GROUNDHOG DAY: Nov. 17th is the latest deadline for the US Congress to pass a 2024 budget that keeps the Federal government open. Little progress has been made since the last 45-day extension. Markets have ignored this so far, with another stop gap resolution the base case. And a worst-case of a short government shutdown, that has traditionally not impacted markets. The caveat this time is that Congress is more divided than ever and the 2024 election cycle well under way. The silver lining is that a hard line on Federal spending may cool the still strong economy, and the government over-spending fears that have contributed to rising bond yields.
SHUTDOWN: The US Federal government 2024 fiscal year started on October 1st without a discretionary spending budget. After Congress was unable to pass the needed 12 spending bills. A shutdown was avoided by a last gasp 45-day stop-gap spending extension. Top-line discretionary spending, which represents 25% of the budget, was set in January when the overall debt ceiling was raised until early 2025. This allows a 3% defense spending increase but a 8% cut to other discretionary spending. These details need to be worked out, and some are pushing for bigger cuts. A shutdown would see all non-essential government services, including inflation and jobs report data collection, stopped. Workers would not be paid whilst shutdown.
IMPACT: Shutdowns became a feature of the US government after a 1980-1 Attorney General legal opinion tightening the ability to operate with a funding gap. The US has seen 20 funding gaps the past forty-five years. Lasting an average eight days. These typically had little market impact, as investors have assumed a 1) relatively speedy resolution, and 2) little long-lasting economic damage as furloughed workers receive catch up payments. The risk is that these assumptions are questioned as 1) politics becomes more polarized and 2) shutdowns lengthen.
All data, figures & charts are valid as of 09/11/2023.