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Upcoming Government Shutdown
Let’s discuss the looming government shutdown, its potential economic impact, and how you can prepare. Don’t forget to follow me on Instagram: GPStephan!
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What a Government Shutdown Means
If Congress fails to pass a budget by September 30th, the government won’t have authorization to spend money. Consequently, nonessential federal services will cease, leading to agency closures and furloughs for workers or forcing them to work without pay until a resolution is reached.
Why This is Happening
While Congress has increased the debt ceiling significantly, there’s contention over budget allocation. Republicans control both the House and Senate but are internally divided—some demand cuts to programs like Medicaid and ACA subsidies, while others advocate for a short-term extension. Democrats aim to defend subsidies and social programs, but both sides are at an impasse, resulting in the current stalemate.
Who is Most Affected
Active-duty military and federal law enforcement will continue to work, albeit without pay until funding resumes. Agencies like FEMA, TSA, and FDA will likely face delays or closures. This can disrupt disaster relief efforts, inspections, and tax refunds. Moreover, the collection of vital government data, such as job statistics and inflation reports, may also be delayed, complicating matters for the Federal Reserve ahead of its meeting on November 7th.
Economic Impact
Goldman Sachs estimates that each week of a shutdown could reduce GDP growth by approximately 0.2%. While activity typically rebounds post-reopening, for those living paycheck-to-paycheck, even minor delays can cause significant challenges. Each shutdown also undermines confidence in U.S. stability, potentially affecting the broader economy.
Effects on the Stock Market
Shutdowns historically do not lead to stock market crashes. Since 1976, there have been 20 shutdown periods—the S&P 500 has both risen and fallen during these times, averaging a neutral return. The longest shutdown lasted 34 days in 2018, coinciding with a 13% rally in stocks. Over the long term, markets have generally shown strong gains in the year following shutdowns, as factors like company earnings and interest rates play a larger role.
The Real Risk: U.S. Credit Rating
Earlier this year, Moody’s downgraded the U.S. outlook from AAA to Aa1 due to unsustainable debt growth and political dysfunction. Shutdowns further underscore these weaknesses, eroding investor confidence. With debt exceeding $37 trillion and interest payments projected to represent 30% of the budget by 2035, the U.S. cannot afford to appear divided and unstable.
Likely Outcome
Historically, Congress tends to pass a temporary funding measure just in time, keeping the government operational for a few more weeks while negotiations continue. A comprehensive agreement seems unlikely soon, as neither party is willing to compromise, though prolonged shutdowns serve no one’s interests.
What You Can Do
Although shutdowns tend to be political theater, they carry real risks for everyday citizens. Preparing personally is vital: maintain an emergency fund, live within your means, and don’t depend on government actions for financial security. Remember, bills don’t stop just because Congress is in a stalemate.
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Note: Some links may generate a commission for Graham Stephan, who is part of an affiliate network. The content in this video is based on information available at the time of posting, and offers may no longer be valid. This is not investment advice.
