.. but ahead of the Sept 30 midnight drop dead date, there is still some confusion so let's recap the main points, the first of which is that a government shutdown should not be confused with the debt ceiling and its potential for a sovereign default.
As JPM writes in its latest shutdown note, if no deal is reached by Oct 1 - which is now certainly the default case - then a continuing resolution is one of the more likely paths, but should a CR remain in place by Jan 1, 2024, then there will be an automatic cut to military/defense spending.
A government shutdown does not actually shutdown all aspects of the government, as many elements are exempted. In addition to the items listed below, JPM assumes that Departments of Defense, Health and Human Services, Homeland Security, State, and the Social Security Administration continue to make payments.
Some more details on the economic impact
The 5-week shutdown from 2018-19 reduced real GDP by $11bn or 0.3%; $3bn of that $11bn was likely non-recoverable once the government reopened.
In the past events, the 10Y yield has dropped both ahead of the shutdown (beginning as many as 15 days ahead) and throughout the shutdown.
What about Equities?
JPM's Mkt Intel desk finds that if you one uses the bank's sample size of shutdowns lasting more than one business day, the SPX fell 2.5% in the 10 days leading up to the shutdown with Tech and Real Estate the biggest laggards.
If the shutdown reaches the 10-day mark, the SPX will have rebounded by ~2% led by Cyclicals and Tech the only major sector producing a negative return.
Once a resolution is reached, the SPX trades up 80bps at the 10-day mark, +3.6% at the 30-day mark, and +5.9% at the 90-day mark.
10-day mark: SPX +0.8% and top 3 sectors are Industrials (+2.4%), Staples (+1.9%), and Utilities (+1.3%)
30-day mark: SPX +3.6% and the top 3 sectors are Industrials (+5.2%), Healthcare (+4.9%), and Utilities (+4.5%).
90-day mark: SPX +5.9% and the top 3 sectors are Tech (+9.8%), Industrials (+8.1%), and Materials (+7.9%).
Finally, courtesy of Bloomberg, here is a summary of what government services would stop on Oct 1, and what would go on:
Not all services would abruptly stop. Medicare payments and efforts to safeguard nuclear weapons would be unaffected. You’d likely still get mail and be able to travel on Amtrak. You wouldn’t, however, be able to get married in DC courts.
Many federal employees are likely to be furloughed, but some will be deemed “essential” and work without pay until the shutdown ends. The last major shutdown in 2018-2019 lasted 35 days.
The Office of Management and Budget has collected agency contingency plans that outline what happens in the event of a shutdown. Here are some highlights:
Labor
Economic indicators, like the Bureau of Labor Statistics’s monthly jobs report, could be delayed as in past shutdowns.
The Federal Mediation and Conciliation Service, charged with promoting labor-management cooperation, would have to cut back its work amid a strike by the United Auto Workers.
Federal Reserve
Federal Reserve activity would be unaffected, meaning the central bank could still raise interest rates at its next meeting Nov. 1.
Financial Regulators
The Federal Trade Commission would stop “the vast bulk of its competition and consumer protection investigations.”
The Securities & Exchange Commission wouldn’t review or approve registrations from investment advisers, broker-dealers, transfer agents, rating organizations, investment companies and municipal advisors.
IRS
The Internal Revenue Service has yet to release plans for this potential shutdown. Previous plans said the agency would use funds from President Joe Biden’s Inflation Reduction Act to keep employees paid and working. A union representing IRS workers has said new plans are being discussed that would involve some furloughs.
Businesses and individuals who requested six-month extensions for their tax returns in April are still required to file by Oct. 16.
Emergency Relief
A shutdown would “create an increased risk” Federal Emergency Management Agency relief funds would be depleted, and “complicate new emergency response efforts if additional catastrophic disasters occur.”
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