UBS On-Air: Paul Donovan Daily Audio 'How bouncy is the bounce back?'
At a Glance
The desk believes that the current US government shutdown will likely have a moderate negative impact on growth due to the absence of back pay for furloughed workers, as discussed by Paul Donovan of UBS. This impact could be exacerbated if consumer spending declines due to uncertainty around job security. Per the full note, the economists typically view government shutdowns as resulting in deferred economic activity rather than a permanent loss; however, the current situation may challenge that presumption depending on government actions regarding compensation. With no high-impact events on the horizon, focus will remain on economic data releases for signs of resilience.
Key Takeaways
- 01Current US government shutdown could impact growth dynamics more than typically expected.
- 02Furloughed workers face potential non-payment of back wages, risking decreased consumer spending.
- 03Economic rebound traditionally seen after shutdowns is under threat from current uncertainties.
- 04Focus should be on economic data releases for indications of broader impact on growth.
Full Analysis
What the desk is arguing
The desk contends that the recent US government shutdown could lead to a weaker economic rebound due to possible non-payment of back wages to furloughed workers. Economists like Donovan traditionally minimize the long-term effects of such shutdowns, viewing them as net-neutral events where lost output is recouped post-resumption of government functions. However, variables such as potential job losses and a lack of promised back pay may weaken any anticipated recovery following the end of the shutdown, stressing the importance of consumer confidence.
Evidence supporting this view includes Donovan's observations on job security, suggesting that if furloughed workers don't receive back pay, their spending may plummet as they conserve resources in anticipation of harder financial times. This ripple effect can reduce overall economic activity, resulting in a more pronounced drag on growth than previously anticipated.
While the consensus often leans towards quick recovery post-shutdowns, the current landscape introduces uncertainties that could lead to an atypical outcome, fundamentally altering the traditional economic response.
Market Implications
Traders should monitor USD/JPY for its sensitivity to shifts in US fiscal policy and consumer spending data amid the shutdown dilemma. Additionally, a solid economic data release may provide relief, while disappointing figures could exacerbate market volatility as concerns over a weaker recovery surface.
From the original
Economists traditionally do not worry too much about the growth impact of US government shutdowns, as the short-term loss of economic output tends to be paid back with an economic bounce when government reopens. It is still a net negative—contractors are not compensated for lost
Related speeches
4 itemsUBS On-Air: Paul Donovan Daily Audio 'Not employment report Friday'
The desk views the US employment report's reliability as compromised due to the federal government shutdown, potentially undermining the perceived strength of the labor market; low fear of unemployment has been a bulwark against recession risk. Per the full note from UBS, the confusion around the actual cost of the shutdown further clouds economic assessment, leading to concerns about the accuracy of data reflecting economic activity. While other economic activity may merely shift in time during shutdowns, the lack of clear signals makes it harder for traders to gauge the market direction accurately.
UBS On-Air: Paul Donovan Daily Audio 'Ignorance is not bliss'
The desk's interpretation hinges on a heightened awareness of the fragility underpinning recent US economic data, particularly employment and consumer metrics. Per the full note from UBS, the expected government shutdown's impact muddies the clarity surrounding these key indicators and suggests that recent trends might be more a product of circumstance rather than robust economic growth. Compounding this uncertainty is the deterioration in data quality, something that could provoke a more cautious stance from the Federal Reserve as they navigate future policy decisions. In the approach to these critical data releases, traders are advised to position themselves with caution, particularly given the lack of clarity around US economic fundamentals.