Harvey Destruction Prompts Goldman to Cut Government Shutdown Odds

Having in recent weeks boosted its estimate for government shutdown odds to even, or 50%, in a note overnight from Goldman’s Jan Hatzius, the Goldman chief economists writes that due to the human tragedy from Hurricane Harvey, the odds of a shutdown have been again reduced, back to Goldman’s original shutdown estimate of 33%.

According to Hatzius, “recent events have lowered the odds of a government shutdown or a delayed debt ceiling hike but have also increased the number of possible scenarios, complicating the legislative outlook over the next couple of months. At this point, we peg the probability of a shutdown in early October at 35%, down from our prior view of 50% over the last couple of weeks.“

As Goldman explains, the main issue is Hurricane Harvey and the considerations are largely optical: “allowing a partial government shutdown when federal relief efforts are underway would pose greater political risks than under normal circumstances, raising the probability that lawmakers will find a way to resolve disagreements.” In addition, Hatzius predicts that over the next several weeks “Congress will probably need to appropriate additional disaster relief funds”, and Congressional leaders will be “apt to combine this with legislation to extend federal spending authority and/or raise the debt limit if possible.”

If they do, a combined package would be more likely to pass and less likely to be vetoed, in our view.

As a result, the most obvious scenario now, and the one with the highest probability, is that disaster relief funding will be paired with legislation to raise the debt limit (due by September 29) and extend government spending authority (due by September 30), Goldman writes.

Congress Is Likely to Appropriate Emergency Funds

That said, a shutdown or delayed debt ceiling hike is still clearly possible. Hatzius sees three ways that the current standoff could still end in a government shutdown.

• First, if the combined bill extends spending authority (and possibly the debt limit) for only a short period, a shutdown could still occur at the next expiration if the president insists on border wall funding. At that point, if hurricane relief funding has already been agreed to, a shutdown would have fewer negative political consequences and thus could become more likely. At this point, the continuing resolution (a short-term spending extension) is expected to last until mid-December, but could last anywhere from one week to several months.
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• A second scenario is simply that disaster funding ends up passing separately from the broader spending legislation. While congressional Republican leaders would presumably want to avoid this, it could happen if the funds are needed more quickly than Congress can organize a broader spending/debt limit bill. We also note that the President appears to view this as a plausible outcome: in a press conference on August 28, he was asked regarding the hurricane “does this situation make you reconsider the possibility of a government shutdown?” He replied “I think it has nothing to do with it, really. This is separate — this is going to go very, very quickly.”
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• A third scenario is simply that the president vetoes the spending bill over its omission of border wall funding, potentially vetoing hurricane relief funds as well. This does not appear particularly likely to us, but cannot be ruled out entirely. When asked about the possibility of vetoing the spending bill, President Trump replied “I hope that’s not necessary. If it’s necessary, we’ll have to see.”

Despite these three potential hurdles, Goldman now believes there is a 35% chance of a partial federal shutdown “because it continues to be unlikely that Congress will pass legislation that funds the border wall and it continues to be unclear whether President Trump will sign spending legislation that omits it.” However, the odds of a presidential veto of upcoming spending legislation do appear to have declined somewhat following recent events and we therefore believe that a shutdown is less likely as a result.

Then again, with Trump what typically appears obvious and makes the sense, usually ends up being the last thing to actually happen, so putting on the proverbial “hedging trades” may still not be a bad idea.