The political drama in Washington continues to unfold, with the U.S. federal government just three days away from another potential shutdown.
On Wednesday, a temporary funding bill pushed by the Senate faced another roadblock in the House of Representatives. House Speaker McCarthy remained opposed, continuing his tussle with hardliners within his party. As of this report, Congress is still in negotiations with no public progress announced.
Conservatives in the House are advocating for significant spending cuts, a move unlikely to pass in the Democrat-controlled Senate. Meanwhile, the Senate has proposed a short-term spending plan that would ensure government funding until November 17, along with some aid for Ukraine and the Federal Emergency Management Agency (FEMA). It remains uncertain if House Republicans will accept this proposal.
If the deadlock persists, the Biden administration will commence a shutdown at 12:01 a.m. Eastern Time this Sunday, October 1. This would mark the 22nd government shutdown in U.S. history. Since 1976, there have been 21 shutdowns, with the most recent and longest one in December 2018, furloughing about 800,000 of the 2.1 million federal employees for 34 days.
The tug-of-war between the two parties, leading to federal agency chaos, is a recurring theme in Washington politics. Most agencies have adapted to this rhythm, establishing contingency plans. For instance, the Department of Health and Human Services plans to retain about 58% of its workforce during a shutdown, while the Department of Justice will instruct nearly 85% of its employees to continue working. The Office of Management and Budget has also issued guidance to federal employees about what to expect as a shutdown approaches.
In the event of a shutdown, hundreds of thousands of federal workers will be forced to take unpaid leave or work without pay. Numerous non-essential government services, ranging from economic data releases to nutritional benefit distributions, will be halted.
The private sector will also feel the ripple effects and will be forced to adjust. During the last government shutdown in 2018, inspections of chemical plants, power plants, and water treatment facilities came to a standstill due to the temporary furlough of Environmental Protection Agency employees. The Food and Drug Administration also paused routine food safety checks on seafood, fruits, and vegetables, adding pressure on restaurants and grocery stores.
For the public, this typically translates to disruptions in various government services and a slew of daily inconveniences. Concerns about a government shutdown have spread beyond Washington. In Atlanta, the Jimmy Carter Library and Museum, which had planned to celebrate the former president's 99th birthday on October 1, moved the event to the previous day in light of the potential shutdown.
Consumer confidence in their financial situations and job prospects is also waning. According to the monthly index from the World Business Council, U.S. consumer confidence dropped to a four-month low in September.
This series of impacts will inevitably trigger a domino effect on the economy. As time progresses, millions of workers will go without pay, private contractors won't receive payments, and consumer confidence will further decline due to Washington's dysfunction.
A report from Bloomberg last week stated that for every week the federal government is shut down, the annualized GDP growth rate would drop by 0.2 percentage points. While this situation would reverse once government funding is restored, the shutdown will still result in a "mild negative impact" due to halted economic activity and uncertainty concerns. A federal funding gap lasting a month could temporarily push the unemployment rate to 4% in October, triggering a common rule used to determine the start of economic recessions.
For contractors reliant on government agencies, this translates to a daily loss of $1.9 billion. According to data compiled by Bloomberg, federal agencies paid approximately $706.9 billion in non-classified primary contract service funds to suppliers in the 2022 fiscal year, equivalent to $1.9 billion daily.
Federal contractors, already hit by historic inflation, will increasingly face cash shortages and will scale back activities during a prolonged shutdown, such as furloughs, layoffs, or worse scenarios. Eric Fanning, president of the Aerospace Industries Association (AIA), mentioned that "we might see companies going under."
David J. Berteau, president of the Professional Services Council (PSC) representing federal contractors, stated that between 3 to 4 million government contract workers "are very concerned."
Analyst Nathan Dean highlighted that small contractors are at the greatest risk. Large contractors that have experienced government shutdowns are typically better prepared and might have secured some funds in advance. However, contractors relying on short-term payments and rolling contracts will face bigger challenges.
In the 2022 fiscal year, the contractors receiving the most funds from federal agencies included defense company Lockheed Martin, Arlington-based RTX, and General Dynamics.
The deadlock in Washington is also sending shockwaves through global financial markets. Due to market anxieties over high interest rates, rising oil prices, and labor strikes, the U.S. stock market has retreated from its mid-July peak. Just in September, the S&P 500 index has dropped by over 5%.
This standoff has once again raised concerns among rating agencies about the U.S. government's governance capabilities. While they stated that a short-lived shutdown is unlikely to have a significant impact on the overall U.S. economy and GDP, both Moody's and Fitch warned that it could further damage the U.S. government's credibility.
In another drama about the debt ceiling four months ago, Fitch downgraded the U.S. government's rating to AA+. If the current deadlock leads to another downgrade, it will further elevate the already high borrowing costs and national debt for the U.S.
