Government Shutdown Impact

“The sky is falling!” I can’t recall how many times we have heard this during the past six years. This time it revolves (again) around raising the debt ceiling and the government shutdown.

How concerned should investors be? Let’s look back on history.

Between 1976 to 1996, there have been 17 government shutdowns totaling 110 days. Similar to those, there is a strong likelihood that the politicians will come to some agreement as soon as pressure mounts even though it might not have any long-term benefits. The last shutdown, which was also the longest, occurred for three weeks from mid-December 1995 to early January 1996. Real GDP grew 2.3% in the year before the shutdown, a 2.9% annual rate in Q4-1995 and then at a 2.6% pace in Q1-1996, despite the shutdown and the East Coast Blizzard. The shutdown did not hurt the economy in the long-term. One of the positive outcomes of the 1995-1996 shutdown was that our government could no longer hide the fact that it was overspending.

What is impacted by a shutdown?

There is enough revenue flowing into the Treasury Department to make Social Security payments, interest payments on the debt, and to pay for all essential services, such as the military, border control, food inspections, air traffic, prisons, weather service, and post office, to name a few. What is getting impacted is the stoppage of non-essential services and the furlough of non-essential federal workers, although Congress did pass a bill to pay the workers reactively once the shutdown has been resolved. For October, federal receipts will be $200 billion, while interest owed on the debt is $25 billion. Principal can be repaid by issuing new debt and rolling it over. Any “default” would be a political choice not to pay interest on the debt, which would be a dereliction of duty because paying the debt is the number one responsibility of the Treasury Department as mandated by the US Constitution.

While it is natural to be nervous as there is continued news about the potential fiscal impact, there will most likely be some short-term resolution by the politicians before the situation deteriorates too far. The temporary government shutdown will not lead to any long-term fiscal problems, but the inability of the politicians to address the overspending and related issues will. In short, this is more “noise” than substance.

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