The US should be able to avoid a recession this year. A government shutdown could change that.

  • There are positive signs that the US will avoid a recession.

  • However, Janet Yellen warned about the economic impact of a government shutdown.

  • If the government shuts down and the economy slows, finger-pointing will follow.

Will we recession? Will we not recession?

While some still believe it would take a miracle to avoid a recession, there are positive signs that the US economy can avoid an ugly fate that seemed pretty likely at the start of the year. Even the Fed's economists think there won't be a recession and the US will continue down a "Goldilocks" scenario of not too hot and not too cold as inflation cools and the economy keeps growing.

But those good signs could be all for naught if the government can't avoid a shutdown. That was the message US Secretary of the Treasury Janet Yellen delivered on CNBC's "Squawk on the Street."

During her interview, Yellen spoke about the strength of the economy, the labor market, and lower inflation as reasons she doesn't "see any signs that the economy is at risk of a downturn."

However, she did warn that if Congress can't avoid a government shutdown in the next two weeks, it could kill the economy's momentum.

"It could have some impact," Yellen said when asked about the impact of a shutdown on the economy. "There is no reason for it to occur, and we want Congress to stay focused. We've got a good, strong economy, as we just discussed, and creating a situation that could cause a loss of momentum is something we don't need as a risk at this point."

Kevin McCarthy
House Speaker Kevin McCarthy.Andrew Caballero-Reynolds/Getty Images

Congress has until September 30 to agree on funding the government or it faces shutting down for the first time since December 2018, when it closed for 35 days, the longest in US history.

Last week, Goldman Sachs also warned that a shutdown, along with the ongoing Hollywood and auto worker strikes and student loan payments restarting, could have a harmful impact on the economy's recent positivity. However, a team of strategists led by Goldman's chief economist Jan Hatzius said in a research note the slowdown would be "shallow and short-lived," referring to a potential government shutdown as one of the "temporary drags."

With the 2024 election nearing and the economy always a top issue, Yellen's comments could be laying the groundwork for pointing at House Republicans and a shutdown as the causes if the economy does slow at the end of this year and into the start of next year.

Oddly enough, Biden's own impeachment inquiry could be the key to avoiding a government shutdown and saving the economy from slowing before the election. Some Republican lawmakers have said they want any government spending bill attached to an impeachment inquiry.

You can see Yellen's full interview on CNBC here.

Read the original article on Business Insider