By Libby Cantrill, PIMCO Head of Public Policy

1. What is happening? With only 8 scheduled legislative days before September 30th, Congress has precious little time to pass a government funding bill in order to avoid a shutdown before the beginning of the government’s Fiscal Year 2024 (October 1st). A deal negotiated with different factions of House Republicans collapsed on Sunday as soon as it was released.

2. Conventional wisdom on Capitol Hill: shutdown is a question of when, not if. This is because Speaker McCarthy is in a bind: The House Freedom Caucus does not want him to pass a short-term funding bill and neither do they want him to a pass an omnibus bill based on the funding levels already agreed upon and there is not enough time – or consensus among House Republicans – to renegotiate funding levels. In other words, shutting down the government seems like it could be the only viable option to assuage the conservative group of Republican lawmakers.

3. Our concern: the duration. If the government shuts down, there may not be a catalyst for it to reopen given the complicated internal dynamics of House Republicans. The longest full government shutdown was 16 days in 2013. That shutdown shaved ~.6% of GDP and while some of the growth impact was temporary, some of it was sustained as detailed here. Today, there is an additional factor to consider: a data-dependent Fed. During a shutdown there would be no economic data collected or released during the period of the shutdown, including no GDP data, no payroll data, and no inflation data, and even when the government reopens, economic data will be delayed. All to say, the Fed – who has emphasized how data-dependent it currently is – would be flying blind into November when the next Fed meeting (after this week) occurs and may be reluctant to raise rates.

4. Bottom line: Our view has been that a shutdown is more likely to happen than not, and the compressed timeframe and lack of roadmap strengthens that view. While markets have historically taken shutdowns in stride, this one could differ in that it collides with several other headwinds for the economy (resumption of student loan payments, auto worker strike, rising gas prices, etc.) and the heretofore resilient consumer; it could last longer and there would be no economic data released or compiled. This is all to say, a government shutdown may have a bigger impact given the backdrop than many assume.