Government Shutdown Metrics

We are told that one reason stocks have been going down lately is the threat of a government shutdown, which seems almost probable if the President’s recent statements are to be taken at face value. President Trump is on record as embracing a government shutdown on Friday, December 21 unless he receives full funding for his border wall with Mexico. This seems unlikely, so it might be time to ask: If the government shuts down, what is actually likely to happen?

An article on the ZeroHedge website offers some news that might surprise most of us. First: government shutdowns have been more common than we might realize. In all, there have been 20 government shutdowns since October 1, 1976:

October 1-10, 1976
October 1-12, 1977
November 1-8, 1977
December 1-8, 1977
October 1-17, 1978
October 1-11, 1979
November 21-22, 1981
October 1, 1982
December 18-20, 1982
November 11-13, 1983
October 1-2, 1984
October 4, 1984
October 17, 1986
December 19, 1987
October 6-8, 1990
November 14-18, 1995
December 6, 1995 – January 5, 1996
October 1-16, 2013
January 20-22, 2018
February 9, 2018

The article notes a few things to remember. First, Congress can avoid a partial shutdown by passing another continuing resolution—following the continuing resolution in September that temporarily funded seven out of 12 total appropriations into December. If the President were to veto that resolution, then a two-thirds majority in both the House and Senate could override the veto.

What about the other five of the 12 appropriations? Those—Energy & Water; the Legislative Branch; Military Construction and VA; the Department of Defense; and Labor, Health & Human Services—represent 75% of discretionary government spending. This is basically 75% of the money spent that is not related to Social Security, Medicare or other entitlement programs. Those programs are fully funded through September 30, 2019.

So what appropriations would the shutdown actually impact? The seven that still have to be authorized are Agriculture; Commerce, Justice and Science; Financial Services and General Government; Homeland Security; Interior and Environment; State and Foreign Operations; and Transportation and HUD.

What would be the economic impact of this potential partial shutdown? The report estimates that for every day of a full shutdown, American GDP is reduced by 2.4 basis points, or 0.024%. But since only 25% of the government would be inoperable, the impact in this case would be about 0.008% per day.

Put another way, each month would reduce American economic growth by about half a percent. That, of course, is unlikely to happen.

What have the markets done during past government shutdowns? The data show that the average market move for the S&P 500 index, in the week of a government shutdown, is down 0.06%—which I think most of us would regard as virtually unchanged. The two weeks during and after a shutdown, the markets averaged down 0.13%. More interesting is the fact that the one-week data shows that only 47% of the time did the market go down. More interesting still, in the month after the shutdown, the average price move was UP 0.25%.

Nobody is saying that a government shutdown is good for stocks, or that shutting the government down is a great way to shake the market out of its current tailspin. But it probably isn’t a good idea to panic about the market impact of a shutdown either.

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