With only five days left before a potential U.S. government shutdown, Moody's has sounded the alarm, warning that another federal halt on October 1 could negatively affect the U.S. credit rating. This comes after Fitch Ratings downgraded the U.S.'s long-term foreign currency issuer default rating (IDR) from "AAA" to "AA+" in August due to the debt ceiling standoff. Standard & Poor's had already downgraded the U.S. rating in 2011 over a similar issue.

Moody's Warning

Moody's, in its assessment released on September 25, noted that while a government shutdown wouldn't disrupt the U.S. economy, it would expose weaknesses in U.S. governance. The assessment highlighted that compared to other "AAA" rated countries, a shutdown would reveal the U.S.'s relative lack of emphasis on medium-term fiscal planning. This is a fundamental difference between the U.S. and most other "AAA" rated countries like Germany and Canada.

Moody's specifically mentioned U.S. political polarization, stating that a government shutdown would demonstrate how increased political polarization poses "serious constraints" on U.S. fiscal policy-making. In the long run, weak fiscal policy-making could lead to "persistently high fiscal deficits and higher-than-expected interest costs," putting pressure on the U.S.'s rating or outlook.

The economic impact of a federal shutdown, Moody's pointed out, would primarily affect areas with government involvement, such as defense contractors and public transportation providers. Government spending would decrease, and federal employees and government contractors without pay would reduce consumption.

However, if the shutdown is short-lived, its overall impact on the U.S. economy and GDP growth prospects would be very limited. But if the shutdown drags on, affecting business and consumer confidence or triggering negative reactions in financial markets, it could have a more significant impact on the U.S. economy.

Despite Moody's warning, U.S. stock markets remained stable. On Monday, all three major U.S. stock indices rose, with the Dow Jones Industrial Average up by 0.13%, the S&P 500 by 0.40%, and the Nasdaq Composite by 0.45%.

A report released last week by Goldman Sachs also suggested that the economic impact of a federal government shutdown would be limited. Unlike the debt ceiling standoff, a government shutdown is more controllable from a macroeconomic perspective. After a shutdown, as most government departments are deemed essential, about 65% of federal employees would continue to work. Market investments and the purchasing of goods and services would remain unaffected.

The report noted that during the three prolonged shutdowns since 1990, U.S. stock markets showed no significant changes, even rising before falling again. However, the report also warned that precisely because a federal shutdown's economic impact is less than that of a debt ceiling standoff, there's a greater likelihood that Congress might not act in time.

Since 1976, there have been 20 U.S. federal government shutdowns. The last one occurred in December 2018 during Trump's administration, lasting 35 days, making it the longest government shutdown in U.S. history.

Agreement Unlikely This Week

The U.S. Congress needs to pass 12 appropriation bills for the new fiscal year by midnight on September 30. As of now, the House has only passed one of these 12 bills, which pertains to veterans' affairs and military construction. The Senate has yet to pass any.

The main disagreements lie in the House. Republicans advocate for a smaller government and free competition. The House Republicans' primary goal is to force the Biden administration to make significant spending cuts.

Kevin McCarthy, the House Minority Leader, has been negotiating with the conservative Freedom Caucus, but his proposals have been rejected. Last Thursday, a frustrated McCarthy directly accused some party members of wanting to "burn everything down."

Former U.S. President Donald Trump also stirred the pot, posting on social media that the Republicans' compromise on the debt ceiling issue brought no benefits. He urged the GOP not to compromise this time and let the government shut down, placing the blame on whoever is in charge.

One solution is to temporarily ensure the government remains open by passing a "Continuing Resolution" (CR). A CR is a stopgap spending measure that allows the federal government to continue operating at the previous fiscal year's funding levels for a set period, ranging from a few days to five months.

However, the hardline Republicans in the House also refuse to pass a CR. With no solutions in sight, McCarthy decided to compromise with the hardliners to retain his position as Minority Leader.

On Tuesday, McCarthy will convene the House to debate four of the 12 appropriation bills, covering the Departments of Defense, Homeland Security, State, Agriculture, and the Food and Drug Administration.

These four bills contain over 400 amendments that need discussion, addressing hardliner demands, including further abortion restrictions, canceling Biden's $110 billion climate change plan, and resuming construction of the U.S.-Mexico border wall.

Even if these amendments get House approval, they will likely be vetoed by the Senate. McCarthy is aware of this outcome, stating that the move is to appease conservatives in hopes they'll agree to pass a CR.

Meanwhile, the Senate plans to vote on a CR this week to prevent a government shutdown.

Once the Senate passes the vote, the CR will be sent to the House for voting, putting the burden back on McCarthy. Some Republican members have warned that if McCarthy collaborates with Democrats to pass the CR, he will pay a price.

With only five days left until October 1, there are no signs that the U.S. can avoid another government shutdown.

Arizona has already announced that if the federal government shuts down, the state will use lottery revenues to keep the Grand Canyon National Park open. The Grand Canyon is a significant tourist attraction in Arizona, drawing five million visitors annually.