Saturday, April 29, marks what may be a bittersweet anniversary for the Administration: it is President Trump’s 100th day in office.

It could also mark Day 1 of a government shutdown if Congress doesn’t pass a spending bill authorizing funding, or if the president doesn’t sign it before then. This is a risk the GOP will be eager to avoid, although in recent days chatter has again picked up as a result of Trump’s insistence to add wall funding in the spending bill. As noted earlier today, there is virtual unanimity among Democrats to oppose any bill that budgets for a wall, and since passing a new Continuing Resolution would require 60 votes in the Senate, at least some Democratic support is needed.

So while it remains at best a moderate risk factor – Goldman’s latest estimate puts it at about 1-in-3 chance – the question of what happens if the government does shut down at midnight on Saturday is starting to percolate. Here are some thoughts from Citi.

First, threats of a shutdown are more common than actual shutdowns. The last one occurred in October 2013, and the one prior to that was 1995/96. Those that last have an impact on the economy. In 1995/96 the government shut down for 21 days. In 2013, for 16 days. But not all shutdowns are impactful. During the Regan administrations, there were a total of 8 shutdowns with the maximum lasting 3 days.

What is the economic impact?

In 2013, reduction in fourth quarter Gross Domestic Product (GDP) was estimated to be between -0.2 and -0.6 percentage points. 120,000 fewer private-sector jobs created during the first two weeks of October.

A second and important point for markets, federal data collection ceases over this period. Statistical reports will be delayed. This economic uncertainty acts like a tax on confidence. It also makes trading off data releases difficult.
Financial market impacts?

Taking the 2013 market impact as a baseline most of the negative impacts precede the actual shutdown. Rates recover slower than FX.

USD – In the three weeks prior to the shutdown the TW USD fell 3%. It set a base 3 business days after the shutdown ended for a total loss of 3.5%. In the following month it recovered ½ of the loss.
UST – 5y yields lost a total of 57 bps (1.84%-1.27%), and were slower to recover with yields rising by only 15bps in the next month.

What happens in a shutdown?

1. Details of which government functions stop are determined by the Office of Management and Budget.

2. If it looks like a shutdown will occur, White House budget office works with federal agencies to determine which federal functions and employees are “essential” or “excepted.” The White House has latitude in how broadly it defines “excepted.”

3. Agencies and services considered non-essential close. Federal workers will be furloughed without pay. The Federal Government employs over 4-million individuals, so this can be hundreds of thousands of workers affected. Congress may decide after the shutdown to pay them for the time off. Financial disruption is one concern.

4. “Emergency personnel” continue to be employed, including the active duty military, federal law enforcement agents, doctors and nurses working in federal hospitals, and air traffic controllers. For the Department of Defense, at least half of the civilian workforce, and the full-time, dual-status military technicians in the US National Guard and traditional Guardsmen (those on Title 32 status) are furloughed without pay. Members of Congress continue to be paid, because their pay cannot be altered except by direct law.

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