Three Things to Know About the Looming Government Shutdown

Summary:

Hi everyone. Welcome to the latest edition of the LPL Research Street View. One of the top questions investors are asking is what to do, if anything, about a looming government shutdown. So, I thought in this video I discuss the top three things to know about government shutdowns, and the first one is this. This is nothing new. The government had 21 funding gaps since Congress introduced the modern budget process in the late seventies. Of those 21 times, only four have been true shutdowns where government operations were down for more than a business day, and the fourth one was only a partial shutdown because almost half of the 12 appropriations were previously enacted. Second, a shutdown creates a real but only negligible headwind for the economy. If the government is shut down, are we actually saving money? The answer is no, unfortunately. Did you know that federal workers are guaranteed back pay?

So even though the workers are forced to be idle during a shutdown, they do get that back pay when things reopen. And more importantly, a shutdown is far from money saving because there is some cost to the economy. As some businesses often forego hiring, and others may delay investment decisions because those firms can't get federal permits or perhaps access to federal business loans. Third, a shutdown is different than a default. So what's the difference? A default is when a government is unable to pay some of its creditors. Now, when a government is unable to pay its bills, markets get nervous. Whereas a shutdown is when the federal government temporarily stops paying workers who performed some type of government service. Historically, markets were not materially impacted by previous shutdowns. For example, in 2013, the House and Senate were in a standoff over funding for the so-called Affordable Care Act, and the government was down for 16 days.

During the first part of October. The S&P had some down days, but overall, the equity market took all the political bickering in stride. In this case, we think there would be minimal damage as many public services should continue. The U.S. Postal Service, for example, is unaffected since it does not depend on Congress for funding. The Social Security Administration would keep issuing benefits. Medicare and Medicaid would continue payments. Since many aspects of these programs are not subject to annual appropriations. Now, if I had to highlight a downside risk, it would be if FEMA runs out of disaster relief should a major storm impact the country. If you want more insights on global market trends, follow us on social media and take care.

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