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Shutdown Rundown

The federal government is about to shut the lights off, at least partially

The U.S. government is facing a shutdown this weekend due to Congress’ inability to pass appropriations bills to keep funding the government. There will not be a total shutdown however, as employees and functions deemed essential will continue working, even if they are not getting paid.

Implications for the broader economy and markets are dependent on the length of the shutdown. A shutdown will not be a shock to the market, but an extended one could cause equity and bond investors to rethink how much risk they are willing to shoulder.

Below are some excerpts (with links to full articles) regarding the situation and how it could affect the economy and the stock market.

Government shutdowns are inherently political affairs. This detailed article from Tangle presents viewpoints from both sides of the aisle.

Each year, the U.S. government passes 12 appropriations bills that fund government operations before a new fiscal year begins. The new fiscal year begins October 1, which is the deadline for passing the appropriations bills. Typically, when all 12 appropriations bills aren't passed in time, Congress and the president keep the government working by passing short-term extensions of current funding, called continuing resolutions (CR). For the last few decades, Congress has been especially bad at passing appropriations bills on time, and often passes continuing resolutions and then giant omnibus bills (a combination of all 12 appropriations bills at once) to keep the government running. Congress has passed zero of the 12 appropriations bills so far this year, and the House has only passed one. Now, they are having trouble agreeing to a CR to keep the government running. - Tangle, "A looming government shutdown (again)"

Reuters adds to the discussion of how a shutdown might affect government employees and the overall economy. There is also a short video explaining the situation.

A shutdown would directly reduce GDP growth by around 0.15 percentage points for each week it lasts, according to Goldman Sachs, but growth would rise by the same amount after the shutdown was resolved.
The 2018-2019 shutdown cost the economy about $3 billion, equal to 0.02% of GDP, according to the Congressional Budget Office. - Reuters, "US government shutdown: what does it mean?"

In addition to potentially reduced spending from furloughed government employees, there could be indirect impacts to the economy. The Federal Reserve, which has been very active in raising interest rates, is heavily dependent on economic data. Business Insider explains that economic data may be delayed if there is an extended shutdown.

The September jobs report and CPI report are scheduled to be released on October 6 and October 12, respectively, so a government shutdown lasting past those dates would hamper the data-dependent Fed, especially if the shutdown extends to its next FOMC meeting on November 1. - Business Insider, "A government shutdown would make the Fed's job a lot harder as economic data is delayed"

If the markets get spooked and volatility spikes, there will be less oversight from the Securities and Exchange Commission during a shutdown. Any private companies wishing to advance their plans to go public will also have to wait.

Gensler said the agency would lose more than 90% of its workforce to unpaid furloughs, leaving a "skeletal" staff to perform essential functions, which include monitoring U.S. markets, according to the agency's contingency plan. - Reuters, "As government shutdown looms, companies should go public 'before Friday,' SEC chief says"

That said, the stock market has generally shrugged off government shutdowns and not viewed them as a cause for alarm.

Historically, government shutdowns have not caused a major reaction in the markets. In fact, the S&P 500® has risen during the last five government shutdowns.
But shutdowns can increase market volatility. In the 2018-2019 shutdown, the S&P 500 dropped by 2.7% on the first trading day after the shutdown, rebounded nearly 5% on the next trading day and was up more than 10% by the end of the 35-day shutdown. - Schwab, "Congress Scrambling to Avoid Government Shutdown"

As House Speaker Keven McCarthy claims, "No one wins in a shutdown". There is certain to be relatively more pain felt by the hundreds of thousands of affected employees compared to the rest of the labor force. If their spending is scaled back enough during a prolonged impasse, we could see negative implications ripple through the broader economy.

Hopefully this will be short-lived, and we can focus on the usual economic challenges.



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