Potential Government Shutdown: What We Know Now

Potential Government Shutdown: What We Know Now

September 27, 2023

Recent headlines have highlighted the potential government shutdown looming this coming Saturday. LPL Research has provided their insights into the matter, and we want to keep you informed. Please read below:

Potential Government Shutdown: What We Know Now.

Our Take

  • In the present political climate, we feel there is around a 75% chance of a government shutdown happening with the divisions that exist between factions in the House of Representatives, not to mention the divide between Senate Democrats and Republicans.
  • We believe it’s unlikely an agreement will be reached by the deadline at midnight, September 30.
  • As in past shutdowns, we do not expect the Washington drama to be a market moving event.

A Little History

  • The government has had 21 funding gaps since Congress introduced the modern budget process in the late 1970s. Of those 21 occurrences, only four have been true shutdowns where government operations were down for more than a single business day (and the fourth one was only a partial shutdown).
  • One of the most significant shutdowns took place during 1995, when the conservative House majority demanded budget cuts in order to reach a funding agreement. During this time, the government shut down for 21 days.
  • The longest government shutdown happened between 2018 and 2019 when then-President Trump and congressional Democrats were unable to reach a funding agreement. That shutdown lasted 35 days, but only a portion of the government was shut down.
  • Historically, markets have not been materially impacted by shutdowns. Looking at October 2013, the House and Senate were in a standoff over funding for the Affordable Care Act, and the government was shut down for 16 days. The S&P 500 Index witnessed some volatility; however, overall, the equity market took the political stalemate in stride as the S&P 50 rose 3.1% during the shutdown.

Do Taxpayers Save Money Amid a Government Shutdown?

  • Unfortunately, no. First, federal workers are guaranteed back pay. So even when government services are idle, workers continue to accrue their salary and compensation.
  • More importantly, there is a sizable cost to the economy as some businesses often forego hiring and making investment decisions because those firms are unable to get federal permits or access to federal business loans.

What to Expect if There Is a Shutdown

  • The Social Security Administration will continue to issue retirement and disability benefits, and payments would continue under the Medicare and Medicaid health programs. In addition, Military veterans' benefits would also continue to be paid.
  • The 2 million U.S. military personnel would remain at their posts; however, roughly half of the Pentagon's 800,000 civilian employees would be furloughed.
  • Essential workers such as border control, air traffic controllers, and TSA agents are still required to go to work and will receive back pay once funding is available.
  • The Federal Emergency Management Agency (FEMA) would risk running out of funds for disaster relief and other recovery projects.
  • The U.S. Postal Service (USPS) would be unaffected as it does not depend on Congress for funding.

Debt Rating

  • Moody’s Investor Services, the only major credit agency that has the U.S. at a top rating, stated that a U.S. government shutdown would reflect negatively on its credit rating. Moreover, it may underscore the weakness of U.S. institutional and governance strength relative to other top-rated sovereign governments.

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