As negotiations between house and senate is not on right path due to many disagreements, US government shutdown looks imminent. This will not be the first time that US federal government will cease to function. This has already happened several times in past with 2018 being the longest shutdown under Donald trump presidency which lasted for almost 35 days. How does markets react to it is something we are concerned about and how much shutdown effects US GDP. Lets go back in history and get a clue of what happened in past shutdowns?
Why government shutdown happen?
It happens when congress fails to pass dozens of spending bills that channels money to government programs and agencies. A shutdown is likely when both chambers in Congress − the House and Senate − can’t come to an agreement on how much money to allocate to certain agencies or agree on certain spending terms, putting federal agencies at risk. A partial government shutdown can occur if Congress is able to pass any of the 12 individual spending bills.
12 appropriation bills
These 12 appropriation bills are sent by 12 respective departments in both the House and Senate Appropriations Committees. For example, the House Appropriations Subcommittee on Defense steers the Defense spending bill, which provides funding for the Department of Defense and other related activities. Experts suggest only likely resolution to avert a shutdown is a short-term stopgap measure to keep the government open and buy lawmakers more time to move through the appropriations process.
Same way bills on agriculture, social security, Medicare, education etc needs to be cleared before the deadline to stop the government shutdown.
List of presidents under whom government shutdown happened
Over the last five decades, there have been 21 federal shutdowns:
- 1976: Under President Gerald Ford. Lasted for 11 days.
- 1977: Under President Jimmy Carter. Lasted 12 days.
- 1977: Under President Carter. Lasted eight days.
- 1977: Under President Carter. Lasted eight days.
- 1978: Under President Carter. Lasted 17 days.
- 1979: Under President Carter. Lasted 11 days.
- 1981: Under President Ronald Reagan. Lasted two days.
- 1982: Under President Reagan. Lasted one day.
- 1982: Under President Reagan. Lasted three days.
- 1983: Under President Reagan. Lasted three days.
- 1984: Under President Reagan. Lasted two days.
- 1984: Under President Reagan. Lasted one day.
- 1986: Under President Reagan. Lasted one day.
- 1987: Under President Reagan. Lasted one day.
- 1990: Under George H.W. Bush. Lasted four days.
- 1995: Under President Bill Clinton. Lasted five days.
- 1996: Under President Clinton. Lasted 21 days.
- 2013: Under President Barack Obama. Lasted 17 days.
- 2018: Under President Donald Trump. Lasted three days.
- 2018: Under President Trump. Lasted several hours.
- 2019: Under Trump. Lasted 35 days.(longest shutdown on US history due to disagreement on passing bill for border fencing)
Latest updates
Yes, the US government shutdown is happening. Congress failed to reach a deal on a spending bill before the start of the new fiscal year on October 1, 2023, at midnight. This means that most federal agencies are now closed and hundreds of thousands of federal employees are furloughed without pay. The shutdown is expected to continue until Congress can pass a spending bill. However, it is unclear when this will happen. Republicans and Democrats are deeply divided on a number of issues, including the budget and immigration.
Here are some of the immediate effects of the government shutdown:
- Most federal agencies are closed, and hundreds of thousands of federal employees are furloughed without pay.
- National parks and monuments are closed.
- Food and education programs for low-income children may be disrupted.
- Passport processing is delayed.
- Air traffic control may be disrupted.
- Medical research may be delayed.
- National security operations may be affected.
The long-term effects of the shutdown are more difficult to predict. However, economists say that a prolonged shutdown could damage the US economy and lead to a recession.
A rough estimate of how much impact government shutdown have on US GDP
The impact of a government shutdown on US GDP depends on the length of the shutdown and the types of government services that are affected. A short shutdown of a few days is likely to have a minimal impact on GDP, but a longer shutdown could have a significant impact.
The Congressional Budget Office (CBO) estimates that a four-week shutdown could reduce GDP growth by 0.4 percentage points. This is because government spending accounts for about 16% of US GDP. A shutdown would reduce this spending, which would lead to a decline in economic activity. The CBO also estimates that a four-week shutdown would cost the US economy about $11 billion. This includes both the lost wages of furloughed federal employees and the lost economic activity that would result from the closure of government agencies.
The impact of a government shutdown on GDP is not evenly distributed. Some sectors of the economy are more affected than others. For example, the tourism sector is likely to be hit hard by a shutdown, as many national parks and monuments would be closed. The construction sector is also likely to be affected, as many government construction projects would be halted.
The impact of a government shutdown on GDP can also be amplified by other factors. For example, a shutdown could lead to a decline in consumer confidence, which could reduce spending and investment. A shutdown could also damage the US economy’s reputation, which could make it more difficult for businesses to attract foreign investment.
How does US stock market reacts to government shutdown?
Stock markets have had mixed reactions to US government shutdowns in the past. Some shutdowns have led to declines in stock prices, while others have had little impact or even led to gains. A 2019 study by Bespoke Investment Group found that the S&P 500 has fallen an average of 0.7% during the first week of a government shutdown, but has gained an average of 0.6% over the entire period of the shutdown. The study also found that shutdowns that last more than two weeks tend to have a more negative impact on stock prices.
The most recent government shutdown, which lasted 35 days from December 2018 to January 2019, had a relatively small impact on the stock market. The S&P 500 fell 2.8% during the shutdown, but then rebounded to reach new record highs in the months that followed.
Overall economic climate will keep playing a key role in depicting stock market direction. In medium to long term market will keep tracking key economic indicators like inflation, GDP growth, recession indicators, housing market outlook and pace of consumer spending to take directional cues.
Effect on Indian stock market
Usually Indian stock market remained unaffected with US government shutdowns in past, even if it reacted negatively sometimes, it recovered very fast. Our markets will be more focused on domestic cues and focus on valuation will keep adjusting the Indian stock market in short term as many pockets of broader market looks expensive in short term. Investors should focus on long term and should diversify their portfolio in a mixture of large cap(50%), quality mid and small cap(30-20%) mostly from sectors that underperformed in last rally.
Know more about impacts of govt shutdown on local services, click here.
Conclusion
The government shutdown is an unfortunate example of the deep partisan divide in American politics. It is a reminder that Congress needs to find a way to work together to fund the government and provide essential services to the American people. In the end it is the taxpayers who suffer and their resolve to get free and fair government gets impacted. Similar episodes occurred few months back when their was a standoff between senate about raising debt ceiling, but later got resolved but the event caused US a rating downgrade from Fitch.
