The US government going into a shutdown sounds like a serious business. So why aren’t markets responding more dramatically?
The answer is that they are behaving perfectly rationally.
That is because since 1976, when the current system of approving the US budget was set in place by US Congress, there have been no fewer than 18 previous “funding gaps”.
Not all of them have done lasting economic damage and, until 1990, a funding gap did not automatically lead to a full or partial government shutdown with non-essential government employees being given a temporary leave of absence from their workplace.
That said, the most recent shutdown, in October 2013, was reckoned by the US Commerce Department to have clipped 0.3 percentage points from US GDP
The last meaningful shutdowns before then, in November 1995, December 1995 and January 1996, led to a slight rise in the jobless rate at the end of the period, although it is worth remembering that US GDP still grew at an annual rate of 2.9% in the final three months of 1995 and by 2.7% in the first three months of 1996, which was far from shabby.
Panic is only really likely to set in if the shutdown looks to be protracted and, in more recent times, the government has avoided sending too many employees on a leave of absence by classing an increasing number of them as “essential”.
Image: Wall Street stock indices have been trading at record highs
As Tom Porcelli, chief US economist at RBC Capital Markets, puts it: “The economic impact of a temporary shutdown is negligible.
“Essential employees continue to work but will not be paid and there are no disruptions to Treasury operations or the [US Federal Reserve].
“The two largest sources of postponed economic activity during the 2013 shutdown were to the travel industry and the impact on wages for government workers.
“On the former, the US Travel Association noted in spectacular fashion back then that ‘every day the government is shut down is another $152m down the drain’.
“Meanwhile, the aggregate impact on wages was estimated by the Obama White House to be on the order of $2bn.
“Even if we take these estimates at face value, it implies an annualised economic pause of 0.5% of GDP.”
He argues that, with an unusually high number of Americans tending to receive tax refunds after filing their annual tax return, any delay to tax refunds due to staff at the Internal Revenue Service being told to stay at home would be more damaging.
And, if the US is to experience another shutdown, this is not a bad time to be having one.
Image: Donald Trump’s tax cuts have lifted markets
Figures due out on Friday are likely to confirm that the US economy grew by more than 3% during the final three months of the year – the third consecutive quarter of growth above that level.
The jobless rate is still falling and many millions of Americans have extra money in their pockets after some of the country’s employers, including Comcast, Apple, Wal-Mart, Boeing and AT&T, announced one-off bonuses and pay increases following President Trump’s tax cuts.
That is not to say all investors are sanguine about the shutdown.
While stock market investors have taken it in their stride, with the S&P 500 and the Nasdaq both closing at new record highs on Friday evening even as the shutdown was looming, there have been signs of unease elsewhere.
The yields on Treasuries – US government bonds – have been rising in recent weeks.
The yield on 10-year US government Treasuries, which had been as low as 1.321% in July 2016, rose on Friday to 2.661% – its highest level since July 2014 and meaning that implied government borrowing costs have doubled in just 18 months.
That reflects a number of factors, including expectations of further interest rate increases from the Fed this year, concerns over higher inflation and rumours – denied by Beijing – that China is to reduce its purchases of Treasuries.
But it is a signal that investors do have some anxieties over the direction of US fiscal policy.
The flipside of Mr Trump’s tax cuts are a higher Budget deficit and, by extension, more government borrowing if the cuts fail to pay for themselves by spurring more activity in the economy.
That unease is also showing up in the US dollar.
The greenback has fallen against a basket of international currencies in each of the last five weeks, its worst run since 2015, with the trade-weighted dollar index falling on Friday night to its lowest level since December 2014.
Again, that is due to a combination of reasons, one of which is that investors are betting that other central banks will follow the Fed in raising interest rates this year.
But the shutdown does not help sentiment.
For now, boosted by the tax cuts, US equities continue to enjoy a purple patch.
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But, rather like a slow puncture, there has been a gradual sell-off in both US Treasuries and the dollar in recent months.
The longer the shutdown persists, and the more questions it raises about US growth, the more visible that will be.