If you’re like many Americans, you’re watching to see how Congress deals with the latest threat of a government shutdown. Lawmakers are busy this week ahead of a Sept. 30 deadline, hoping to pass a short-term funding measure to keep the government operational. On Oct. 1, when the government’s new fiscal year begins, one of three potential scenarios will take place: business as usual, with Congress passing a dozen appropriations bills to fund the government for another year; business as usual, with a continuing resolution to keep the government running in the short-term while negotiations continue, or a shutdown that could bring furloughs, delayed pay, and a reduction in services. (Note: Mandatory spending items, such as Medicare and Social Security, would not be affected.)

The Annual Funding Deadline Drama

Congress bears the foundational responsibility of funding federal government operations, but it doesn’t have the greatest record for timely action. On 14 occasions since 1980, funding has lapsed, shutting down the government for anywhere from one day to as long as 35 days. The last time Congress actually passed all 12 appropriations bills by Sept. 30 was in 1997.

To keep the government temporarily afloat, Congress has the ability to pass a “continuing resolution” (CR), a temporary funding extension for a specified period that prevents a government shutdown. CRs can span from a few days to weeks or even months. In the past two decades, CRs have endured for an entire fiscal year on three occasions.

Implications of a Government Shutdown

During a government shutdown, each agency devises a contingency plan to ensure the operation of “essential” services. Personnel in critical roles, such as air traffic controllers, border security agents, military personnel, and postal workers, continue working, albeit with potential paycheck delays. According to CNN, during the 2018 – 2019 government shutdown, many TSA workers called in sick so they could find paying jobs, causing major problems at the nation’s airports. In addition, an estimated 850,000 federal workers were furloughed during the same period.

Treasury and stock markets typically continue normal operations during a shutdown, although Securities and Exchange Commission (SEC) Chair Gary Gensler noted last week that normal oversight would not be possible in a shutdown. “The public should understand, we’ll largely be a skeletal staff,” he said.

Critical economic data releases may also face delays during a shutdown. The Bureau of Labor Statistics, for instance, indicated its intent to “suspend data collection, processing, and dissemination” if the government shuts down. This could impact releases such as the job openings and labor turnover survey (JOLTS) scheduled for October 3, as well as the October 6 nonfarm payrolls report. Additionally, the release of producer price index (PPI) and consumer price index (CPI) data, set for October 11 and 12, respectively, could be affected. These data points hold significance for the Federal Reserve as it assesses the economy ahead of its October 31 and November 1 monetary policy meeting.

The Internal Revenue Service, however, continues to function due to additional funding made available by the Inflation Reduction Act passed last year.

Market Sentiment During Shutdowns

While government shutdowns have historically not triggered major market reactions, they can introduce increased market volatility. For instance, during the 2018-2019 shutdown, the S&P 500 dropped by 2.7% on the first trading day after the shutdown began, only to rebound nearly 5% on the following trading day. By the end of the 35-day shutdown, the S&P 500 had risen by more than 10%.

An extended shutdown could exert a modest impact on the broader economy. According to the Congressional Budget Office, the 2018-2019 shutdown cost the economy approximately $3 billion.

Where Things Stand

With the shutdown deadline looming this Saturday evening, events on Capitol Hill are taking center stage.

At the end of August, the White House called upon Congress to pass a funding extension until November or December, allowing more time for negotiations. Additionally, it has requested emergency aid, including billions for recent disaster victims and substantial aid to support Ukraine in its ongoing conflict with Russia. However, this proposal has encountered resistance in the House of Representatives, where Republicans hold a narrow majority. Conservative Republicans in the House are advocating for substantial spending cuts and questioning the appropriateness of further aid to Ukraine, leading to an intra-party stalemate.

While a last-minute agreement remains possible, many in Washington believe a government shutdown is probable. At Savant, our team of advisors and investment specialists are monitoring the situation. If you have questions or concerns, please reach out to your advisor.

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