Washington, D.C. – With the September 30th deadline to pass spending bills rapidly approaching, the threat of yet another government shutdown looms large. This would mark the second time this year that Congressional deadlock has brought operations of federal agencies and services to a grinding halt.
Back in the summer, last-minute deals narrowly avoided a default on the national debt when the debt ceiling needed to be raised. Now Congress faces a similar showdown as they struggle to find agreement on funding the government past the end of the month.
Most services will continue during a shutdown, but the effects ripple far beyond the nation’s capital. From closed national parks to delayed small business loans, millions of Americans end up impacted when federal agencies are forced to run on limited funding and staffing.
What Exactly is a Government Shutdown?
To understand what happens during a shutdown, it helps to understand how the government is funded. Annual spending for federal agencies and programs is determined by the 12 appropriations bills that Congress is supposed to pass each year. If some bills get approved but not all, we end up with a partial government shutdown. And failure to pass any of them triggers a full shutdown.
Even in that worst case scenario of a full shutdown, essential services like Medicare payments, law enforcement, air traffic control, and others will continue operating. But any agency whose funding has lapsed will need to furlough employees, suspend activities, and restrict services until Congress can agree on their budget.
According to the Congressional Research Service, there have been 21 funding gaps or shutdowns since 1976, ranging from just a single day up to weeks long. The most recent occurred over the 2018-2019 winter holidays and lasted a record 35 days.
Uncertainty Fuels Recession Fears
With economic storm clouds gathering, concerns have emerged that a shutdown could push the country into a recession. Treasury Secretary Janet Yellen warned lawmakers this month that the loss of momentum from stalled government operations poses an unnecessary economic risk.
Other experts argue the direct impact would be limited, estimating a shutdown would trim quarterly GDP growth by just 0.15 percentage points for each week federal agencies remain unfunded. But even a modest hit to growth could have an outsized effect if a shutdown exacerbates recessionary pressures already simmering in the economy.
Duration Matters
Markets and the broader economy have historically shrugged off shutdowns lasting just a few days. But analysts caution that this time could be different if political divides lead to an extended funding gap.
“If a government shutdown does occur, it is likely to be significant in duration with no clear path for reopening the government,” warned the U.S. Chamber of Commerce in a recent blog post. They argue the microeconomic consequences – such as delayed loans and permits at understaffed agencies – could have a heavy toll on small businesses across the country if operations remain limited for weeks on end.
With household budgets stretched by inflation and small business optimism waning, an extended shutdown could sap consumer and business confidence at an inopportune moment. That one-two punch of operational disruptions and psychological unease could put the economy in a precarious spot.
What It Means for Markets
Analysts say markets have taken past shutdowns in stride, with stocks recovering fairly quickly from any temporary dips in prices. But forecasting how markets will react this time is complicated by other economic crosscurrents.
Liz Ann Sonders, chief investment strategist at Charles Schwab, told Kiplinger magazine that “the growth trajectory is already weakening, and the impact of a shutdown could push growth to the flat line or worse.” She stressed that the severity of any market reaction depends entirely on whether a deal is reached quickly or if brinkmanship in Washington drags out the funding gap.
Even a brief shutdown though could dent confidence in the government’s ability to function properly. Credit rating agency Fitch cited the “repeated debt-limit political standoffs and last-minute resolutions” when downgrading America’s credit rating earlier this year. While the country’s new AA+ rating remains very strong, the downgrade is a symbolic blow and cautionary tale on the consequences of polarization in Washington.
Long-Term Perspective Is Key
Navigating an uncertain economic environment is daunting for investors, especially with threats like a shutdown looming. The wisest course of action is often to stay the course rather than make dramatic moves reacting to the latest crisis.
Market volatility and pullbacks are inevitable, even in periods of sustained growth. While shutdown-driven downturns can feel unsettling, history shows markets rebound in a relatively short timeframe once a deal is struck.
For long-term investors, it’s important to maintain perspective and remain committed to your financial plan. That means tuning out short-term political noise and market swings. Focus instead on ensuring your investment strategy aligns with your risk tolerance and timeframe.
Patience and discipline are always rewarded when it comes to investing for the long haul. That’s as true today as ever, even with the endless parade of crises that tend to dominate the headlines. Turbulence may be ahead in the near-term, but a diversified portfolio focused on the future can help endure any market storms.