A surprising last-minute deal on Capitol Hill averted a government shutdown—for now. But lawmakers face a new mid-November deadline that will be just as tricky to navigate.
In a surprising turn of events, Congress passed legislation late September 30 to fund government operations until November 17, avoiding a government shutdown at the last possible moment. President Joe Biden signed the bill into law just 32 minutes before the midnight deadline, when a shutdown would have started.
The bill continues funding for all government agencies at current levels. It also includes $16 billion in emergency aid for victims of the Hawaii wildfire, the hurricane in Florida, and other recent natural disasters. But the bill did not include any additional aid for Ukraine in its ongoing war with Russia, a controversial decision that could impact Ukraine’s war effort. Proponents expect a separate vote in Congress on Ukraine aid later this month.
While passage of the last-minute deal provides certainty to federal employees for the next six weeks, the broader question of how a deeply divided Congress will come to an agreement on a deal for the rest of the fiscal year remains unresolved and the prospects of a shutdown in November remain elevated. Government shutdowns have not historically produced significant market reactions. But an extended shutdown could have broader impact on the economy.
Here’s what investors need to know.
Among the most basic responsibilities of Congress is funding federal government operations. Every year, lawmakers are supposed to pass the 12 appropriations bills that fund every government agency and program by September 30, in time for the start of the government’s fiscal year on October 1.
But their track record for doing so is terrible. The last time all 12 bills passed Congress by the deadline was 1997.
That produces an annual end-of-September drama on Capitol Hill as Congress scrambles to pass a “continuing resolution,” a temporary extension of funding for a specific amount of time that keeps the government open and operating. A “CR” can last for a day or two, weeks or months. On three occasions in the last 20 years, the continuing resolution has lasted the entire fiscal year.
Without a continuing resolution, the government shuts down. The last shutdown lasted 35 days from late December 2018 to late January 2019—the longest shutdown ever.
Each agency makes its own contingency plan for operating “essential” services during a government shutdown. Employees in key roles—air traffic controllers, border security agents, military personnel, the Postal Service, and many more—would continue to work, though paychecks may be delayed. Non-essential services, however, will be paused. In the 2018-2019 shutdown, an estimated 850,000 federal workers were furloughed.
Treasury markets and the stock market would continue to operate normally during a shutdown, though Securities and Exchange Commission (SEC) Chair Gary Gensler said in a September 20 interview that the agency’s “normal oversight … on markets will not be possible” during a shutdown because the SEC would have a “skeletal staff.” The same situation would exist in November if the government were to shut down then.
The September 30 agreement will keep important government economic data flowing. Last month, the Bureau of Labor Statistics announced that it would “suspend data collection, processing and dissemination” if the government closes. Key statistics like the Job Openings and Labor Turnover Survey (JOLTS), the nonfarm payrolls report, the Producer Price Index (PPI), and the Consumer Price Index (CPI) data would not be released during a shutdown. All of this data is critical for the Federal Reserve as it assesses the state of the economy. The agreement to keep the government open for six weeks ensures that Fed officials will have that critical data in advance of the next monetary policy meeting on October 31 and November 1, but a mid-November shutdown could impact the Fed’s final meeting of the year, scheduled for December 12-13.
Non-essential government functions would stop during a shutdown. In past shutdowns, the closures of national parks and the Smithsonian museums have been among the most high-profile impacts, and the Interior Department confirmed September 29 that most national parks would close if the government shuts down. The processing of passport and Social Security applications would be suspended, although Social Security and other benefits would continue to be paid out.
Historically, government shutdowns have not caused a major reaction in the markets. In fact, the S&P 500® index (SPX) has risen during the last five government shutdowns.
But shutdowns can increase market volatility. In the 2018-2019 shutdown, the SPX dropped by 2.7% on the first trading day after the shutdown, rebounded nearly 5% on the next trading day, and was up more than 10% by the end of the 35-day shutdown.
An extended shutdown could have a modest impact on the overall economy. The Congressional Budget Office estimates that the 2018-2019 shutdown cost the economy about $3 billion.
With the temporary extension of funding approved, Congress has bought itself an additional six weeks to come up with a longer-term solution. Expect both the House and the Senate to work in the coming weeks to pass their versions of the 12 appropriations bills. To date, the House has passed four, while the Senate has yet to pass any.
But the prospects for a longer-term solution remain murky because the two chambers are taking very different approaches to those appropriations bills. In the Senate, where Democrats hold a narrow majority, lawmakers have been working in a bipartisan fashion to craft bills that keep funding for the coming year at current levels. In the House, where Republicans have a four-seat margin, conservatives are pushing for steep spending cuts that have no chance of passing the Senate. That dynamic has not changed and puts a November government shutdown squarely on the table.