With the U.S. House of Representatives sharply divided over funding plans, the federal government could be hurtling toward its third shutdown in five years. Though a last-minute maneuver to avert a closure remains possible, the political posturing and logistical realities are less than encouraging. As a result, federal agencies and employees are bracing for potential furloughs and work stoppages.
“The tea leaves don’t feel great, though that can all turn very quickly,” says Kellin Clark, Capital Group vice president of government and regulatory affairs.
Federal shutdowns are always painful as so-called nonessential employees are furloughed and services are shuttered. The ultimate impact would depend on several factors, especially the length and magnitude of a government closure.
As for the economic effect, short-term gross domestic product (GDP) growth did suffer during some past shutdowns, but it snapped back once the government reopened. Moreover, shutdowns haven’t had long-term impacts on the financial markets, says Capital Group political economist Matt Miller. In general, the political clashes driving shutdowns pale in significance next to the deeper economic dynamics and corporate growth opportunities that pace the markets.
“These events can disrupt markets for a while — sometimes even weeks or months — but if we look at history, they don’t tend to have a lasting impact on investors,” Miller explains. Of course, “that’s assuming we get a reasonable resolution.” Previous shutdowns, he notes, were fairly short-lived.
Here are answers to some common questions about the potential shutdown:
With the federal government’s fiscal year starting Oct. 1, Congress has until midnight Sept. 30 — this Saturday — to pass funding bills and avoid a shutdown. The bad news is that Congress hasn’t passed any of the 12 appropriations bills that set discretionary spending levels. For comparison, it had passed five of the bills ahead of the 2019 shutdown.
However, it does have the option of passing a stopgap resolution that would temporarily fund the government. “If they get a continuing resolution now, they’ll have more time to sort things out,” Clark says. “I think it would signal that a shutdown would be less likely, though there could be a shutdown at the new deadline.”
There have been several federal government shutdowns in the past three decades, lasting from just a few days, such as in January 2018, to more than a month, from December 2018–January 2019.
There was little consistency in how the market reacted, either before or after the shutdowns. The S&P 500 index pulled back in the days or weeks leading up to four of those episodes but twice recouped the losses during the closures themselves. In four of the five instances, the index rose in the subsequent year ― three of those times by more than 20%.
More significantly for long-term investors, the S&P 500 went on to grow significantly in the five years after each of the four shutdowns that happened more than five years ago.
Of course, past results don’t predict the future, and today’s circumstances are unique, with elevated inflation in a post-pandemic recovery. But it’s worth noting that every era has its own challenges and that markets thus far have recovered after every downturn.
The practical impact could depend on which parts of the government are affected. Each of the 12 appropriations bills covers a different set of departments and agencies; ahead of the 2018–19 closure, Congress had passed five of the bills, meaning that some government responsibilities continued to be filled during that time.
Generally, unfunded nonessential services aren’t staffed during a shutdown. That includes national park maintenance, most Environmental Protection Agency and Food and Drug Administration inspections, and National Institutes of Health new-patient processing. Workers in essential services, such as law officers, firefighters and air traffic controllers, are asked to work but don’t get paid until funding has been approved.
Mandatory spending programs, such as Medicare and Social Security, will continue to send out checks.
Despite expectations of a minimal economic impact over the long run, the combination of furloughed workers, delayed or missed applications, and other factors could weigh on economic growth, explains Capital Group economist Jared Franz.
“The impacts are manageable, but the cumulative impact is meaningful,” he says. “If a shutdown persists through October, the hit to U.S. GDP could be as high as 0.5% for the fourth quarter.”
Additionally, there could be a knock-on effect on the U.S. credit rating. Moody’s, the only one of the big three companies that still gives the federal government its highest score, says a shutdown could change that. Standard & Poor’s slashed its rating in 2011 after a debt ceiling impasse nearly triggered a shutdown. Fitch downgraded its rating to its second highest earlier this year on concerns about government debt.
Previous shutdown threats typically resulted from disagreements between Congress and the president. Unusually, the current situation stems from internal jockeying in the Republican party, Miller says.
“The GOP’s thin majority in the House has empowered a small minority of politicians to hold up this process,” he says. “Senate Republicans — and Democrats and the White House — generally don’t want a shutdown.”
The House dissidents have a variety of goals, including limiting or eliminating funding for the Ukraine war effort, alongside more general budget cuts.
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