A Federal Government Shutdown in 2023 Is Looking Increasingly Likely

Key takeaways

• The U.S. government is on the brink of a shutdown over budgets — again
• Republicans want to cut funding, whereas Democrats want to increase it
• Goldman Sachs has warned a shutdown could cost GDP growth 0.2% for every week it drags on for

Ever since the eleventh-hour debt ceiling deal was passed, rumors have been swirling about a potential government shutdown on the horizon. Those whispers have gotten louder as Speaker McCarthy now faces avoiding a government shutdown in the next two weeks without losing his speakership role.

The latest political drama has caught the attention of Wall Street, who haven’t forgotten the credit rating agencies’ threats to downgrade U.S. debt after repeated bouts of political instability. Here’s the lowdown on what on earth is happening now — and what it could mean for the stock market.

Could we see a government shutdown in 2023?

We’re back to watching politicians argue about budgets again. That’s at the heart of Speaker McCarthy’s issue, in what many call a Republican ‘civil war’.

The problem: President Biden needs to pass spending legislation by September 30 to stop federal agencies from sinking, but some Republicans are gambling on a hardball strategy by demanding deep spending cuts when Democrats want more money to fund programs.

Any more details?: A government shutdown doesn’t help the Republicans looking to impeach Biden, but other Republicans are looking to hold the budget hostage to cut services and get some agreements on border controls.

Why September?: That’s when the federal budget year closes, and a new one starts.

What happens next?: It was announced on Sunday that McCarthy had managed to agree on a short-term spending plan that would keep federal agencies going until October 31, but that still needs to be passed by Congress and isn’t a guarantee.

How does a government shutdown impact the economy?

There’s the immediate impact of a government shutdown that furloughs federal workers and makes programs like SNAP more difficult for people to access and get help with. But there’s a broader impact on the economy as well, mainly depending on how long the shutdown lasts.

Goldman Sachs has previously warned that a shutdown could contribute to falling GDP growth, helping to trigger a recession in the U.S., and reducing economic growth by 0.2% for every week the shutdown lasted.

The fourth partial shutdown in a decade certainly won’t impress the likes of ratings agency Fitch, which downgraded the U.S.’ credit rating from the top AA+ score to AAA. It cited a “steady deterioration” in governance over the last 20 years, including political brinkmanship from shutdowns.

But the markets have survived a lot this year, including the debt ceiling crisis. The S&P 500 has seen a 16.6% growth this year, the Nasdaq has climbed 32.3% and the Dow Jones Industrial Average is up by 4.7%.

The bottom line

A government shutdown isn’t good for anyone except posturing politicians, which could lead to potential self-harm in the economy in the form of negative GDP growth.

But the stock markets have been surprisingly stable this year despite high interest rates, inflation and the debt ceiling crisis — so perhaps they could also survive a government shutdown.