Goldman Sachs suggests that investors should not be overly concerned about potential weakness in the US Dollar caused by a government shutdown. They provide several reasons for this stance. Firstly, they argue that a significant portion of the economic decline caused by a shutdown and workers’ strike would likely be reversed in the subsequent quarter, suggesting that the negative impact on the economy might be temporary. Secondly, they highlight that the effects of a shutdown would primarily impact real GDP, not nominal growth, assuming that federal workers receive their full wages retroactively. This means that while the economic output might be disrupted, the total value, including inflation, remains stable.
Furthermore, Goldman Sachs points out that there could be implications for inflation during a shutdown, including a technical increase in Personal Consumption Expenditures (PCE) inflation and potential wage gains resulting from a workers’ strike. This could present challenges in managing inflation targets when the labor market remains robust. Lastly, while a potential “data blackout” during a shutdown might slightly impede the Federal Reserve’s ability to enact a rate hike, the firm believes that there is enough data available from both the Fed and private sectors to make informed decisions. They cite past examples, such as the Fed’s decision to begin tapering in 2013 after a government shutdown, to support their argument that the economic impacts might not be as severe or long-lasting as feared.
In summary, Goldman Sachs advises investors to consider fading any short-term weaknesses in the US Dollar resulting from a government shutdown. They believe that the overall impact on the economy, particularly nominal growth, would likely be limited and temporary. Additionally, the implications for inflation and the Federal Reserve’s historical actions indicate that the economic consequences might not be as significant as anticipated.