Goldman Sachs: Congressional Blustering Could Impact 4Q GDP

By FOXBusiness

The fiscal fight of 2013 is officially underway.

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The House of Representatives, in a vote of 230 to 189, passed a continuing resolution Friday afternoon to keep the government funded through December 15.

The spending bill now heads to the Senate where it’s all but certain to be dead on arrival. Though the House-passed version keeps the government functioning, it also adds a provision to fully de-fund the Affordable Care Act, President Obama’s hallmark law. The president has spoken out on the House’s version of a spending bill, saying if it does manage to receive approval from the Senate, it will be met with a veto when it lands on the his desk.

Many dismiss the action on the Hill as just politics, but Wall Street might see it a little differently with not just one, but two battles ready to ignite in Congress. While the budget battle is in full-swing, the nation faces a fight over whether to raise the debt ceiling by mid-October. And with the Treasury Department already nearly maxed out on its extraordinary measures, if no agreement is reached, the nation could begin to default on its financial obligations.

Nobody knows exactly what will happen if the U.S. defaults, but just the threat of such a drastic move could spark a range of scary consequences that could send financial markets into a tailspin. In 2011, during the last Congressional showdown over the nations’ borrowing limit, financial markets fluctuated violently. In fact, the clash contributed to Standard & Poor's decision to slash the American credit rating -- sending the Dow plunging 635 points, nearly 6%, in a single session, adding to what was the worst selloff since the financial crisis.

In a note to clients on Thursday, Goldman Sachs (NYSE:GS) said it sees headline risk to the downside.

“In our view, the effect on markets and the economy depends on three factors: 1) whether the risk relates to fundamental policy changes or is limited to tail risk; 2) the severity of the tail risk, and 3) the duration of the uncertainty,” it noted.

The investment bank sees a risk of a government shutdown on the low end, and even if a shutdown were to happen, it sees it as short-lived and having minimal impact.

However, where the greatest uncertainty lies is in the debt ceiling battle. Goldman Sachs analysts say this debate involves more serious “tail risk,” a reference to an unlikely but possible event;  though policy stakes are expected to be lower than that of the same showdown in 2011.

“Guided by prior fiscal ‘showdowns’ we estimate that upcoming events could raise policy uncertainty… by 75% in the worst plausible case, or half that in the base case.” the bank wrote in the note.

Bank of America Merrill Lynch (NYSE:BAC) analysts see the probability of a government shutdown doubling from an initial 15% to 30%.

“(House Speaker) Boehner has chosen to side with conservative House Republicans in their efforts to defund ObamaCare rather than present a bill that could pass the Democratic controlled Senate. Friday’s vote will mark the 41st time that the House has voted to overturn ObamaCare. This latest move risks a stalemate,” the bank said in a note to clients Thursday.

Further, Goldman sees the fiscal showdown weighing negatively on gross domestic product in the fourth quarter. Currently, the bank’s economists forecast GDP growth of 2.5%. But even if Congress comes to an agreement and manages not to breach the debt ceiling, in the worst case scenario, the uncertainty could reduce growth by 0.7 percentage point. In the best case scenario, the investment bank sees a reduction in growth by 0.0035 percentage point.

Bank of America notes, still, Congress is missing the point and the nation’s fiscal problems are long-term and can’t be patched up by constant debt-ceiling and funding fights over discretionary dollars, which makes up one-third of the nation’s total spending.

“The real issue is that mandatory spending programs – Medicare  and Social Security – have promised too much, relative to the amount of revenue  collected to support them. Unfortunately, today’s debate doesn’t address this long-run issue, and only adds downside risks to the economy,” the bank said.

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