Looking Down the Barrel of a Government Shutdown

Both sides were firmly entrenched in their positions, as Democrats sought to extend healthcare benefit subsidies due to expire at end of the year, and Republicans steadfastly held that such negotiations should be conducted separately and decoupled from the passing of a spending bill to fund the government. While neither side desires to be tagged as the party responsible for a disruptive shutdown, that is exactly where they headed as the second Senate vote to approve a temporary spending bill did not pass (Republicans required seven Democrat votes to move the legislation to the House), and the current funding plan in place for the federal government expired as of 12:01 am EST this morning.

So, what happens now? For historical perspective, over the past fifty years there have been 21 federal government shutdowns of varying durations. While many of these lasted only a few days before resolution, it is worth noting that the most recent lasted 35 days and occurred in the first Trump administration in 2018-2019, as both parties faced off about immigration and border security. The key issue at play this time is the $1.7T that funds federal agency operations, which represents approximately 25 percent of the government’s $7T budget. With no deal on the table, the following are some repercussions of a shutdown:

• Federal agencies’ operations and programs relying on annual Congressional funding approval will be paused. Apparently, many agencies have already issued detailed closure and work stoppage plans in the event of a shutdown.
• The Congressional Budget Office (CBO) estimates that approximately 750,000 federal workers not deemed “essential” will be furloughed without pay until funding is restored. While it has been generally assumed from past practices that furloughed workers receive back pay once an agreement is reached, President Trump has asserted that he plans to fire thousands of workers if a shutdown occurs.
• Essential workers, such as military and federal law enforcement personnel, will remain on the job, but without pay.
• National parks could be closed. However, during the last shutdown in his first term, President Trump kept the parks open to the public while the National Park Service employees were furloughed.
• Although air traffic controllers and TSA personnel are considered “essential”, it is possible that airport operations and flights could be slowed due to workforce disruptions stemming from employees taking extended “sick leave” as a reaction to missing pay.
• The Labor Department would not issue monthly jobs reports, which is an important economic indicator used by the Federal Reserve to guide monetary policy.
• The U.S. Postal Service will still deliver mail, as they are self-funded and do not rely on Congression appropriations.
• Social Security, Medicare, Medicaid and veteran’s benefits will be paid as these are mandatory programs. However, there may be administrative delays in claim and application processing.
• National Weather Service will continue to communicate forecasts and extreme weather warnings.
• Most of Federal Emergency Management Agency (FEMA) is considered exempt and will be on duty for any emergencies or disasters. However, the primary funding source for FEMA (Disaster Relief Fund) will require replenishment from Congress.
• SEC operational pace would likely slow with diminished staffing, which could impact IPO approvals and market oversight functions.

The broader economic or market impact of a shutdown will depend on the duration. A short-term pause in federal spending would have less severe consequences than a longer-term freeze.  For reference, the CBO estimated that during the first Trump term shutdown of 35 days, economic output was reduced by $11B over two quarters. While some of that sum was made up with a restoration of government operations, the CBO further stated that about $3B of economic output was estimated to be permanently lost. 

In terms of the markets, the delay in receiving critical employment data from the Bureau of Labor Statistics will complicate the Fed’s decision-making at the October meeting. Further, the SEC closure will impact the IPO market and the IPO calendar as well as private equity, at least in the short term. Finally, the effect on consumer sentiment and potential for consumer spending will depend on the length of the shutdown. Interestingly, while the shutdown was widely expected, the stock market took the threat of an imminent shutdown somewhat in stride as all major indexes moved a tad higher on September 30.