Members of Congress have headed back to their districts for a two-week recess after one of the most bitterly divided sessions in history that culminated with Republicans launching the 'nuclear option' to confirm Supreme Court Justice Neil Gorsuch. Unfortunately, upon their return to Washington DC, they will have just 5 days to unveil, debate and pass a spending bill, or trigger a government shutdown on April 28.
And while government shut downs have happened before with little economic consequence, as Goldman warns, failure to pass a budget this time around could have broader implications regarding the Trump administration's ability to implement some of his key policy initiatives like tax reform and healthcare...issues which have clearly helped boost equity markets to all-time highs.
Congressional appropriations expire April 28. If Congress does not pass an extension, the federal government will partially shut down. The economic consequences of a short shutdown are minor, since lost federal pay is usually made up retroactively and government procurement and private sector activity would be largely unaffected.
However, a shutdown would send another signal to markets that Republicans may not be able to enact their agenda, lowering expectations for tax reform and an infrastructure program.
We believe Congress is more likely to meet the deadline, but see a one in three chance of a shutdown.
The “freedom caucus” in the House may be unwilling to vote for a spending bill, denying Republicans a majority without Democratic votes. However, Democrats might be unwilling to provide those votes as they often have in the past, in light of the decision to change Senate rules to confirm Neil Gorsuch to the Supreme Court over Democratic opposition.
That said, there is not yet a clear issue Democrats are likely to point to in defense of a shutdown, as Republicans did in the 2013 shutdown when they demanded that Obamacare be defunded. If such an issue emerges—Republican leaders have already indicated they plan to keep funding for the border wall out of the bill to avoid such an issue—then the odds of a shutdown would rise considerably.
While the media will undoubtedly go berserk if a Government shut down actually happens, they're hardly unprecedented. Per the chart below from Goldman, there have been 11 such shutdowns since 1977, varying in duration up to 21 days.
Of course, the likelihood of any spending bill getting passed with bipartisan support will ultimately depend on how aggressive the Trump administration wants to be in demanding funding for the border wall, as both Chuck Schumer and in the Senate and Nancy Pelosi in the House have confirmed that Democrats will oppose any bill that includes funding for that purpose. Per Bloomberg:
But there are several wild cards that could derail things, the biggest one being Trump. The president wants Congress to begin spending money on a border wall -- his signature campaign promise -- even though Democrats are mostly opposed and Republican leaders are in no hurry.
The White House won’t say whether Trump will threaten to veto the spending bill if the border money isn’t included. Trump has asked Congress for $33 billion in extra defense and border wall funding, paired with $18 billion in cuts to domestic programs.
Republicans have rejected the domestic cuts, but it’s unclear how the wall funding will be handled.
"The only thing that could derail that progress is the White House insisting on their extraneous demands, which would meet bipartisan opposition,” said Matt House, a spokesman for Senate Minority Leader Chuck Schumer. House Minority Leader Nancy Pelosi warned Thursday that including funding for the border wall will almost certainly cause a loss of Democratic support. “I would hope that they wouldn’t try that,” she said, adding, “the American people don’t even support it.”
Meanwhile, Republicans will undoubtedly continue their civil war with the Freedom Caucus potentially looking to oppose any new spending bill that omits funding for some of Trump's top priorities. House Republicans “have differences of opinion. And they aren’t just political differences, they are policy differences,” said Republican Senator Rob Portman of Ohio. “They’re going to have a tough time coming together without some Democratic votes, and I think that’s the acknowledgment."
Conservatives, however, are expecting to see some of Trump’s priorities reflected in the measure, something that Democrats are unlikely to go along with.
“I think that what you will see, you’ll see funding in there for the wall, I think you will see funding in there for better enforcement of sanctuary cities, and I think you will see a plus-up on military,” Meadows predicted. “I think that most people will vote for that, it will go to the Senate, it will get stripped out and then we will have a hard decision to be made in four days.”
Other Republicans say it’s time for the GOP to show it can govern.
“We’re going to do what it takes to get get the comity back to the Senate,” said Senate Judiciary Chairman Chuck Grassley, an Iowa Republican.
And while we can't be sure how this will all play out, we're almost certain that any outcome will be positive for U.S. equities... and while they remain ignorantly blissful for now, the T-Bill market is anything but...