Satyam Panday is not particuarly worried about what the government shutdown will do directly to the economy. This chief economist for the U.S. and Canada at S&P global ratings says history shows shutdowns generally have only a marginal effect on the broader economy. And he estimates that this one will shave GDP growth 0.1 to 0.2 percentage points a week, not an insignifcant amout but one that will be temporary.
Satyam holds up the ultimate yardstick for gauging how dangerous this could be as he points out that S&P doesn’t consider the impact of the shutdowns to be credit events for the nation’s sovereign debt rating.
But this doesn’t mean he sees nothing to worry about, especially if the shutdown does not end quickly as many fear it will not.
First there are the delays in key government data, particularly the Bureau of Labor Statistic October 3 jobs report. It has been seen as the economic swing factor that could tilt the Fed toward cutting its key rate again at the end of this month - or deciding to wait and see until the December meeting to move.
So dive in and hear more about why even amidst this economic data conundrum, Satyam is in the camp looking for two more rate cuts this year. Spoiler alert: he says the Fed sees little it can do now to lower inflation as the tariffs supply shock hits good prices and is placing its bets on something it sees it can do which is boosting demand to help the employment side of the economy.
How long will the shutdown last? 3-Weeks? 35-Days? 00:01:53.800
Well, in terms of how long it might last, it’s anyone’s guess, but in the past, we’ve had times when they’ve lasted about 3 weeks, right? I think the longest one was back in 2018-19 when it lasted for 35 days, so that’s more than a month. And then in the Obama administration back in 2013, we had maybe somewhere, you know, closer to 13 or 14 day.
Macroeconomic impact has been small 00:02:24.120
In terms of macroeconomic impact. it’s probably about 0.1 to 0.2 percentage points for the quarterly growth, right? So it’s very small, marginal at best. You know, a lot of folks, they get repaid. You know, there is a back pay at the end of the day, and In the longer run, it’s more about the productivity that was lost over the duration of that shutdown, more than anything else. So maybe, perhaps, that’s why the markets are quite sanguine right now.
2% growth expected this, but with issues 00:03:33.190
So, we just had published our… economic forecast, this was before… the revisions that came out last week. But we thought, you know, the economy is on a path for a 1.9% annual average growth rate for this year, which is not bad. Basically, a 2% economy, right? It is still slower than what we were used to the last couple of years, but…We did have… You know, in our forecast the fourth quarter was going to be a sub-1% growth rate quarter, given some of the uncertainties related to either tariff or some of the immigration-related issues, and the cost-saving initiatives by the federal government themselves.
<The impact> is still going to be below 1%. annualized quarterly growth rate for the fourth quarter, it doesn’t make too much of a difference in the narrative itself. We still have a housing market slump. But at the same time, we are still being carried by high-tech investments. And between all of this, we are having a longer-run supply, immigrant supply, you know, population growth headwinds. Okay. Put it together, it’s a 2% economy, more or less.
Permanent job cuts could make this shutdown different 00:05:28.100
Well, in the past, the economy moved on. That is, you know, it’s pretty clear. This time around, it may be, given what the Trump administration has been voicing, they’ve been saying they would want to cut permanently some of what would have otherwise been only temporary layoffs, right? And that does… sort of add to some of the Doge-related cuts that they’ve already announced, so that means more, payroll, jobs losses. And maybe, perhaps, unemployment rate also a little bit higher than what would otherwise have been. So that is something that, we are also trying to figure out exactly where this is going to fall at the end of the day. We’ll see in the next few days, I’m sure, what exactly they have in their plans.
It’s not just loss of September data: Fed will also rely future surveys and releases 00:06:47.450
I think all these influential government data matter, because…it’s not just the September data. Now, the longer this goes, the October collection time is also going to be affected, meaning November. This could go all the way through November. So the Fed themselves are going to be… they are going to be, running with whatever they have, like the Chicago Fed’s unemployment rate number that has come out, that will be used as an alternative to what the BLS would have otherwise published today. It does run quite close with the BLS number. We have the ADP data as well. Even though the first estimates are generally not as correlated, there’s something to it. And then besides that, I think you have the small businesses, other government contract workers, folks who are waiting for permits and licenses, all of it is going to be pushed back, so you are seeing, productivity loss across the board.
Measured Fed rate cuts coming 00:08:23.740
The 25 basis points each in the October meeting, the late October meeting, and the mid-December meeting, I think that’s basically baked in the pricing of the futures market right now. There’s nothing new to that. Could it be 50 basis points? I think the Fed is going to be limited by the excess inflationary pressures that is still in the service side of the economy, and I think in their response function, from whatever they’ve been saying, it’s pretty clear that they would be only confident with a 25 basis point cut, but I don’t think they would want to go as high as 50 in one meeting, especially given the darkness in the data.
Now they are… now that they have to look through. I think 25 basis points is where they are going to be comfortable. That is still a gradual easing. It is nothing like in a recession, where you cut far… harder and fast. They want to get to what they deem is a neutral stance, which is around 3.1%. And I think they’re going take their time the next 12 months, not just in one cut or in two meetings.
Fed sees inflation as beyond its influence for now 00:10:22.180
Everything, everything, all of this data has to be dealt with in an alternative reading, right? Either private sector, I mean, you can look at the ISM, survey numbers, or you can look at some of the other running estimates that are being put out by so many other private sector firms. The billion price project would be one place where you can look at how the prices are changing. And the Fed is doing that. They were already doing it, they’ll be doing, you know, they’ll continue to do it.
One thing that they’ve already sort of, convince themselves of is that the excess inflation in services is going to come down, they’ll continue to come down because of the shelter price component of it. But at the same time, they’re also convinced that the goods prices, which are driven by, some of it is driven by the tariffs is a one-time price-level bump, they can’t do anything about it anyway. It’s a supply-side shock, because they can only control the demand-side impact.
So they’ve just said, you know what, it’s better for us to just, focus on the employment mandate for now, because inflation, we cannot control, it’s a one-time bump, and we don’t think it’s going to be an ongoing inflationary cycle, because the demand side of things are already going to…<behave>
A one-time bump in prices 00:12:13.100
And there is some truth to that. We just had an experience with the post-pandemic surge. One thing that’s different this time around is that the fiscal policy is not as stimulative in the sense they’re not handing out paychecks, they’re not handing out extra unemployment benefits. It’s the good old days. So, that kind of a dynamic isn’t there to support demand. If… we have more weakness in the employment market. There is some loss in the demand coming from the immigration channel, the population growth channel, so the rental prices are not really going up that much from that side either. So when you put it all together, the economic reasons for that self-fulfilling price growth isn’t really quite there - outside of that one-time bump. Now, there might be some other non-economic reasons, like a supply-side shock of energy prices, either it be coming from Russia, Ukraine, or some… Agricultural issues, that’s a different story, but economic, reasons say that most likely it is going to be a one-time bump.
Workers will be cut more that you might have thought 00:13:35.380
Cutting workers… they want to do that, that’s what they’ve said it, so I’m not… <thinking> it is a bargaining tactic. We know that’s the way that he likes to function. There’s a lot of bargaining. At the same time, he’s of the kind… you know, the… the way that he works is he’ll put something on the table, he’ll pull it back if it seems like it’s not going well with his constituents, so you could also expect that. You know, we did see with the tariffs when it went back and forth. It could also be litigated, right, in the courts, and it could take a while. And that’s what makes, you know, forecasting so difficult at this juncture, with the way that things are, I think, you know, they will try to… they do have quite a bit of leeway in deeming who is essential and who is not essential, they will use that bandwidth to perhaps curb more of the federal employees that are on the books. And I think if one had thought 10-15%, federal workforce contraction, you know, from the beginning of this year. I think it’ll probably be more than that, given this opportunity that the Trump administration has.
Low drum-beat for monthly job growth 00:16:15.290
Well, the break-even payroll employment growth that has moved down, as you just suggested, it is more of a function, I think, of the net immigration headwinds right now, because, you know, it does. The population growth picture does matter here. And the numbers that have been coming in, clearly, payroll growth is now averaging 22,000 the last 3 months, and that’s also overestimating some of the revisions that are yet to come, and it seems, maybe the break-even payroll growth is between Zero and 50,000 now, and you would still not have unemployment rate move up it will be stuck at 4.3%. Now, having said that, is… is more federal employee cuts, going to affect that? Not so. It is more of a structural population growth story than just the federal employment story, but like I said, it does matter to those folks who are in that particular group.
The perceived impact depends on who controls the narrative 00:18:20.400
It really comes down to who is controlling the narrative, right, between the two parties, and I’m not quite clear right now. It seems the pollings are suggesting that the independents and the Republicans do think it is more about the President’s party that is at, fault. Well, that’s sort of a crude word here, but, it really comes down to polling, and whoever controls the narrative, I think, and I am sort of looking at whether this ACA subsidies that were about to expire, are going to be extended or not, because that does matter for the number of people who are getting insured medical expenses. Growth is going to happen. Prices, if the prices are going up, that is going to affect PCE inflation numbers. But those are, again, policy choices, so, you know, there are lots of things to watch, but at the end of the day, it’s the polling and how much, faith that you have in those pollings also matters, I guess. But we are looking for all of those things. Anything that we can hold on, you know, grab onto, and see how President Trump is changing his tune, you know, day to day.
Satyam Panday
Dr. Satyam Panday is the US Chief Economist at S&P Global Ratings. In his position, he develops U.S. and Canada economic forecasts for Ratings and provides insights into evolving risks associated with the business cycle and long-term economic growth. Before joining S&P Global Ratings in 2013, Satyam taught undergraduate and graduate economics courses at Boston College and Brandeis University from 2010 to 2013. Previously, he was a research fellow in the macroeconomic analysis division at the Congressional Budget Office in Washington D.C. Earlier in his career, he spent several years at MassMutual Financial Group as a quantitative analyst in the actuarial department. Satyam holds a Ph.D. in International Economics and Finance from Brandeis University. He specialized in macroeconomics, development economics and applied econometrics. He has an undergraduate degree in Mathematics from St. Olaf College in Minnesota and received his MBA from the University of Massachusetts at Amherst’s Isenberg School of Management. Dr. Panday is a member of American Economic Association, National Association of Business Economists, and ECOMOD Global Economic Modeling Network. He is originally from Nepal.
