A Government Shutdown Looms

Why a Shutdown and What Are the Impacts? 

The United States government is on the brink of a potential shutdown, which could result in a multitude of ripple effects on the U.S. economy. Speaker of the House, Kevin McCarthy, has faced continuous roadblocks in his effort to pass new spending legislation. The opposition is focused on reining in longer term spending, Ukraine funding and immigration spending specific to Eagle Pass.¹ Recall that McCarthy faced troubles when becoming Speaker of the House in January of 2023 and has since been forced to walk a tightrope amid threats to remove his speakership. Given the divisions within the U.S. Senate, there is a sense that a shutdown is becoming increasingly likely.  

There have been 14 government shutdowns since 1980, many of which only lasted a few days.² The most recent shutdown lasted a lengthy 34 days, spanning from December 2018 and into January 2019, and cost the U.S. $3 billion – or 0.02% of GDP.³ During this period 800,000 out of the 2.2 million government employees were furloughed. If the government is unable to allocate funding to its 438 federal agencies by October 1, shutdown will occur. It is estimated that this shutdown would be more costly than the last shutdown, reducing U.S. GDP by around 0.15% every day the shutdown persists.⁴  

There are key differences between a government shutdown and the debt ceiling issue that the country faced earlier this year. The debt ceiling is a cap on how much the U.S. can borrow, and it needs to be periodically raised. If not raised, the U.S. would have to default on its debt, resulting in severe consequences like a recession and questions regarding the legitimacy of the U.S. dollar as the global reserve currency. This possible shutdown, driven by a lack of all federal agencies being funded, would not result in consequences as severe as a debt default, but would still have material financial impacts.  

Essential government data from the Bureau of Labor Statistics and the Bureau of Economic Analysis would be suspended in light of a government shutdown. This includes unemployment, retail sales and housing starts, among other data reports. Given both Federal Reserve and investor reliance upon government-released data, any delay would reduce transparency in an economy that already has various crosscurrents. A shutdown of more than two weeks could deprive Fed officials of pertinent information that would be used when contemplating whether or not to raise rates at the next FOMC meeting on October 31. Instead, Fed officials may rely on third-party data that is typically used as a complement to official U.S. government data.  

Chart 1: Duration of Government Shutdowns/Funding Gaps ⁵ 

Now the question is which agencies and services would be directly impacted if the government were to shut down. First off, the 2 million members of the military would continue to work, but the 800,000 civilian workers at the Pentagon would be furloughed. This could result in a delay of payment to defense contractors like Boeing (BA), RTX Corp (RTX) and Lockheed Martin (LMT). Although previous contracts will be honored, the shutdown would prevent any new contracts from being signed. Federal courts would have enough money to stay open until at least October 13, but some activities may slow after this date. Regarding transportation, airport security and air traffic control would be required to work, but training for new air traffic controllers would stop, amplifying the existing shortage of essential air traffic control workers. Air traffic controllers are also more likely to call in sick during a shutdown, which has historically caused some airports to suspend operations during the 2019 government shutdown. It is predicted that the travel sector could lose $140 million per day during a shutdown.⁶  

Additionally, infrastructure projects could face delays due to environmental review and permitting process disruptions. Other permits such as clinical trials, firearm permits and passports could see delays. The United States Postal Service would operate as normal. Finally, disability and retirement benefit payments would continue, but SNAP benefits could be impacted since grocery stores would be unable to renew their licenses.⁷  

Chart 2: S&P Performance During Shutdown/Funding Gaps⁸ 

What Is Needed? 

A bipartisan deal is needed to avoid a government shutdown, but the main question on our minds is when this will come. As mentioned above, there can be broad implications to an extended shutdown as the House of Representatives weighs its options.  

The plan this week is to move four appropriation bills and then a six-week continuing resolution (CR) in the house. Tuesday, September 26 was the beginning of the debate of the Defense bill. Wednesday, September 27 would see the amendments debate wrap up, followed by a debate on the Homeland Security bill and its amendments. Thursday, September 28 would be set aside for debate and amendments to the State-Foreign Operations bill, while Friday, September 29 would seek to finish debates on the Agriculture Spending bill as well as the voting process on all four bills mentioned above.  

The Senate will start to move a competing CR claim that will involve Ukraine and other disaster aid, but it is unknown if this will be supported by the House. The Senate bill will likely show up in the House the day before the shutdown. It will be a tough task for all, especially speaker Kevin McCarthy.   

Stephanie Link: CNBC TV Schedule 

Sources

1. Wall Street Journal. As of September 26, 2023.
2. CBS. As of September 26, 2023.
3. Reuters. As of September 25, 2023.
4. Reuters. As of September 25, 2023.
5. Strategas Research. As of September 20, 2023.
6. CNBC. As of September 23, 2023
7. Reuters. As of September 25, 2023
8. Strategas Research. As of September 20, 2023.

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