2 Major Sectors Will Likely Take The Hit If Government Shuts Down In October

Just three months after achieving a deal that scratched a government default, House Speaker Kevin McCarthy is again under pressure to find common ground between far right Republicans and Democrats in order to avoid a government shutdown.

Sept. 30 is the last day of the fiscal year and the deadline by which lawmakers need to agree on how to allocate funding for 438 governmental agencies. If the Congress doesn't approve a spending bill by then, most government agencies will pause their activities, unable to pay salaries.

What happens in a government shutdown? Federal workers deemed essential, like mail delivery, tax collection and border security agents, the Coast Guard, prison staff, prosecutors from the Department of Justice and military personnel would continue to carry out their duties but would not receive compensation for their work until the situation is resolved.

Those not considered essential, — a large percentage of the 18 million civilian government employees — would be furloughed without pay. The last time the U.S. government shut down was during the 2018-2019 budget season, when the government furloughed roughly 800,000 employees for 35 days in the longest shutdown in history. Since 1970, there have been a total of 20 shutdowns of various lengths, some as short as only a few hours.

A government shutdown would temporarily reduce GDP by 0.15% for every week that passes, according to Goldman Sachs.

McCarthy's dilemma: It is likely that Congress will pass a monthlong budget extension, also called a continuing resolution, in order to buy time to agree on the 12 appropriations bills needed to avoid a shutdown.

In August, members of the hard-right House Freedom Caucus, who demand spending cuts on all 12 bills, said they would only approve a continuing resolution if certain concessions are granted: the resolution would have to include a border security bill passed last year after the end of Title 42, and not include any funding for Ukraine.

Some of the tough cuts on spending the causes demands would interfere with terms of the Biden-McCarthy deal that avoided a debt ceiling crisis. 

On Tuesday, McCarthy declared his intention to launch an impeachment inquiry into President Joe Biden to investigate “allegations of abuse of power, obstruction and corruption.”

Read also: Explained: What An Impeachment On Biden Could Mean For The 2024 Presidential Race

Yet the speaker also recently mentioned that a government shutdown would interfere with impeachment procedures, in an effort to calm down the fierceness of conservative GOP lawmakers, who also have Biden's impeachment high on their agenda.

Republican Rep. Bob Good said to Politico on Tuesday that his party should not be afraid of a shutdown. Good is part of the GOP faction that is against McCarthy as a speaker. He said that if McCarthy were to make a deal with the Democrats, his days as a speaker are numbered.

Impact on the stock market: Market behavior has been inconsistent in response to government shutdowns in the past. During the 2018-2019 shutdown, the S&P 500 had very positive performance, rising over 10% during the 35 days of the shutdown.

Two other short-lived shutdowns that occurred during 2018 — both lasting less than three days — didn't move the index by more than 1%. A two-week-long shutdown during October 2013 saw the index gain 2.4% during that period.

Yet several other shutdowns during the 1970s and 1980s saw the index respond negatively, losing value during the pause.

Government contractors —most heavy in the defense sector— would likely become affected by a shutdown. Lockheed Martin Corp LMT, the largest contractor for the Department of Defense, tops the list of government contractors by budget. It is followed by airplane maker and defense supplier Boeing Co BA, General Dynamics GD, Raytheon RTN and Northrop Grumman Corp NOCE.

ETFs following the defense sector could also be affected, including iShares US Aerospace & Defense ETF ITA. The fund lost roughly 23% of its value in the two-and-a-half months leading to the December 2018 shutdown. The fund however, recovered half of its price during the 35-day shutdown and continued growing for an almost complete recovery by February.

SPDR S&P Aerospace & Defense ETF XAR, another major defense ETF, followed a very similar path.

The Department of Energy is second among government agencies that outsource their budget to publicly listed companies after the Department of  Defense. A government shutdown would likely also affect its contractors. The top publicly listed companies working with Energy are Aecom ACM, Fluor Corp FLR and Honeywell International Inc HON.

Kevin McCarthy photo by Consolidated News Photos on Shutterstock.