Shenwan Hongyuan: Six Questions for the U.S. Government on "Shutdown"

According to the Zhitong Finance APP, Shenwan Hongyuan released a research report stating that on September 30, due to the failure to timely pass temporary fiscal appropriations, the U.S. government has once again fallen into a shutdown after nearly seven years. The long-term impact of the government shutdown on major asset classes is relatively limited. U.S. stocks do not necessarily panic and decline; the S&P 500 has an average increase of 2.91% during government shutdowns, with a win rate of 75%. U.S. Treasuries have seen moderate safe-haven trading, with more pronounced declines at the front end; the 10-year Treasury has a win rate of 75%, with an average decline of 2.25 basis points, while the 2-year Treasury has a win rate of 100%, with an average decline of 8 basis points. The U.S. dollar is slightly weak but not significantly down, with an average decline of 0.30%. Gold has risen slightly but with a low win rate, averaging an increase of 1.07%. In long-term government shutdown events, gold has a higher increase.

Shenwan Hongyuan's main points are as follows:

On September 30, due to the failure to timely pass temporary fiscal appropriations, the U.S. government has once again fallen into a shutdown after nearly seven years. What is special about this government "shutdown," and what impact might it have on the U.S. economy and markets?

Question 1: Why is the U.S. government "shutting down" this year? The core conflict is the healthcare subsidy policy.

The main reason for this year's U.S. government shutdown is the dispute between the two parties over whether to extend the healthcare subsidy policy, which has prevented the timely passage of temporary appropriations. The Democratic Party insists on extending the enhanced healthcare tax credits under the Affordable Care Act and demands the repeal of the cuts to Medicaid in the Inflation Reduction Act; the Republican Party accuses the Democrats of forcibly bundling issues and being responsible for the government shutdown.

The market expects the government shutdown to last at least 15 days. As of October 6, the House of Representatives has passed a temporary appropriations bill, but the Senate has failed to reach 60 votes in multiple votes. Market predictions show that the average probability of a shutdown lasting more than 15 days is 67%. The reopening of the government requires compromise between the two parties, and there is a higher likelihood of a short-term temporary appropriation and a temporary extension of the Affordable Care Act premium tax credits.

Question 2: What happens during a government "shutdown"? Non-essential government activities cease operations, and statistical data publication is paused.

During the government "shutdown," non-essential government activities cease operations, while necessary activities related to life, property, and national security can continue to operate normally. Federal statistics and data may be paused, with the most affected being data from the U.S. Census Bureau on retail and real estate; data from the U.S. Bureau of Labor Statistics on non-farm employment, unemployment rate, CPI, etc.; military, law enforcement, social security, and healthcare functions continue to operate.

Question 3: How many times has the U.S. experienced a government "shutdown" in history? 11 shutdowns, with an average duration of 8.6 days.

Since 1980, the U.S. government has experienced 11 shutdowns, with an average duration of 8.6 days, the longest being 34 days and the shortest 1 day; October is a peak month for government shutdowns. Since 1977, the U.S. government has almost never passed the fiscal appropriations bill on time, and when the new fiscal year begins on October 1, the U.S. generally uses temporary appropriations to bridge the gap, which has also led to October being a peak month for shutdowns.

Government shutdowns are often triggered by two types of disputes. One is fiscal policy disputes, with the focus on whether fiscal expansion is necessary, such as the 1981 Reagan administration shutdown. The other is political game disputes. Most government shutdowns are unrelated to fiscal positions but are used as political tools by the opposition party, with both parties forcibly bundling healthcare, immigration, and other policies with the fiscal budget to achieve their political goals, such as the 2018 government shutdown Four Questions: How Does a Government "Shutdown" Affect GDP? A One-Month Shutdown May Only Impact by 0.02 Percentage Points

The impact of a government "shutdown" on U.S. GDP is relatively weak, with a one-month shutdown potentially affecting it by only 0.02 percentage points. The government shutdown primarily affects the economy through channels such as federal employee income and policy uncertainty. Due to the short duration and the fact that back pay will be issued, the impact on GDP is limited. In 2019, a 34-day government shutdown resulted in a permanent loss of $3 billion to GDP, approximately 0.02% of GDP.

Five Questions: How Does a Government "Shutdown" Affect Employment? It May Slightly Raise the Unemployment Rate, Then Fall Back After Reopening

The government shutdown generally has no substantial impact on non-farm employment, but it may temporarily raise the unemployment rate slightly, which will decrease after reopening. During a government shutdown, federal employees are placed on unpaid leave but remain employed, resulting in a low impact on non-farm employment. However, a government shutdown may lead to a temporary increase in unemployment under the Current Population Survey (CPS) measure. In 2019, a 34-day government shutdown caused the unemployment rate to initially rise by 0.1 percentage points, followed by a decrease of 0.2 percentage points.

Six Questions: How Does a Government "Shutdown" Affect Market Pricing? U.S. Stocks Still Rise, U.S. Treasury Yields Fall, U.S. Dollar Weakens

The long-term impact of a government shutdown on major asset classes is relatively limited. U.S. stocks do not necessarily panic and decline; the S&P 500 averaged a 2.91% increase during the government shutdown, with a 75% success rate. U.S. Treasuries experienced moderate safe-haven trading, with more pronounced declines at the front end; the 10-year Treasury had a 75% success rate, averaging a decline of 2.25 basis points, while the 2-year Treasury had a 100% success rate, averaging a decline of 8 basis points. The U.S. dollar weakened but not significantly, averaging a decline of 0.30%. Gold saw a slight increase but with a low success rate, averaging a rise of 1.07%. In long-term government shutdown events, gold's increase is more pronounced.

Risk Warning

Escalation of geopolitical conflicts; U.S. economic slowdown exceeding expectations; Federal Reserve turning "hawkish" beyond expectations