Fund managers and the US shutdown

WE are closedThe partial US shutdown that saw the suspension of “non-essential” government services this week did not rattle markets but fund managers are concerned about how long it will last.

“A shutdown for less than a week will have a minimal impact on Q4 growth and the market consensus is there are no lasting effects aside from some lost wages and perhaps weakened confidence,” says David Harris, head of US multi-sector fixed income at Schroders.

But he adds: “The longer the US government shutdown goes on, however, the larger the economic impact will be. Beyond two weeks the impact would begin to accelerate, as most wages lost would not be made back and we would begin to see the secondary effects of productivity declines and business decisions put on hold.”

The shutdown resulted from a failure by Congress to put in place a budget for 2014 in time for the new financial year – started on October 1 – which left federal coffers short and meant 800,000 workers were not required to go to work this week.

Abi Oladimeji, head of investment strategy at Thomas Miller Investment, says: “
Clearly, an economy that continues to operate with a substantial output gap and still growing at a below-trend pace four years into an ‘economic expansion’ hardly needs another negative growth shock.”

In a blog, Ken Taubes, head of investment management in the US for Pioneer Investments, writes: “We expect that this impasse will be resolved one way or another and that the shutdown will be short-term in nature. However, it is not yet clear what the resolutions will be, so it’s difficult to gauge the actual length of the shutdown.”

A US shutdown in 1995 that lasted 21 days is estimated to have subtracted about 1% from GDP, says Schroders’ Harris, who believes the current shutdown is unlikely to be protracted due to the upcoming debt ceiling deadline.

The deadline for the US to raise the debt ceiling is October 17, which fund managers say is the more important event than the partial shutdown.

However, fund managers are watching the progress of the shut down. Harris says: “Beyond two weeks the impact would begin to accelerate, as most wages lost would not be made back and we would begin to see the secondary effects of productivity declines and business decisions put on hold.”

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