Only two weeks left, the U.S. government may face another &#34;shutdown&#34;.
According to media reports on Monday, the partisan divide in the United States has intensified, and they are still grappling with budget issues, only approving one of the 12 annual spending bills that provide funding for the government. In order to avoid a shutdown, Congress needs to pass a temporary funding bill within the remaining 10 working days to ensure that the government continues to receive funding after the deadline.
The latest news shows that the two factions of Republicans in the U.S. House of Representatives have reached an agreement on this temporary spending bill to temporarily fund the government, but the chances of it being passed in the Senate (controlled by Democrats) are not high.
If Congress fails to pass the spending bill by midnight on September 30th, the U.S. government will face a shutdown, and Bank of America believes that the probability of this shutdown is about 50%.
It can be foreseen that if the government shuts down, it will have a certain impact on the U.S. economy and the market. Goldman Sachs pointed out that if the government shuts down completely for one week, economic growth will directly decrease by about 0.15 percentage points, but the impact on the financial market is limited and not as worrisome as the U.S. government defaulting on its debt.
<h2>Why are we on the brink of a shutdown again?</h2>
Every fiscal year (from October 1st to September 30th of the following year), the U.S. Congress must pass appropriation bills (a total of 12) that cover discretionary spending and federal agency funding for the next fiscal year.
This fiscal year will end on September 30th, and if all 12 appropriation bills or temporary funding agreements have not been passed by then, the U.S. government will face a shutdown.
Although the leaders of both parties in Congress agree that a temporary funding bill is needed to avoid a government shutdown crisis, conservative factions within the Republican Party still demand further cuts in spending and major policy changes, which the Democrats will not support. This will result in the temporary funding bill &#34;never reaching Biden's desk,&#34; and there is still no answer to how to avoid a government shutdown.
This is not the first time in U.S. history that a budget has failed to be passed before the end of the fiscal year. For example, there were two shutdowns in the 1996 fiscal year. The first resulted in 800,000 employees being furloughed, and the second resulted in 284,000 employees being furloughed.
Once the government shuts down, each agency will retain only the minimum number of &#34;essential&#34; employees, who will work without pay, while all &#34;non-essential&#34; employees will be forced to take leave.
Typically, law enforcement officers and prison staff, Transportation Security Administration employees, Border Patrol agents, Forest Service firefighters, and National Weather Service forecasters are considered essential personnel and will work without pay. In addition, mandatory spending (including Social Security, Medicare, and Medicaid) continues uninterrupted because it is not subject to annual appropriations. During a government shutdown, the issuance of government bonds and government payments also continue.
<h2>What is the likelihood of a shutdown?</h2>
In terms of the latest progress in negotiations between the two parties, the final lifeline, the &#34;temporary funding bill,&#34; also faces significant obstacles.
According to two Republican sources cited by the media, the so-called temporary funding bill will maintain government funding for 30 days, but federal spending for each agency, except the Department of Defense and the Department of Veterans Affairs, will be cut by 1% across the board.
The bill will also include H.R.2, a bill proposed by House Republicans aimed at restoring most of the border policies from the Trump era, but excluding provisions that require employers to use the Department of Homeland Security's &#34;E-Verify&#34; system to determine the eligibility of their employees.
Analysts point out that the bill is unlikely to reach a consensus as it only cuts non-defense spending by 1%. Several conservative lawmakers have either expressed opposition or are leaning towards opposing it.
A senior Democratic aide pointed out that the bill is unlikely to become law as H.R.2 received zero votes from House Democrats, making it unlikely to pass for the Democratic Party.
How likely is a government shutdown? According to a report from Bank of America:
<blockquote>
It is expected that Congress will pass a temporary funding bill on October 1st to avoid a government shutdown. However, this is a precarious decision and the situation remains unstable. We believe that the likelihood of a brief government shutdown is gradually approaching 50%, but at present, we expect Congress to reach some kind of agreement on a temporary funding bill at the last minute.
If a shutdown occurs, we believe it will last for a few weeks at most. It has been proven that previous shutdowns have been costly for the party responsible for the shutdown. The longer the government shutdown lasts, the more pressure there is on Congress to pass a temporary funding bill and return to the negotiating table.
</blockquote>
<h2>What will be the economic and market impact?</h2>
With only two weeks left until the deadline, Wall Street is studying the potential impact of a government shutdown on the economy.
Goldman Sachs economists stated in a report last month:
<blockquote>
For each week of a full government shutdown, economic growth will directly decrease by approximately 0.15 percentage points; including the impact on the private sector, the overall impact on economic growth could be around 0.2 percentage points per week. Economic growth will not be affected once the government reopens for a quarter.
</blockquote>
Bank of America analyst Stephen Juneau stated in a report:
<blockquote>
The economic growth impact of a government shutdown is moderate, with a GDP growth rate decrease of approximately 0.1 percentage points per week. The reduction in government spending on goods and services will also have secondary effects.
The impact on financial markets during a shutdown is usually limited. On average, US interest rates and the DXY are hardly affected, and the S&amp;P 500 index and volatility index typically show a muted response, except for the significant exception at the end of 2018 and the beginning of 2019. During that period, there was a stock market sell-off, and stock implied trading volume increased significantly in response to the hawkish FOMC meeting in December 2018 and weak US economic data.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/8fd634a4-bd7c-4b82-b6c1-975f90dc58fb.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="Image" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/8fd634a4-bd7c-4b82-b6c1-975f90dc58fb.png"/>
According to Ernst &amp; Young's analysis, the probability of a government shutdown and the associated uncertainty, as well as the recovery of student loan repayments, are additional downside risks to the economic outlook.
</blockquote>
On the other hand, some believe that the impact on the economy and the market is relatively small. Barclays analysts wrote that past government shutdowns did not have a profound impact on the market, and this time will be no exception. UBS also pointed out that shutdowns are often of short duration and have minimal impact on economic growth.
It is worth mentioning that a government shutdown is not a good thing, but its severity may be far less than that of a debt default.
The economic impact of a debt default could be much greater than that of a government shutdown. An analysis by the Federal Reserve in 2013 estimated that a default lasting several weeks would reduce the growth rate by 1.3 percentage points in the year of default and by 1.7 percentage points in the following year. The Economic Advisory Committee found that a long-term default could lead to a 5 percentage point increase in the unemployment rate in the third quarter of 2023, while a short-term default could cause a 0.3% increase in the unemployment rate. These impacts far exceed the potential impact of a government shutdown.
<h2>Is the Fed's job becoming more &#34;tricky&#34;?</h2>
With the imminent shutdown of the US federal government, a series of important US economic data may be forced to be delayed for release, making the Fed's job more challenging.
Based on the practices of various agencies during previous government shutdowns, key economic data for September, such as the monthly employment data from the US Department of Labor and the critical inflation indicators from the US Department of Commerce, will not be released on their scheduled dates in October. During the 2013 US federal government shutdown, the release of employment data and other data was also postponed.
If the federal government does shut down, heavyweight data for September, such as non-farm payrolls, PPI and CPI, and third-quarter US GDP, may not be released as scheduled. These data are very important, not only as important references for the Fed to formulate the next interest rate policy, but also as important indicators for market analysis of the performance of the US economy in the third quarter.
The Fed has always emphasized making decisions based on the latest data. The market generally expects the Fed to maintain interest rate stability at its meeting next week, but the situation in November remains uncertain.

Bank of America believes that there is a 50% probability of this shutdown, and it can be foreseen that if the US government shuts down, it will have a certain impact on the US economy and market. Goldman Sachs pointed out that for each week of a complete shutdown, economic growth will directly decrease by about 0.15 percentage points, but the impact on the financial market is limited.

The US government is going to shut down again? If they can't reach an agreement, it will happen at the end of the month!