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Investing Specialists

Reality of Government Shutdown Still Setting In

Although the market has been soft in recent weeks, it seems to have hardly grasped the potential of a longer-term shutdown, writes Morningstar's Bob Johnson.

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This week was all about the government shutdown and the even more worrisome prospect of violating the debt ceiling sometime later this month. A debt ceiling violation could lead to the deadly combination of higher interest rates and a slower economy. In a world where markets swoon on a 20,000-job miss in monthly employment data (on monthly job growth of about 200,000), losing 800,000 government jobs in one shot is a very big deal.

Although the market has been soft in recent weeks, it seems to have hardly grasped the potential of a longer-term shutdown. We have reached this crisis point so many times recently with no negative consequences that the market seems almost numbed to the potential pain. And I have to admit, if they come to a settlement on the debt ceiling and budget issues in the next week or two (and include retroactive pay for government employees), the economy will do just fine. But even a month-long shutdown would likely cut GDP growth by at least 0.5% in a world of 2% growth. In our weekly video, we discussed the impact of the shutdown.

Robert Johnson, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.