Goldman Sachs Foresees a 90% Chance of Government Shutdown and its Impact Will Be Ugly

The chances that the government avoids a shutdown in the next three days are not looking good, according to Goldman Sachs economists.

“A shutdown this year has looked likely for several months, and we now think the odds have risen to 90%,” Jan Hatzius, chief economist and head of global research at Goldman Sachs, wrote in a note to investors.

Hatzius and his team say the most likely scenario is the government will shut down on Oct. 1.

On Tuesday evening, the Senate released what is likely a last-chance deal to avert a closure. The 79-page bill would keep the government open until Nov. 17. It is designed to allow more time for negotiations over a broader spending deal that Congress must pass before the end of the year.

“While there is still a chance that Congress can reach a last-minute deal to extend funding past Sep. 30, there has been little progress made and there is little time left,” wrote Hatzius. “In the seemingly unlikely event Congress passes a short-term extension, we would still expect a shutdown sometime later in Q4.”

Even if Washington's drama this week is resolved, lawmakers face an even more consequential deadline on Dec. 31 when they need to enact spending bills for the entire year.

If the government shuts down on Oct. 1, Hatzius says, a fast reopening seems unlikely "as political positions become more deeply entrenched. Instead, political pressure to reopen the government is likely to gradually build."

It's an assessment that has been shared by other observers with a worst case scenario for the economy being a protracted one.

Moody’s Analytics chief economist Mark Zandi has even floated the idea of a shutdown that stretches throughout the entire fourth quarter, smashing the all-time record of 35 days and cutting 1.2 percentage points from fourth quarter growth.

Historically, much of the costs of government shutdowns are made up in subsequent quarters but billions can be lost forever.

A shutdown over failure to provide funding for the fiscal year starting Oct. 1 would disrupt federal services, and federal workers would be furloughed without pay.

Potential "pressure points" to reopen the government include pay dates for active-duty military and the deterioration of essential operations like border patrol and airport screening.

Airlines for America, the industry’s voice in Washington, recently told Yahoo Finance a shutdown "could lead to flight delays for travelers and cargo shipments, longer screening lines,” and setbacks for training air traffic controllers and modernization initiatives.

As for the impact on economic growth, Goldman’s economists predict a shutdown would subtract 0.2 percentage points from the fourth quarter’s gross domestic product (GDP) for each week it lasts.

"The main effect of the shutdown is the hit to GDP from the missed work that furloughed workers do not perform," wrote Hatzius.

Economic data releases from government agencies are also expected to stop until after the government reopens. The Federal Reserve, which does not rely on congressional funding, would continue operations but could have much less information to consider when it next meets on Oct. 31.

"We would just have to deal with that," Federal Reserve Chair Jerome Powell said last week.

Originally published by Ines Ferré and Ben Werschkul at Yahoo! Finance