US shutdown unlikely to hurt economy; S&P Ratings lowers recession risk, sees two more Fed rate cuts this year

The ongoing US government shutdown is unlikely to have a significant long-term impact on the American economy, as markets have historically shrugged off such events, according to Satyam Pandey, Chief US and Canada Economist at S&P Global Ratings. Speaking with CNBC TV18, Pandey said that while there might be short-term pain, a resolution is typically found once public pressure mounts, and the ultimate hit to gross domestic product (GDP) is minimal.

Wall Street indices closed at record highs on Thursday, supported by technology shares and expectations of further US rate cuts. The S&P 500 gained 0.1 percent and the Nasdaq 100 rose 0.4 percent, with an OpenAI share sale valuing the company at $500 billion helping fuel a rally in US chip stocks.

Shutdown impact and recession risk

Pandey explained that a week-long partial shutdown might reduce GDP by about $6 billion, which he described as "chump change" in the context of the large US economy, especially since federal employees typically receive back pay once the government reopens. He added that markets are also taking comfort from the fact that this political standoff does not involve a contentious debt ceiling debate. Investors are also anticipating that any economic weakness, whether from the shutdown or other factors, will reinforce the case for monetary policy easing from the US Federal Reserve.

On the subject of a potential economic downturn, Pandey said that S&P Global Ratings has lowered its probability of a US recession beginning in the next 12 months to below 30%. This is a downward revision from a 35% probability estimated earlier in the year during the peak of trade tariff tensions. He attributed this improved outlook to businesses adapting to the new environment and surprisingly strong capital expenditure, particularly in high-tech sectors. However, he cautioned that weaknesses persist, with "yellow flags" visible in the labour market, consumer spending, and sentiment, all of which remain below what would be considered healthy levels.

Fed outlook and sticky inflation

Regarding the Federal Reserve's path, Pandey expects a gradual easing cycle. He projects the central bank will implement a 25 basis point rate cut at its October meeting and potentially another one in December. He added that these are not recessionary, sharp cuts but rather a "tweaking around the edges" to guide the policy rate back towards a neutral level, which he estimates to be between 3.1% and 3.3%. The Fed is closely monitoring the labour market and appears to be prioritising its employment mandate, even with existing inflationary pressures.

Pandey said he anticipates that core inflation will remain sticky, staying slightly north of 3% until the middle of next year. This persistent inflation is the primary reason the Fed will not cut rates more aggressively, as it continues to erode consumer purchasing power and could lead to softer GDP growth. He added that the dynamic between a weakening labour market and sticky inflation will be a key factor for the US economy over the next six months.

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