Do Government Shutdowns Matter To The Stock Market?
On October 1, 2023, less than a week away, the U.S. Government faces a government shutdown. A shutdown occurs when the federal government suspends services deemed non-essential because a new law to fund discretionary spending programs was not approved before the fiscal year deadline (October 1st). When agreement on a new funding bill is not reached, Congress may pass a “continuing resolution” that extends previous funding levels to keep the government fully operating.
Past government shutdowns paused nonessential activities in various government departments—for example, national parks and museums have closed. Critical federal government functions such as ongoing Social Security benefits, air traffic controllers, and the Postal Service generally were not affected. This can vary across shutdowns, and each government agency will put out guidance clearly defining the scope of their activities. Federal government shutdowns don’t affect state and local government functions, which are not dependent on federal funding.
It’s important to understand that the current negotiations to keep the government fully operational are entirely different from the debate over raising the debt ceiling that the government resolved earlier this year. In the case of the debt ceiling talks, the most significant risk was a potential U.S. default if lawmakers did not raise the debt ceiling. Defaulting occurs when the U.S. Treasury has insufficient resources to satisfy the government’s obligations. A U.S. Treasury default has never happened and would have significant ramifications for U.S. creditworthiness and spillover effects on the global financial system. That is not what we are facing today. Instead, we are facing a debate on discretionary spending for fiscal year 2023/2024, which begins on October 1st.