposition only delays the standoff over spending levels and priorities until the first quarter of 2024. The House Rules Committee is scheduled to discuss the measure, with a full chamber vote expected soon after.

The White House has expressed strong opposition to the stopgap measure and may announce President Joe Biden's intention to veto it. The White House had sought to include emergency aid for Ukraine, Israel, humanitarian efforts, and disaster relief in the package, and also opposes the two-step approach. A veto threat from Biden could lead to more Democratic no votes on the measure.

Despite the uncertainty surrounding the potential shutdown, U.S. stock indexes have traded mostly higher as investors prepare for key inflation data and assess the possibility of a shutdown. Analysts suggest that from an investor's perspective, this shutdown should not be viewed as a significant event as it does not involve the debt ceiling. Any missed economic activity is expected to be recovered once a deal is reached.

Consumer Constraints and Debt

During the pandemic, Americans accumulated approximately $2 trillion in excess savings. This boost to spending has faded as people exhaust their savings. US households are now increasingly relying on credit cards for their financial needs. Delinquency rates have also risen above pre-pandemic levels, which is a cause for concern. One of the main concerns for consumers is high prices, particularly for groceries and gasoline. The Consumer Confidence Index, as measured by The Conference Board, fell to 102.6 last month from an upwardly revised 104.3 in September. This indicates that consumers are feeling the pinch of rising prices and are increasingly turning to credit to meet their financial needs.

The latest University of Michigan consumer survey highlights the challenges that policymakers and financial markets may face. Inflation expectations for the next year have risen to 4.4%, indicating that the significant increase from September's 3.2% reading to October's 4.2% reading was not a one-time occurrence. Long-term inflation expectations have also increased to 3.2% in November, the highest level since 2011.

Despite higher than normal inflation over the past two years, people are still behaving as if their economic situation is good. In fact, inflation-adjusted consumer spending is not only above 2019 levels but also above the pre-pandemic trend. This strong consumer spending is largely responsible for the higher-than-expected GDP growth in the US. This spending has been driven by consumers taking on additional debt. The additional debt seemingly is reaching its constraints as delinquencies begin to rise at the fastest year over year pace. Even higher than the last financial crisis.

Year Over Year Change Of The Above Graph

Despite the positive economic rhetoric, economic sentiment remains low. Many economists are questioning the reliability of people's views on the economy. They argue that people are aligning their views with their political preferences rather than their actual economic experiences.

Holiday Hiring Plummets Compared to Last Year

The holiday hiring season for businesses is expected to be significantly slower this year compared to previous years, indicating a potential weakening labor market. The decrease in holiday hiring can be attributed to two main factors. Consumer spending is predicted to decline in the final months of the year after a surge in spending during the summer. Retailers and logistics companies have managed to address their staffing shortages caused by the pandemic and can meet additional demand by having current part-time employees work more hours. The decline in holiday hiring aligns with other signs of a downshifting labor market, such as slower job growth and a rising unemployment rate.

Overall, Job growth in October was slower than expected, with nonfarm payrolls increasing by only 150,000, half the pace of the previous month. The unemployment rate again went high to an almost two-year high of 3.9%. Additionally, monthly wage growth has slowed. If unemployment continues to rise, it will likely impact consumer confidence, which has already dropped to a five-month low.

Corporate Layoffs

Corporate America is starting to make difficult decisions, which may be an early warning sign for the U.S. economy. While lackluster guidance has been a key theme of earnings season, cost-cutting measures are now being implemented. Layoffs are not yet widespread, but the recent announcements from companies like Virgin Galactic, Citigroup, and Bayer indicate a changing landscape. Delta Air Lines also recently announced corporate layoffs, despite a record third quarter. These decisions are likely driven by the macroeconomic environment, as economic data supports the need for businesses to reevaluate their operations.

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