Is the US headed for another shutdown?
Financial market issues
US Government shutdown
• An issue doing the rounds in the media at present is whether the US faces the prospect of another government shutdown. This is a situation that exists where Congress fails to approve government funding – effectively the government runs out of money and can’t pay bills like public sector wages. And that means non-essential Federal services need to be shut down.
• NBC: “Every year, Congress must approve a federal budget that will finance the government for the upcoming 12 months. It consists of 12 appropriations bills, one for each Appropriations subcommittee.”
• When there is less than a week before funding runs out, normal protocol is for the government to prepare for the eventuality and that is being done now. There are enough funds until Thursday September 30.
• Sounds scary. But it has to be remembered that these events occur regularly in the US.
It is understandable that the media focuses on the issue – bad news sells. But there is also the interest value in one side of politics being pitted against another.
• The last big shutdown – in fact the longest – was from December 23, 2018 until January 25, 2019, a period of 35 days. Over that time period, the US Dow Jones rose by 10.2 per cent and the Nasdaq gained 13.1 per cent. In fact the US sharemarket indices out-paced other global markets. In Australia, the S&P/ASX 200 index rose by 8 per cent over that time period.
• While we can never just dismiss issues like a government shutdown, more important for investors is the medium-term prospects for the economy, and therefore the outlook for company revenues and share prices.
• At issue in the current stoush is the debt ceiling. Democrats in the House of Representatives passed a bill that would see funding continue to December. But the proposal included a measure to suspend the debt ceiling for another year. Republicans oppose this, and at time of writing the Senate had failed to advance the proposal.
• The debt ceiling is the maximum amount of debt that the Federal Government can maintain, currently US$28.4 trillion. In 2019 both sides of politics voted to suspend the debt limit. The suspension ended in July.
Published by Craig James, Chief Economist, CommSec