"Kee" Points with Jim Kee, Ph.D.

Markets were down about a tenth of a percentage point last week as the federal government went into partial shutdown mode (75% of the government workforce is working and getting paid). That flattish market response – particularly surprising given the strong run stocks have already had this year - suggests either that markets don’t think the shutdown will be prolonged, or it reflects a realization that only about 5.9% of federal spending goes to net interest on debt (so a default on government debt is not in the cards), or both. But markets don’t like uncertainty, so I would expect choppy markets as long as the fiscal side of the policy mix remains in flux.

Any interesting insights from the Street? Here are a few: Credit Suisse strategists argue that the chances of a lengthy standoff are low because polls show that Republicans are getting a disproportionate amount of the blame for the shutdown while the Democrats increased their majority in the Senate last election, so Republicans don’t want their political legitimacy to deteriorate further. They also argue that the macro backdrop is much better than the August 2011 debt ceiling showdown because (1) the US fiscal deficit is a much improved 4% of GDP versus 10% in 2011 (fiscal deficit meaning the amount that government spending exceeds the tax revenues that the government takes in), (2) global growth is also accelerating for the first time in three years (unlike 2011), and (3) the European Central Bank has become a willing lender of last resort since the 2011 episode. By the way, in case you are interested, the largest sources of revenue for the government are individual income taxes (46%), followed by Social Security receipts (34%), followed by corporate income taxes (11%). Those three contribute about 90 % of the revenue to the government.  Spending categories are less concentrated, with the largest being Social Security at 23% of federal spending (Crandall Pierce).

Finally, the most interesting thing I saw last week: Barry Bannister at Stifel calculated real GDP growth for the US excluding government spending, which has actually been declining. Since the first quarter of 2008, real GDP growth has been 3.4% versus the reported 2.3% average that includes the decline in government consumption expenditures and investment.