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Government Shutdown: Effects and Implications

By

Michael T Townsend

Vice President, Legislative and Regulatory Affairs, Charles Schwab & Co., Inc.

Michael Townsend handles a number of legislative issues for Charles Schwab & Co., Inc., and is responsible for development and implementation of the firm's public policy communications strategy and third-party ally development.
 

January 18, 2019

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The policy analysis provided by the Charles Schwab & Co., Inc., does not constitute and should not be interpreted as an endorsement of any political party.

The partial government shutdown, already the longest on record, is heading for its fifth week with few prospects for a resolution anytime soon.

Because the shutdown affects only about 25% of government funding—Congress approved funding for about 75% of government operations last fall—it was initially thought the economic and other impacts would be relatively modest.

But as the shutdown drags on, the effects are growing more significant. A White House official told CNBC on January 15 the administration estimates the shutdown will trim 0.1 percentage points off the country’s economic growth rate each week—double its previous estimates.

Other effects are already evident. Many national parks are closed. Others are open but unstaffed, and uncollected trash is piling up. Airport security line delays are increasing as the Transportation Security Administration deals with increasing numbers of unpaid workers refusing to show up to work.

Here’s a quick look at how we got here, what government agencies are impacted and some key things investors should keep their eyes on in the days and weeks ahead.

What happened

Each year, Congress must pass 12 appropriations bills to fund government operations by the start of the government’s fiscal year on October 1. By the deadline last fall, Congress had passed only five of the needed bills. A series of short-term extensions kept open those departments that had not received full funding through December 21. But Congress failed to come to an agreement on another extension, resulting in a shutdown of those agencies.

What’s open

The departments of Defense, Education, Energy, Health and Human Services, Labor, and Veterans Affairs are all funded through the remainder of the fiscal year ending September 30. They are open and operating as normal.

In addition, the legislative branch is fully funded—Congress made sure to fund itself. And agencies that have their own funding sources outside of the appropriations process, such as the U.S. Postal Service and Federal Reserve, are continuing to operate.

What’s closed

These agencies are impacted by the shutdown: the departments of Agriculture, Commerce, Homeland Security, Housing and Urban Development, Interior, Justice, Transportation, and Treasury. In addition, dozens of agencies, including the Securities and Exchange Commission (SEC), the Food and Drug Administration and the Environmental Protection Agency are affected. At these agencies, only “essential” personnel are working.

Investors may be particularly concerned about the SEC: Fewer than 300 of the agency’s estimated 4,400 employees are working during the shutdown. Most of the agency’s energy is directed toward monitoring the markets to ensure that they continue to operate properly. But SEC investigations have halted and initial public offerings are not on the list of essential tasks. Several companies that had planned to go public in January have had to delay their plans.

Who decides who is “essential?”

Some employees designated as essential are intuitive: law enforcement officials, for example, and air traffic controllers. But most federal agencies make their own determinations about who is essential.

Mixed impact on economic data

The Labor Department is open, so that means monthly employment reports and consumer price index data will continue to be released. But the Commerce Department is closed, which affects a host of other important economic metrics, including retail sales and housing starts. Investors—and the Federal Reserve—rely on this data to provide a clear picture of the economy.

Similarly, the Agriculture Department has delayed some crop reports for products like soybeans and corn, potentially impacting the commodities market. And the market’s overseer, the Commodity Futures Trading Commission, is not providing key data that traders rely on to understand the futures markets.

Tax-filing season and tax refunds

The Trump administration announced in early January that tax filings would be accepted beginning on January 28 and refunds would be processed as normal, though they could be delayed. That means that thousands of furloughed employees will have to be brought back to work, though they may not be paid. And some services, such as the Internal Revenue Service’s toll-free tax-help lines, are likely to be significantly curtailed.

Farm and small business loans

Applications for farmers looking to secure financing are not being processed at the Department of Agriculture. Small business assistance has been curtailed because the Small Business Administration (SBA) is shut down.

Back pay for federal workers, but contractors in limbo

Congress overwhelmingly approved legislation last week that guarantees furloughed federal workers would receive back pay once the shutdown ends. President Donald Trump signed the bill, which also guarantees back pay for future shutdowns, on January 16.

But the measure doesn’t apply to federal contractors whose work has stopped during the shutdown. Contractors could end up as one of the most impacted populations, as there is little hope that they will receive back pay.

Social Security, Medicare and Medicaid

Social Security checks will continue to be distributed, regardless of how long the shutdown lasts.

The shutdown has no effect on Medicare or Medicaid. The programs are overseen by the Centers for Medicare and Medicaid Services, a part of the Department of Health and Human Services, which has full funding for the remainder of the fiscal year.

Food stamp program changes

The Department of Agriculture announced plans to pay out February food stamp benefits as soon as next week, with no additional benefits coming in February. Usually benefits are staggered throughout the month. And the agency has not indicated how—or even whether—it will pay out March benefits if the shutdown drags on that long.

When will it end?

There’s no telling when the standoff in Washington will end. President Trump has said repeatedly that he will not sign legislation to open the government unless it includes funding for a southern border wall. House Speaker Nancy Pelosi (D-CA) and Senate Minority Leader Charles Schumer (D-NY) have been equally adamant that no such legislation will be approved by Congress.

Both sides show no sign of weakening in their positions. And so the shutdown continues.

One thing to keep an eye on is the shutdown’s impact on travel. More than one analyst in Washington has noted that long security lines at airports or flight delays resulting from understaffed air traffic control operations could become the catalyst for an intensifying public backlash against the shutdown. That could push lawmakers back to the negotiating table.

What should investors do?

We continue to believe that investors should not over-react to developments in Washington, but a protracted standoff in the nation’s capital could contribute to market volatility in the weeks ahead.

  • If you’ve built a solid financial plan and a well-diversified portfolio, it’s best to ignore the political noise and focus on your long-term goals. Want to talk about your portfolio? Call our investment professionals at 800-355-2162.
  • Watch Schwab experts discuss other market and economic topics in the Stock Market Report.

Important Disclosures 

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

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