It appears that we are heading towards another government shutdown in Washington. Sadly, this is not new ground as this will be, by my math, the 24th funding gap since 1976 and the 10th government shutdown since 1980. But what causes a government shutdown? What are the impacts? And, how does the investment world react?
What causes a government shutdown?
A government shutdown happens when a federal government budget isn’t approved before the start of the next fiscal year, which begins on October 1st.
How long do shutdowns usually last?
The answer is: it depends. Some have lasted mere hours while the longest, in 2018, lasted 35 days.
What happens during a shutdown?
In short, most federal government operations cease. Essential work - for example, emergency operations and personnel – continues on, but much of the rest of the work the government does comes to a halt.
What happens to the Federal employees?
Many of them will get furloughed – which is like a temporary, unpaid leave of absence. During the most recent shutdown in 2018, approximately 380,000 Federal employees were furloughed but in prior instances, that number has been closer to 800,000.
The legislators should be motivated to resolve the outstanding issues then because they don’t get paid during a shutdown, right?
Sadly, no. Since Congressional pay can only be changed by direct law, unless the men and women in Congress came together to vote for a pay cut or halt – which is highly unlikely – their paychecks will keep on coming no matter how long the process takes.
What happens in the investing world during a government shutdown?
Surprisingly, the market doesn’t seem to be negatively impacted by government shutdowns. According to Ed Mills, Raymond James Washington Policy Analyst, since 1995 (a period with five shutdowns, including the three longest in history) the S&P 500 has returned on average 3.2% during shutdowns and has been up “universally” 30 days later. US Treasury yields have tended to drop, but by such a small amount that there’s really been no impact.
Whew. So, you’re saying this is no big deal?
To the market, yes, but remember that the market is not the economy. Between furloughed workers and others who are concerned about what’s coming, we’re likely to see some consumers pull back on spending in meaningful ways. With consumers making up about 2/3rds of GDP, there will be an economic impact if this turns into a protracted shutdown.
There must be one quirky, nerdy aspect of this shutdown you’d like to mention, right?
As a matter of fact, there is. I’m so glad you asked. One of the departments that will be shutdown is the Bureau of Labor Statistics who does surveys and, as you might have guessed from their name, compiles statistics on inflation, employment, and productivity among other topics. The US Federal Reserve uses these numbers to craft interest rate policy. If we have a long shutdown, the Fed could be flying somewhat blind at their next meeting at the end of October. Since there is generally some consternation about what the Fed does with all the information they can get, it will be interesting to see what, if any, action they take if they have incomplete info at their next meeting.
Photo by Andy Feliciotti on Unsplash