Goldman Sachs says the government shutdown will result in a 0.2% reduction in first-quarter GDP for every week it persists.

However, it said the negative effect will be reversed in the second quarter, assuming the shutdown ends by then.

The firm notes that the impact on financial markets will be "very modest."



Expect the government shutdown to slowly drain the US economy, says Goldman Sachs.

Now that the federal government has failed to successfully negotiate a funding bill, first-quarter gross domestic product (GDP) will slip by 0.2 percentage points for each week the shutdown persists, according to Goldman.

But the firm isn't particularly worried about any long-term damage, noting that any economic slowdown will be quickly reversed in the second quarter, assuming the shutdown is over by then. Goldman is also confident that the market's reaction will be muted.

"We expect any negative impact on financial markets from a shutdown to be very modest," Jan Hatzius, the chief economist at Goldman Sachs, wrote in a client note. "Markets have also tended to react mildly to shutdowns."

Since 1981, the S&P 500 has seen a median move of just -0.9% on the first day of trading after a government shutdown, according to Goldman data. And on the three occasions those stoppages have lasted for a lengthy period, the equity index hasn't declined more than 1.5% during the entire shutdown.

The firm's findings mirror those of Ryan Detrick, a senior market strategist at LPL Financial, who looked at stock performance during shutdowns dating back to 1976 and discovered that the S&P 500 has been largely unchanged, on a median basis.

And interestingly enough, Goldman says the damage to markets could've been far worse if the government had instead decided on an extension of federal spending authority. That would've increased the odds that the funding deadline winds up interacting with the debt limit, which Goldman says will need to be raised in March.

"Unlike government shutdowns, which financial markets tend to shrug off, markets could have a stronger negative reaction if the upcoming debt limit increase became entangled in the current set of issues," said Hatzius.