As of Wednesday morning, lawmakers have made little progress towards averting a possible crisis. Again.
Every month, there are plenty of things to talk about regarding the markets. This month, however, I want to give you a quick preview of something that may happen next month: A government shutdown.
On September 30, Congress will hit its deadline to fund the federal government for the fiscal year 2024. Given how deep political divisions run in Congress, it’s certainly possible the deadline will not be met. Should that happen, each federal agency must halt all its non-essential functions. (More on that in a moment.)
While we’ve known this has been in the cards for some time, the probability gets higher each day. So, let’s do a short nonpolitical Q&A on a potential shutdown and how it may affect the markets. We’ll start with:
Q: What is a government shutdown?
Whenever Congress authorizes a law, the government must spend money to enact it. But sometimes, the authorization doesn’t contain provisions to fund the law. A second piece of legislation, known as an appropriations bill, is required. This is where Congress separately appropriates money specifically for the new law.
These appropriations must be renewed – usually every year – for the law to remain funded. This is what’s known as discretionary spending because Congress decides upon its own discretion whether to continue funding the law.
Currently, there are twelve appropriations bills that Congress must pass every year. These bills fund defense spending, national parks, food safety, passport applications, transportation, and much more.
As of this writing, Congress has not currently passed any of these bills. (To be more precise, the Senate has passed all twelve, but the House has passed none. As you know, both branches must sign off on a bill before it becomes law.) Sadly, this is not an uncommon occurrence. Since 1977, Congress has managed to fund all twelve bills on time on only four occasions…and the last was all the way back in the late 1990s!1
When this happens, Congress will usually pass what’s known as a continuing resolution. This is a temporary spending bill that funds the government until a specified date. It’s essentially a way for Congress to buy itself more time. This may still happen, but some members of the House have been vocal about disliking the idea. So, if the House cannot pass any of the bills or a continuing resolution, much of the government will shut down on October 1.
Q: What happens during a shutdown?
I said before that during a shutdown, federal agencies must halt all their non-essential functions. Basically, this means that many federal employees will be told not to show up for work. This can lead to delays in many government services, some of which I’ve already mentioned. Thankfully, congressional budget drama is now so common that just about every agency has a contingency plan for what to do in the event of a shutdown. You can even see those plans yourself! Just visit www.whitehouse.gov/omb/information-for-agencies/agency-contingency-plans. (Each plan makes for an interesting – if not exactly gripping – read.)
Now, you’ll notice that I said non-essential functions. Some services, which are simply too vital to ever stop operating, will continue. Think air traffic control. Law enforcement. Forest Service firefighting. Much of the national Weather Service. You get the idea. However, it should be noted that many of the people who do these jobs will not be paid until Congress acts.
Some government operations, meanwhile, falls under the umbrella of mandatory spending. These are for certain laws and programs that are not required to be renewed annually. (Think Social Security benefits, Medicare, and Medicaid.) These programs will continue operating during a shutdown. However, many of the federal employees who oversee these programs will be sent home. As a result, there may be delays in helping citizens who need to interact with these services in some way.
Sometimes, Congress may pass some appropriations bills, but not all. This leads to a partial shutdown. When this happens, agencies that have been funded remain open, while those that have not close up shop.
Q: How long do shutdowns last?
It’s impossible to know, however they typically don’t last long. Many shutdowns, in fact, only last for a day or two. But sometimes, shutdowns can drag on for weeks. In 2013, for example, we experienced a 16-day shutdown.2 From December 2018 through January 2019, the government shut down for 35 days.2 (Although this was technically a partial shutdown.)
Q: How might a government shutdown affect the economy and the markets?
Shutdowns aren’t fun for anyone. Typically, however, they tend to have only a minor impact on the overall economy. The last major shutdown led to roughly 0.2% lower economic growth.3 (That’s about $8 billion in lost growth.) This time around, some economists are predicting a 0.2% reduction in GDP growth for each week the shutdown lasts. 3
Shutdowns usually don’t have that big of an effect on the markets, either. Data suggests that the S&P 500 has fallen “an average of 0.4% in the week before a shutdown and gained a total of 0.1% over the length of all shutdowns since 1976.”3 This isn’t surprising. The markets are driven by many factors. Important as it is, a shutdown is only one of them. Quite frankly, it’s rare for just one event to have a lasting impact on stocks, even if media headlines suggest otherwise.
That said, our economy is in a tricky period right now. Persistent inflation has led to rising interest rates, which has put everyone on watch for a potential recession. So far, a strong labor market and solid consumer spending have staved off an economic decline. But adding anything negative to the mix just causes uncertainty…and uncertainty often leads to market volatility. While history suggests shutdowns aren’t a major problem for investors, it’s important we remain alert in the weeks ahead. As you know, past performance is no guarantee of future results!
So, that’s where things stand right now. We will continue keeping an eye on both Washington and the markets. In the meantime, please let me know if you have any questions or concerns. Unlike the government, we open and here and ready to be of service!
Have a great end of summer!
