Strategas Logo

Government Shutdown in October Possible Given Budget Fights

Strategas Washington Policy Research

Despite the June debt ceiling deal, the House and Senate cannot agree on spending levels for fiscal 2024, and there is a growing possibility of a government shutdown on October 1. While government shutdowns have historically not had a major impact on GDP or equities, we are watching to see whether a shutdown this fall could lead to Moody’s putting the US on a credit ratings watch, which would be a major event.

Though a deal to avoid breaching the debt ceiling this year was ultimately agreed upon, it did little to alleviate broader fiscal concerns in the US. The June deal included caps on federal discretionary spending for FY24 and FY25. Congress has since been writing FY24 appropriations bills to fund the government past September 30, but at different levels. The House is looking to set FY24 appropriations at lower FY22 levels while the Senate is looking to provide more spending in FY24 than the debt ceiling deal allows. As a result, we are setting up for a budget fight when Congress returns from recess in September and there is an increasing likelihood that we will see a government shutdown on October 1.

In recent years, shutdowns have not really hurt economic growth or even stocks.

Bar chart showing the real GDP growth rate during past government shutdowns.

As our chart shows, the last six government shutdowns all occurred in quarters with positive GDP growth. However, on August 1, Fitch downgraded US debt—12 years after another rating agency, S&P, did the same following the 2011 debt ceiling fight. If Moody’s, the third and final major rating agency, were to put the US on credit watch because of a government shutdown, that would be a significant event and one to follow closely.

A shutdown could lead to higher spending.

If a government shutdown occurs, legislation will be needed to reopen the government and set appropriations levels. Ironically, a shutdown over government spending could lead to higher spending levels because legislation to reopen the government is likely to be biased towards the current Senate proposals to provide for more government spending. This outcome has made some members of Congress wary, which could actually prevent a shutdown. There is increasing talk of the need for a continuing budget resolution to buy time for further negotiations. A continuing budget resolution would extend current (FY23) spending levels for a set period (e.g., 30 days, 90 days). In that scenario, we would look for Congress to pass a larger piece of legislation towards the end of the year (likely December) that would include the FY24 budget, but also various other policy provisions.

Regardless of how this plays out, fiscal concerns will continue to play a prominent role in US politics.

The US is experiencing significant costs to service federal debt due to high interest rates, higher federal spending on entitlements, and lower tax revenues, which is worsening the federal deficit. Action may not be taken until after the 2024 presidential election, but the US is likely entering a period of austerity as it needs to get its fiscal house in order.

The information reflected on this page are Baird expert opinions today and are subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action.

This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. 

This report does not provide recipients with information or advice that is sufficient to base an investment decision on. This report does not take into account the specific investment objectives, financial situation, or need of any particular client and may not be suitable for all types of investors. Recipients should consider the contents of this report as a single factor in making an investment decision. Additional fundamental and other analyses would be required to make an investment decision about any individual security identified in this report.

For investment advice specific to your situation, or for additional information, please contact your Baird Financial Advisor and/or your tax or legal advisor.

Fixed income yield and equity multiples do not correlate and while they can be used as a general comparison, the investments carry material differences in how they are structured and how they are valued. Both carry unique risks that the other may not.

Past performance is not indicative of future results and diversification does not ensure a profit or protect against loss. All investments carry some level of risk, including loss of principal. An investment cannot be made directly in an index.

Strategas Asset Management, LLC and Strategas Securities, LLC are affiliated with and wholly owned by Robert W. Baird & Co. Incorporated, a broker-dealer and FINRA member firm, although the firms conduct separate and distinct businesses.

Copyright 2023 Robert W. Baird & Co. Incorporated.

Other Disclosures

UK disclosure requirements for the purpose of distributing this research into the UK and other countries for which Robert W. Baird Limited holds an ISD passport.

This report is for distribution into the United Kingdom only to persons who fall within Article 19 or Article 49(2) of the Financial Services and Markets Act 2000 (financial promotion) order 2001 being persons who are investment professionals and may not be distributed to private clients.  Issued in the United Kingdom by Robert W. Baird Limited, which has an office at Finsbury Circus House, 15 Finsbury Circus, London EC2M 7EB, and is a company authorized and regulated by the Financial Conduct Authority.  For the purposes of the Financial Conduct Authority requirements, this investment research report is classified as objective. 

Robert W. Baird Limited ("RWBL") is exempt from the requirement to hold an Australian financial services license.  RWBL is regulated by the Financial Conduct Authority ("FCA") under UK laws and those laws may differ from Australian laws.  This document has been prepared in accordance with FCA requirements and not Australian laws.