Goldman Sachs suggests that investors should consider fading (i.e., going against) any US Dollar (USD) weakness that might arise due to a potential US government shutdown. The firm provides multiple reasons, from both historical and economic perspectives, for this stance.
Temporary Decline: A significant portion of the decline caused by a government shutdown and workers' strike would likely be reversed in the subsequent quarter (Q1). This suggests the negative impact on the economy might be transient.
Real vs. Nominal GDP: The effects of a government shutdown would primarily impact real GDP, as opposed to nominal growth. This is under the assumption that federal workers receive their full wages retroactively after the shutdown ends. Essentially, the economic output might be disrupted, but the total value (including inflation) remains mostly stable.
Implications for Inflation: Due to the difference between real and nominal GDP during a shutdown, there's a technical increase in PCE (Personal Consumption Expenditures) inflation. Furthermore, a workers' strike could lead to wage gains. This, in turn, could emphasize the difficulties of managing inflation targets while the labor market remains robust.
"Data Blackout" and the Fed: While a potential "data blackout" (a period when data is not available due to the shutdown) might slightly impede the Federal Reserve's capability to enact a rate hike in November, Goldman highlights that there's ample data from both the Fed and private sectors in the US. The firm cites the past, noting the Fed's decision to begin tapering in December 2013 right after a government shutdown, as an example of its capability to act even with limited data.
Goldman Sachs suggests investors might consider countering potential short-term weaknesses in the USD resulting from a US government shutdown. The firm believes that while there might be initial negative impacts on real GDP, the overall nominal growth would largely remain intact, and any decline would likely be transient. Additionally, the implications for inflation and the Federal Reserve's past actions post-shutdown indicate that the economic impacts might not be as severe or long-lasting as feared.