Investment Strategy Brief:
Potential Headwinds Could Still Compound

Below is a transcript of this week’s video.

Hi, this is Ilona Vovk with Investment Strategy at Glenmede.

The U.S. is currently navigating multiple challenges. Notably, the threat of a government shutdown this past weekend has dominated headlines.

After multiple efforts to prevent a government shutdown, House Speaker McCarthy shifted strategies. He proposed a six-week extension of the existing spending levels. Congress approved this, averting a shutdown for the immediate 45 days. However, it is possible that we can be in the same position come mid-November, though the immediate pressure has subsided for now.

Although a government shutdown has been avoided, fiscal pressure may lead to more tense negotiations in the recent future. Higher interest rates are expected to put additional pressure on the government budget. This will likely lead to future discussions about budget cuts, a similar issue to what the U.S. government faced in the mid-’80s and early-’90s, during which several major acts of Congress were passed to rein in deficit spending.

Now because we are not out of the woodwork yet, lets take a look at previous government shutdowns and their effect on the economy. Government shutdowns have historically provided a negligible to modest impact on the economy. Since 1978 there have been 15 shutdowns, the longest lasting about 35 days from late December of 2018 to late January 2019.The longest shutdown posed a quarter-percent headwind to GDP, that’s about a -0.1% for the 4^th quarter of 2018 and about -0.2% in 1^st Quarter of 2019. While the impact may appear modest, a prolonged shutdown could intensify the affect, as furloughed federal workers reduce their spending and federal expenditures are paused.

The potential headwind of a future government shutdown is also coming at a time where there are other headwinds, including the United Auto Workers Strike. The UAW has expanded their strike for the second time last Friday. The Union has expanded its strike in GM and Ford factories, bringing the total of striking workers to 25,000. The U.S. motor vehicles and parts industry only makes up 3% of GDP meaning the strike will likely impact a fraction of the sector, however Moody’s Analytics estimates a strike by all 150K UAW members for six weeks could pose a 0.2% headwind to economic growth. That is the direct impact. However, the indirect effects of the strike could also pose risks to the economy, as higher wage growth and automobile costs could add to inflationary pressures.

The other headwind is the restarting of student loans. Student loan interest resumed Sept. 1 and the U.S. Department of Education cash collections have already begun to surge.

This will mark a significant change in consumer spending allocations. A monthly estimate of roughly $383 is expected starting in October this figure is calculated based on the average debt per borrower & average interest rate for all federal loans. For an individual earning an average annual income of $50,000, a $383 monthly payment would near 10% of their total spending. Now the same payment for 43 million borrows as a percentage of U.S. GDP (which was approximately $25 trillion in 2022 for a full year), total student debt as a % of U.S. GDP would be about 0.7%. Now it’s important to note that the impact on GDP is likely to be more modest given expected leniency of repayments, grace period options, as well as other flexibilities.

To summary, the U.S. is navigating several headwinds. We've managed to sidestep an immediate government shutdown, but unresolved budgetary tensions remain a concern heading into the end of the year. The resumption of student loan will likely impact GDP between 0.2% to 0.7% as consumer spending allocation will change. On the labor front, Moody’s Analytics warns that a six-week strike by the entire 150K UAW membership could carve a 0.2% slice out of our economic growth and could pose other indirect risk with higher wage growth and automobile costs adding to inflationary pressures.

The cumulative effect of these headwinds potentially includes a wide range of outcomes from a rounding error to a meaningful headwind to growth.

For the moment, one contributor adding to this buildup of challenges has been set aside. However, the risk of further complications down the road still remains.

And with that, thank you for listening! And please don’t hesitate to reach out with any questions.