September 28, 2023

When Shakespeare wrote, “…neither a borrower nor a lender be…,” his counsel was intended merely for individuals. However, a similar admonition might be just as apt for governments, including the US. More specifically, as shown in the graphic below, the federal debt has grown from $16.7 trillion in 2013 to $32.3 trillion just 10 years later. This is an increase of $15.6 trillion or 93.2%.

shutdown 1

Measuring this level of debt against the annual gross domestic product (GDP) of the US, it rose from 100.2% of GDP in 2013 to a post-pandemic level of 120.6% in 2023. In contrast, the debt-to-GDP ratio in China, the world’s second-largest economy, is 77% as reported by the International Monetary Fund.

This expanding federal deficit underlies the current negotiations in Washington about which approaches, if any, might be acceptable to curtail further, unchecked growth in federal debt. In this report, The Mather Group, LLC (TMG) provides its outlook on a potential government shutdown, and how such an event might affect financial markets and the economy. It is important to note that negotiations will ebb and flow in the immediate future, so our outlook may be subject to further updates.

Key Takeaways

  • The government will shut down on Oct. 1 if Congress cannot enact the 12 annual appropriations bills or extend the deadline.
  • Social Security and Medicare will not be impacted.
  • Payments on US Treasury debt will not be impacted.
  • Essential services employees will continue to work and be paid retroactively.
  • Non-essential services employees will be furloughed and paid retroactively.
  • Economic impact will likely be minimal.
  • We expect elevated stock market volatility, but it will likely be short-lived.
  • We expect elevated bond market volatility.
  • We do not see a need to make adjustments to our investment holdings.

Political Outlook

When the Fiscal Responsibility Act of 2023 (FRA) was signed into law in June 2023, it ended a political struggle over raising the US debt limit. Negotiated between the White House and the Speaker of the House of Representatives, the FRA imposed Congressional spending limits, approved budget caps for fiscal years 2024-2025, and led the Congressional Budget Office to estimate that it would lower projected federal deficits by $1.5 trillion over the next 10 years.

Many analysts and political leaders expected the FRA to end any further spending debates for at least another year. However, as evidenced by the looming government shutdown that could start October 1, the FRA did not end these spending debates. In fact, some House members now wish to end the spending agreements made within the FRA and seek greater spending cuts instead.

At a minimum, both the House and Senate need to pass 12 major appropriations bills each fiscal year to continue funding the government. Without such funding approvals, the government will shut down, as is now feared. Often, some members of either the House or Senate use this approval process of appropriation bills as leverage to secure some political or economic objective, which is occurring now.

The three principal objectives being sought are changes in immigration policy, further government spending cuts, and a reduction in the level of aid for Ukraine. There appears to be a wide gulf in support for these objectives among House and Senate members, which has stymied the process of passing necessary appropriations bills. Without their passage, the government will shut down October 1.

There are two major initiatives under discussion to avoid this shutdown, one each from the Senate and House. Each initiative would have to be approved by both the Senate and the House, however. The Senate bill would enact a “Continuing Resolution” (CR) that would maintain current government spending levels across all departments until November 17. This would allow sufficient time, it is hoped, to discuss and pass the 12 necessary appropriations bills.

The CR is a 79-page bill that passed with strong bipartisan support and that authorizes an additional $6 billion for disaster relief and $6 billion for Ukraine. It is unknown at this time if the House leadership will permit a vote on the Senate’s CR. However, if five House Republicans and all 212 House Democrats voted for a “discharge petition,” the Senate’s CR could be put forward for a House vote, bypassing the Speaker.

In turn, some House members are preparing their own stopgap continuing resolution. This bill would make across-the-board spending cuts of 8% for government departments, rewrite existing immigration policy, and end future funding for Ukraine. Even if passed by the House, it appears there is insufficient Senate support for its passage there.

It now appears that a significant level of compromise will be necessary to avoid a government shutdown—or if a shutdown occurs, to limit it to a length of just a few days and not weeks.

Credit Markets Outlook

With the Federal Reserve Board (Fed) having raised its Fed Funds rate 11 times since March 2022, as shown in the graphic below, it is now at a 22-year high. The impetus for these rate hikes has been the Fed’s goal to reduce current inflation levels to its 2.0% target. Any shutdown, however, could have an impact on the Fed’s strategy, as explained below.

shutdown 2

Historically, there has been little evidence that a government shutdown caused any increase in interest rates. In fact, due to fears some investors may have about the duration and severity of a potential shutdown, there has often been a resultant “flight to safety” instead. Investors know that, even during a potential shutdown, the Treasury continues its payment of principal and interest on all outstanding bonds.

This flight to safety saw investors shifting funds into Treasury bonds due to their perceived safety and liquidity. With this sudden increase in demand, the price of Treasury bonds rose, which resulted in lower bond yields. Foreign investors purchasing Treasury bonds have often led to a stronger US dollar, as has been occurring now for several months.

However, there are two factors that may affect the credit markets and the Fed as a result of a potential shutdown. First, the overall credit rating of Treasury bonds may be at risk of a potential downgrade if a shutdown occurs. Only one rating agency—Moody’s—still rates Treasury securities with its highest AAA rating. Fitch downgraded its rating to an AA+ in August, and Standard & Poor’s did a similar downgrade in 2011. Moody’s has recently stated that it will now review its rating in the context of a potential shutdown.

Of course, rating downgrades for any credit security usually result in lower pricing and higher yields. Any yield increase for Treasury bonds due to a rating downgrade would ripple through to consumers with higher mortgage, auto loan, and credit card rates. For the Treasury, it would mean higher interest payments on future government debt.

The second factor could be a lack of critical economic information that the Fed relies upon to determine its rate decisions. More specifically, a potential shutdown would affect the Department of Labor’s collection of data such as the Consumer Price Index, the number of job openings, employment levels, and employee wages.

These are all critical data utilized by the Fed in its rate decisions. With the next Fed meeting due in November, a lengthy shutdown in data collection could affect its decision process and even contribute to an unwanted recession.

Equity Markets Outlook

Employing the S&P 500 Index as a proxy for US equity markets, it would appear that government shutdowns have a lesser impact in these markets than upon other sectors of the US economy. More specifically, based on the table below, for the six shutdowns since 1978 that lasted more than five days, the average return was 1.42%.

shutdown 3

However, these returns were only measured during the length of the shutdown and not afterward. In further analysis of all 21 shutdowns since 1976, according to Invesco, the average return of the S&P 500 during the 100 days following the end of a shutdown was 7.0%. Of course, it is important to note that past performance is not indicative of future returns.

Economic Outlook

With most government employees left unpaid during a shutdown, this loss of income could have an immediate effect on the US economy. Corporations, as well as consumers, may delay purchases and investments due to potential financial uncertainty. In fact, JP Morgan estimates that each week of a potential shutdown would reduce GDP by a further 0.1%.

With consumer spending comprising about 70% of the US economy, consumer sentiment—and expenditures—could be affected by a lengthy shutdown. As shown in the graphic below, consumer sentiment—measured by the University of Michigan’s Consumer Survey—has been steadily rising since reaching its pandemic low in June 2022.

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Any lengthy curtailment in government services could adversely affect these rising sentiment levels and resultant consumer spending. As an example, both domestic and international air travel have shown dramatic growth in recent months. However, while both air traffic controllers and TSA agents are deemed essential government employees who must still report to work, they will remain unpaid during any shutdown.

During the 2019 shutdown, growing numbers of these essential employees began to call in sick in response to a continuing lack of income, leading to significant delays in air travel. Many analysts suggest this factor became a primary driver of the eventual ending of the shutdown.

However, despite these potential shortfalls in government services, the issuance of Social Security checks and Medicare payments will continue uninterrupted. These are two key elements of financial security for many citizens, and they will help to reduce the economic severity of any potential shutdown.

It is important to note that, despite this period of political volatility, your financial plan plays a critical role in helping you maintain progress toward achieving your financial goals. Your trusted TMG advisor is ready to respond to any questions or concerns you might have, and to help assure that your financial plan remains both timely and actionable. Please reach out to your advisor for guidance at any time.

Sources: Bloomberg; Congressional Budget Office; US Department of Labor; Federal Reserve Bank of St. Louis; Federal Reserve Board; Invesco; JP Morgan; Moody’s Analytics; Office of Management and Budget; National Bureau of Economic Research; Reuters; S&P Global Corporation; Stifel Washington Policy Strategy; US Bureau of Economic Analysis; US Treasury; University of Michigan Consumer Survey; Wall Street Journal

The Mather Group, LLC (TMG) is registered under the Investment Advisers Act of 1940 as a Registered Investment Adviser with the Securities and Exchange Commission (SEC). Registration as an investment adviser does not imply a certain level of skill or training. For a detailed discussion of TMG and its investment advisory services and fees, see the firm’s Form ADV Part 2A on file with the SEC at The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. The opinions and advice expressed in this communication are based on TMG’s research and professional experience and are expressed as of the publishing date of this communication. TMG makes no warranty or representation, express or implied, nor does TMG accept any liability, with respect to the information and data set forth herein. TMG specifically disclaims any duty to update any of the information and data contained in this communication. The information and data in this communication does not constitute legal, tax, accounting, investment, or other professional advice. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives. Past performance does not guarantee future results. This information does not take into account the specific objectives or circumstances of any particular investor. Every investor’s individual tax situation is different and complexity may vary. Benchmarks/indices illustrated are unmanaged, statistical composites. They do not reflect any fees an investor would pay to purchase the securities they represent. Such costs would lower performance. It is not possible to invest directly in a benchmark/index.


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