How Does a Government Shutdown Differ from the Debt Ceiling Debate?

With a looming government shutdown in the news today, we thought it might be a good time to explain the difference between a shutdown and   the recent debt ceiling issue.

The Congressional standoff that has been in the news, threatening a governmental shutdown, is fueled by an inability for Congress to agree on a law to define the funding of government programs prior to the fiscal deadline.  This then causes what is considered “non-essential” services to be shutdown and those workers to go unpaid, until the agreement is reached.  During this shutdown, the government will still require “essential” services and workers to continue to work.  Examples are air traffic control, Postal workers and Social Security benefits.

Keep in mind that a government shutdown does not affect state and local government functions that are NOT dependent on federal funding.  Such shutdowns have occurred over 20 times in the past 40+ years and do NOT impact the government’s ability to pay its bills.  However, it certainly can impact markets and navigation relative to governmental services…i.e., TSA at the airport!

In contrast, we wanted to review the issue we dealt with earlier this year, related to raising the debt ceiling and how that impacts governmental services.  When Congress is negotiating the raising of the debt ceiling and is unsuccessful, it does not shutdown governmental services, instead it precludes the government from having the funds to meet its debt obligations and can trigger significant negative impact on the credit worthiness of the US government.

Lastly, we wanted to touch on how a shutdown might impact financial markets.  Historically there is not a direct correlation between a shutdown and the degree of market volatility or returns. 

You will note the chart on the screen reflects that during 9 shutdowns the market returns were negative, and 11 times were positive.

Generally during the days of a shutdown, the market has been known to rise and fall multiple times, without a substantial positive or negative result.  One notable shutdown, which occurred in 2018-2019, the longest on record, did trigger some marked economic activity, mainly resulting from the level of furloughed federal workers.

And their lack of spending ability I.E.  the reduced demand for goods and services, seeing as these federal employees remained unpaid for such a length of time.

We hope you are watching this, and the shutdown was avoided, but if not, take comfort in having a better understanding of these two different events and the impacts they may and may not have on the economy.

Thank you for joining us and we will see you again next week for another episode of Coffee & Cash.