“History doesn’t repeat itself, but it often rhymes”
A US government shutdown could start on Sunday 1st October if spending bills are not approved by Congress before then. In this note, we outline what this would entail and its potential economic and market impacts. Overall, the financial-market impact is likely to be minimal given that any disruption should be short, while history would suggest a rebound can be expected once the shutdown ends. Indeed, taking the government shutdowns that lasted more than one day since 1980, the average peak-to-trough fall for the S&P 500 one month before the shutdown low was -2.1%. However, the average return three months after the end of the shutdown was 4.2%.
Why might a government shutdown happen and what does it entail?
The US government’s fiscal year ends on September 30th and every year Congress must approve spending before the next fiscal year starts, otherwise funding will not be there for 438 government agencies to operate. This has occurred this time as Republicans in Congress want additional spending cuts in the budget for the next fiscal year that Democrats are unwilling to make.
An extension is possible beyond the end of September via a so-called “continuing resolution”, whereby agencies’ current funding levels are maintained while Congress continues negotiating. On the ground, there could be impacts such as the closure of national parks and potentially air travel delays depending on whether workers in this sector work without pay or, as in 2019, decide to call out from work.
Shutdowns are not uncommon, with 10 having occurred since 1980, with an average length of 8.7 days. Having said that, the last shutdown occurred from December 2018 to January 2019 and lasted 35 days.
How does this differ from the debt ceiling debacle in May?
The debt ceiling is a limit on the stock of debt – a limit on the total amount of debt outstanding the government can have – whereas the government shutdown is due to an issue with the flow – approving funding for the next fiscal year.
What are the potential economic and market impacts?
Private-sector estimates suggest the shutdown would reduce GDP growth by an annualised 0.1-0.2% for each week it lasts, though this would be compensated for by an equivalent rise after the shutdown ends. Indeed, the Congressional Budget Office estimate that the 2018/19 shutdown had a negligible impact, reducing GDP by 0.02%.
In theory, a shutdown could lead to services not being carried out. However, in reality, many agencies – including the Department of Justice, the Department of Homeland Security and the Internal Revenue Service – have the vast majority of their staff continuing to work under contingency plans.
There could be delays to some economic data releases, included those covered by the Bureau of Economic Analysis, the Census Bureau and the Bureau of Labour Statistics. This would include key data like consumer prices and some labour market statistics for October, with the latter potentially distorted by those deemed temporarily unemployed.
The financial-market impact is likely to be minimal given that any disruption should be short, while a rebound would be expected once the shutdown ends. Indeed, taking the government shutdowns that lasted more than one day since 1980, the average peak-to-trough fall for the S&P 500 one month before the shutdown low was -2.1%. However, the average return one month after the end of the shutdown was 1.4% and 4.2% after three months.
The Bottom Line
A US government shutdown would make headlines, but the practical, economic and market implications are likely to be minimal in our view.
This is intended as a general review of investment market conditions. It does not constitute investment advice and has not been prepared based on the financial needs or objectives of any particular person.
**Source – Irish Life Investment Managers