A U.S. federal government shutdown is looking more likely today. The House of Representatives passed a short-term budget resolution Thursday night designed to keep the government open until February 16 while a full fiscal-year budget deal is hammered out. However, political analysts say Senate approval seems unlikely.

If the Senate does not approve the continuing budget resolution, the federal government will shut down at midnight on Friday, January 19. As we noted in a recent blog, federal government shutdowns are nothing new. The government has been shut down 13 times since modern Congressional budgeting began in 1976, with shutdowns lasting an average 5.08 days. The most recent shutdown lasted 16 days (October 1-16, 2013).

What to Expect in a Government Shutdown

If the government does shut down again in 2018, essential government functions will continue to operate. These include but are not limited to, air-traffic control, border patrol, federal prisons, the power grid, mail delivery, disaster relief, food-safety inspections, the military, and tax collection. In addition:

  • Seniors will continue to receive Social Security payments and Medicare coverage.
  • Veteran benefits, unemployment benefits, and food stamps will still be paid.
  • All government workers will not be paid, but will receive their missed pay retroactively when Congress passes a bill to fund the government.

However, roughly 800,000 federal government employees who are deemed non-essential will be furloughed. An estimated 1.3 million workers who are considered “essential” will remain on the job and receive IOUs to be cashed in when any shutdown ends.

With non-essential workers off the job, non-essential government activities will cease. To name a few select examples:

  • The Justice Department will suspend civil cases.
  • NASA will furlough most of its employees but continue to provide support to the International Space Station.
  • The National Institutes of Health will continue clinical trials but no new trials will be started.
  • The National Zoos and National Parks will be closed.

The longer the shutdown persists, the bigger the hit to economic activity. Regardless, as in past shutdowns, the overall impact to U.S. economic activity will ultimately be modest.

How Government Shutdowns Affect Investors

For investors, the good news is that government shutdowns historically have had limited impact on the stock market. In fact, in every instance, market returns have been positive in the 12 months following the beginning of the shutdown, including a 19.72% gain in the year after the 2013 shutdown. The broad market has posted an average return of 17.99% in the one-year period following the government’s 13 shutdowns.

Whether we like it or not, a government shutdown may soon be upon us. Let’s hope cooler heads prevail, and if a shutdown does occur, that it will be resolved quickly.

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