Congress Scrambling to Avoid Government Shutdown

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.

Impact of a government shutdown

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."

Key economic data releases are likely to be delayed in a shutdown. The Bureau of Labor Statistics indicated earlier this week that it would "suspend data collection, processing and dissemination" if the government closes. That would likely impact the Job Openings and Labor Turnover Survey (JOLTS), due to be released on October 3, as well as the October 6 nonfarm payrolls report. A longer shutdown could impact the release of producer price index (PPI) and consumer price index (CPI) data, scheduled for release on October 11 and 12, respectively. All of this data will be critical for the Federal Reserve as it assesses the state of the economy in advance of its next monetary policy meeting on October 31 and November 1.

The Internal Revenue Service would continue to operate because last year's Inflation Reduction Act made additional funding available for the agency.

Non-essential government functions would stop during a shutdown. In past shutdowns, the closure of national parks and the Smithsonian museums has been among the most high-profile impacts. The processing of passport and Social Security applications would be suspended, though Social Security and other benefits would continue to be paid out.

Do markets care about government shutdowns?

Historically, government shutdowns have not caused a major reaction in the markets. In fact, the S&P 500® has risen during the last five government shutdowns.

But shutdowns can increase market volatility. In the 2018-2019 shutdown, the S&P 500 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.

What to watch this week on Capitol Hill

With the shutdown deadline looming next weekend, the coming week will be critical on Capitol Hill.

Earlier this month, the White House asked Congress to pass an extension of funding until November or December to allow for more time for negotiations. It also asked for billions in emergency aid for victims of recent disasters like the Hawaii wildfires and the hurricane in Florida to be added to the short-term agreement. More controversially, the White House requested $24 billion in additional aid to support Ukraine in its ongoing war with Russia.

While the Senate has been open to a bill that combines a short-term extension of funding with the disaster aid and Ukraine aid, that approach has been met with strong resistance in the House of Representatives, where Republicans hold a four-seat majority. Conservatives are pushing for significant overall spending cuts and some are questioning whether more aid for Ukraine is appropriate at this time. The result has been an intraparty stalemate among House Republicans that has stalled any action. Talks were ongoing as the weekend began.

But even if House Republicans were to coalesce in the coming week around a short-term solution, it's unlikely that their approach would be able to pass the Democrat-controlled Senate or win the signature of President Joe Biden. That would create another back-and-forth between the two chambers, with no clear resolution in sight.

Just three months ago, Congress pulled a rabbit out of its hat and found a last-minute agreement on the debt ceiling to avoid a catastrophic default. While it is possible that lawmakers could again reach a last-gasp deal and avoid an October 1 government shutdown, pessimism abounds in Washington and a shutdown is looking increasingly likely.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

The policy analysis provided by the Charles Schwab & Co., Inc., does not constitute and should not be interpreted as an endorsement of any political party.

Investing involves risk including loss of principal.

Past performance is no guarantee of future results, and the opinions presented cannot be viewed as an indicator of future performance.

Supporting documentation for any claims or statistical information is available upon request.

Indexes are unmanaged, do not incur management fees, costs, and expenses and cannot be invested in directly. For more information on indexes please see schwab.com/indexdefinitions.

The Job Openings and Labor Turnover Survey (JOLTS) is conducted by the Bureau of Labor Statistics of the U.S. Department of Labor. The program involves the monthly collection, processing, and dissemination of job openings and labor turnover data. The data, collected from sampled establishments on a voluntary basis, include employment, job openings, hires, quits, layoffs and discharges, and other separations.

The nonfarm payroll survey measures the number of workers in the U.S. except those in farming, private households, proprietors, non-profit employees, and active military. The Bureau of Labor Statistics (BLS) surveys private and government entities throughout the U.S. to obtain information about their payrolls. The nonfarm payroll numbers are reported monthly to the public through the Employment Situation summary.

The Producer Price Index (PPI) measures the average change over time in the prices domestic producers receive for their output. It is a measure of inflation at the wholesale level that is compiled from thousands of indexes measuring producer prices by industry and product category. The index is published monthly by the U.S. Bureau of Labor Statistics (BLS).

The Consumer Price Index (CPI) measures the monthly change in prices paid by U.S. consumers. The Bureau of Labor Statistics (BLS) calculates the CPI as a weighted average of prices for a basket of goods and services representative of aggregate U.S. consumer spending.

A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out our most recent white papers.

© Charles Schwab

Read more commentaries by Charles Schwab