A Looming Government Shutdown

Government shutdowns have become an increasing part of US politics as Republicans and Democrats try to use it as a bargaining chip or influence upcoming election strategy.  Since 1980, there have been 14 full or partial government shutdowns¹ with the potential for the 15^th to occur this year.  Government fiscal years begin on October 1^st, which means Congress needs to come to an agreement on the appropriations bills to fund government operations by the end of September.  The chart below shows the timeline of all shutdowns since 1980¹.

Shutdowns occur based on historical policy rules.  First, the Antideficiency Act passed in 1884 and amended in 1950 states that federal agencies cannot spend any money without an approval (appropriation) from Congress.  In 1980, the U.S. Attorney General also ruled that federal agencies must stop operating if they don’t get funding from Congress.¹ 

Should Congress fail to enact the 12 appropriation bills, federal agencies must stop all non-essential functions until an agreement is met.  However, there are several government functions that will continue during a shutdown, including:

• Social Security payments will continue
• Medicare remains in place
• S. Treasury continues to pay interest on US debt

Shutdowns, whether partial or full, can cause disruptions in processing applications for passports, small business loans, and government benefits but essential government employees and payments will keep working.

From an economic perspective, government shutdowns tend to have little effect and rarely lead to a recession.  The most recent government shutdown was in 2018-2019, which left 800,000 federal employees without pay for over a month but only saw the US Gross Domestic Product (GDP) fall by 0.014%².  The last time a recession followed a shutdown was in October 1990 and economic conditions had been deteriorating leading up to it already³.  Since 1990, we have had five other shutdowns, with 2018-2019 being the longest at 34 days.  None of these led to recessions.  It’s not to say that a recession cannot happen, but a government shutdown is more of a coincidence than an indicator or significant cause of recessions.

Furthermore, the US stock market, or S&P 500, is historically higher by 4.4% on average² during these events, which are likely a result of varying economic conditions and is likely coincidental.  However, depending on the expectations of how much funding certain areas of the government may receive, some sectors within the stock market may perform better than others.  Government defense oriented and health care companies have historically gained 5.2% and 2.3%, respectively².

At Gradient Investments, we will continue to monitor the potential for another government shutdown in the coming weeks should Congress fail to pass the appropriations bills and any opportunity it may present for our portfolios. Our opinion, however, is that these shutdowns can be disruptive for certain agencies and can garner a lot of media attention, but rarely do they create a significant change to our economic perspective or business fundamentals.

1. https://www.reuters.com/world/us/us-shutdown-looms-top-house-republican-kevin-mccarthy-faces-crucial-test-2023-09-18/#:~:text=Chart%20shows%20the%20timeline%20of,fails%20to%20enact%20spending%20measure.
2. https://www.morganstanley.com/articles/government-shutdown-economic-impact-2023#:~:text=Historically%2C%20government%20shutdowns%20have%20had,other%20macroeconomic%20factors%20at%20play.
3. https://www.ftportfolios.com/blogs/EconBlog/2023/9/18/higher-rates–a-shutdown-on-the-menu