Imminent Federal Shutdown Threatens US Economy and Credit Rating
September 29, 2023
Federal Shutdown Looms: Impacts and Consequences
The chances of a federal government shutdown are increasingly becoming a reality as the impending deadline of 12:01 AM ET on Sunday approaches. In the event of a shutdown due to lack of additional funding approval, there will be serious consequences. Among these, millions of federal employees and military service members face furlough, the SEC will be forced to operate with minimal market oversight, and key economic data releases will be delayed. These impacts come at a time when the “U.S. economy is at a delicate point.”
Furthermore, those Americans who rely on federal assistance may experience service disruptions. There could be setbacks for small businesses seeking loans, clinical trials for medical treatments could be delayed, and exporters might be unable to obtain licenses. If the shutdown extends over a long period, industries heavily dependent on federal workers, such as air travel, could also be affected.
Bipartisan Support Vs. House Resistance
As it currently stands, there is bipartisan support in the Senate for a stopgap measure. This measure is designed to extend funding until Nov. 17. However, this has been rejected by hardline Republicans in the House. These individuals are advocating for deeper spending cuts and are pushing to tie the bill to immigration and border enforcement.
House Speaker Kevin McCarthy is finding himself in a quandary due to the holdouts. Some members have even threatened to remove him if their demands are not met. In an overnight session, the Republican-led House passed several partisan bills. Included was a defense bill that removed funding for Ukraine, although it is unlikely to pass in the Democrat-led Senate.
Market Watchers Alert: Credit Ratings and Market Performance
Credit rating agencies are closely observing the situation. Moody’s has issued a warning that a shutdown would be credit negative for the U.S. Earlier, following the debt ceiling crisis in the summer, Fitch downgraded America’s credit rating, while S&P was the first to downgrade U.S. government debt back in 2011.
Budget standoffs in Congress are not new; there have been 21 shutdowns in the last five decades. However, the current potential shutdown highlights the significant constraints political polarization places on fiscal policymaking. This comes at a time when fiscal strength is declining due to widening fiscal deficits and deteriorating debt affordability.
Analysis: Market Impact and Economic Consequences
Investing Group Leader Manika Premsingh, author of Green Growth Giants, has provided some insightful commentary on the situation. According to Premsingh, “Despite potential economic consequences, the S&P 500 and sectors dependent on government funding have historically been unaffected during the duration of the shutdowns.” She continues to explain that the impact of a shutdown is largely dependent on its nature and duration, with prolonged shutdowns having significant economic repercussions in recent years.