Boehner exit has Wall Street weighing shutdown risk

With time running out to avoid a U.S. government shutdown, House Speaker John Boehner's announcement that he plans to leave Congress next month may throw fuel on the political fire.

"It adds to uncertainty on Capitol Hill in that Speaker Boehner's departure creates a power vacuum and could show that fringe elements within the (Republican) party are getting more traction," said Gennadiy Goldberg, U.S. rates strategist with TD Securities.

Alternatively, the Ohio Republican's lame-duck status in the House could spur him to ignore more right-wing Republicans who are pushing for a shutdown, Goldberg added.

Federal agencies will close on Oct. 1 unless Congress passes a government spending bill. Some Republican lawmakers have threatened to block the measure and shutter the government unless Planned Parenthood is stripped of federal funding. The Senate on Thursday scotched a bill that would have defunded the group. Lawmakers are expected to continue the debate on Monday, with the government's fiscal year set to end on Sept. 30.

Although most experts think the immediate economic damage of a shutdown would be relatively light, the toll it could take on consumer spending, business investment and the public psyche more broadly is less clear. A plunge in confidence could stunt demand just as the economy is gaining speed, feeding into concerns over slowing growth in China.

For investors, the threat of a shutdown, along with an actual closure, could boost near-term volatility in the U.S. stock market, said Gus Faucher, a senior economist at PNC Financial Services (PNC).

After surging earlier in the day, U.S. stocks surrendered most of those gains in the hours after Boehner's remarks. At the close, the Dow Jones industrial average ended up 114 points, or 0.7 percent, to 16,315. The S&P 500 ticked 1 point (0.06 percent) lower, to 1,931. The Nasdaq composite fell 48 points (1 percent), ending at 4,686.

Goldman Sachs (GS) analyst Alec Phillips earlier this week put the odds of a federal shutdown at roughly 50 percent. He does not expect House lawmakers to act on a spending bill until shortly before next week's deadline.

Greg Valliere, chief political strategist at Potomac Research Group, sees a lesser risk of a shutdown next week if only because the outgoing Boehner, without fear of repercussions for him within the GOP, is freer to reach across the aisle to Democrats to broker a deal.

But the risks could grow later this year after Boehner leaves office and if lawmakers pass a continuing resolution next week to keep the government open in the short term. Valliere said Boehner, viewed as a moderate by today's partisan political standards, could be replaced by a harder-line Republican who is more willing to push for a shutdown, noting that "the inmates will take over the asylum in late October, early November."

For the U.S., a relatively brief federal shutdown is unlikely to inflict serious wounds to the economy. But a more prolonged shutdown could inflict real damage. Goldman Sachs estimates that GDP in the last three months of the year would fall by at least 0.2 percentage points for each week the government remained closed.

The political impasse that kept federal agencies closed for 16 days in October 2013 reduced the nation's GDP by 0.2 percent-0.6 percent, the Office of Management and Budget estimated in November of that year. The shutdown also may have resulted in 120,000 fewer jobs being created during the two weeks of October, OMB said.

A government shutdown hurts the economy in several ways. Hundreds of thousands of furloughed government workers can go without a paycheck, pushing down spending and hurting local businesses. Federal agencies also curb their own spending on goods and services, while private companies awaiting federal funds and approvals on a range of projects can find themselves dead in the water until the government reopens.

A shutdown also could interfere with the Federal Reserve's timing for raising interest rates, unsettling financial markets. Fed Chair Janet Yellen said in a speech on Thursday that the central bank expects to start lifting short-term rates for the first time since 2006 by year-end.

Beyond the potential hit to consumer and investor confidence, closing down the government would temporarily halt the release of federal economic data. Without access to labor market, inflation and myriad other economic reports government agencies out, however, the Fed would be effectively flying blind, potentially pushing a liftoff in rates into 2016.

Still, any disruptions to the U.S. economy because of a shutdown are likely to be "temporary and made up quickly," Faucher said. Tourists denied access to America's national parks would find other ways to spend discretionary income, and government contractors who go without pay for a short time would be quickly reimbursed, he reasoned.

Assuming a shutdown ended fairly quickly, any economic losses in the fourth quarter would be made up in the following quarter as federal output normalizes.

"We've been through this before -- it doesn't help, but any hit will be made up quickly," Faucher said. "The underlying fundamentals in the economy continue to look very good in terms of consumers, housing and business investment. A shutdown won't affect those fundamentals."

The current budget showdown has parallels with the last crisis. Before the 2013 shutdown, GOP lawmakers threatened to block a government spending bill over their objections to the Affordable Care Act (ACA). Then, as now, most of the brinkmanship was in the House, with Senate Republicans seemingly less willing to force a shutdown.

But the dynamics also differ in important ways. Although the spat over Planned Parenthood has generated headlines, it doesn't appear to have the same resonance for Republican voters as Obamacare, Phillips noted. Polls today show a wider range of opinion regarding the women's health group than over the 2010 health care law, when some surveys showed a majority of Republicans supporting a shutdown as a way to block the ACA's implementation.

Meanwhile, with polling showing that most Americans oppose a shutdown, Republicans may be wary of alienating voters as the 2016 presidential campaign gears up.

"The combination of the political fallout from the 2013 shutdown and the upcoming national election create a strong desire to find a resolution," analysts with Bank of America Merrill Lynch said in note.

If lawmakers manage to keep the government running next week, another, potentially far more disruptive, deadline looms: raising the U.S. debt ceiling.

Forecasts suggest the government will reach its borrowing limit sometime in November, with Congress yet to take up the debate. Failure in Washington to reach agreement on increasing, or at least suspending, the debt cap would raise the specter of a government default and shake investor confidence, Bank of America Merrill Lynch said.

  • Alain Sherter On Twitter»

    Alain Sherter covers business and economic affairs for CBSNews.com.