Key takeaways
The clock is again ticking on another federal government budget deadline.
The 2025 fiscal year began on October 1, 2024.
Washington’s growing partisan tensions may complicate the budget approval process.
More than four months into the new fiscal year, the U.S. government does not yet have a budget in place. To this point, Congress has only managed to pass continuing resolutions, funding government operations for temporary periods. March 14, 2025, is the expiration date for the current funding period. By that point, Congress and President Donald Trump will have to agree on either a continuing resolution to extend government funding to a future date, or finalize the fiscal year’s budget.
Complicating matters is the additional legislative agenda being pursued by the Republican-led U.S. House and Senate. Legislators are seeking to craft broader packages that include significant budget cuts and an extension of the tax relief provisions of the Tax Cuts and Jobs Act, set to expire after 2025. Policymakers are pursuing this daunting process with very slim majorities, particularly in the U.S. House.
An additional factor is that Congress will soon be required to extend the nation’s debt limit. Doing so allows the U.S. Treasury to continue issuing debt to meet government funding obligations that exceed current tax revenues. Already, the U.S. Department of the Treasury was forced to implement “extraordinary measures” in how it manages obligations to keep the government from defaulting on its debt. However, these are likely to be exhausted in the coming months, requiring a Congressional debt ceiling extension.
Despite the extensive nature of the federal government’s budget and funding issues, “To this point, those issues are in the background as far as markets are concerned,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “Now, markets are far more focused on Trump administration policies.” In the administration’s opening weeks, this has included the potential for significant tariffs on foreign imports, an issue that raises inflationary concerns. It also included revamping government agencies and cutting government positions as part of a spending reduction effort.
Haworth notes that other factors such as the economy's strength, inflation, corporate earnings and monetary policy, all currently have greater market visibility. “Because there are deadlines associated with the budget and debt ceiling, it’s more of a ‘cliff’ issue,” says Haworth. “There’s an on/off switch for the government depending on whether Congress meets its deadlines.”
Failure to meet either the budget or debt ceiling deadlines could result in a temporary, partial government shutdown.
Budget battles are nothing new in Washington. Since 1980, the federal government has partially shut down on at least 10 different occasions, with shutdowns lasting for extended periods in only three of those cases.
“To this point, ongoing budget issues are in the background as far as markets are concerned,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “Now, markets are far more focused on Trump administration policies.”
While federal government spending agreements can be contentious, federal spending declined in recent years after peaking in the immediate wake of COVID’s emergence in 2020. However, current projections indicated higher spending for fiscal 2024 and 2025.
The political realities of the makeup of Congress add to budget process challenges, according to Kevin MacMillan, head of state and federal government relations at U.S. Bank. “In 2025, the Republicans will have slender majorities in the House of Representatives and the Senate, leaving only a narrow path to the ultimate budget resolution.” MacMillan says different factions, even within the Republican majority, may push for more significant budget changes. “A small but vocal group of House members sees the budget process as an opportunity to object to further government funding and pursue other aspects of their political agenda,” says MacMillan.
Also affecting budget and debt ceiling negotiations are President Trump’s aggressive executive actions. During his first weeks in office, Trump has pursued significant cuts to existing programs that were already funded by Congress. It is not clear whether these changes can withstand legal challenges or, if they can, if they will prove to be longstanding. However, the White House’s stance has likely sharpened partisan differences. That could be a further impediment to avoiding a government shutdown.
Federal government shutdowns are not a new phenomenon. Since 1980, the federal government has partially shut down on at least 10 different occasions. Between 1980 and 1986, four shutdowns occurred lasting only one day. Three other shutdowns extended just 3-5 days. Since 1995, however, three government shutdowns occurred that lasted much longer.
Date |
Length of Shutdown (in days) |
|---|---|
|
May 1980 |
1 |
|
November 1981 |
1 |
|
October 1984 |
1 |
|
October 1986 |
1 |
|
October 1990 |
3 |
|
November 1995 |
5 |
|
Dec. 1995/Jan. 1996 |
21 |
|
October 2013 |
16 |
|
January 2018 |
3 |
|
Dec. 2018/Jan. 2019 |
35 |
May 1980
1
November 1981
1
October 1984
1
October 1986
1
October 1990
3
November 1995
5
Dec. 1995/Jan. 1996
21
October 2013
16
January 2018
3
Dec. 2018/Jan. 2019
35
Source: United States Congressional Record.
The biggest concern for investors is the risk of an extended government shutdown. “How big a hit a shutdown costs the economy depends on how long the government is closed,” says Beth Ann Bovino, chief economist for U.S. Bank. “One week can be managed as a nuisance, but the longer the government is closed, the more it hurts the economy.”
“The long-term impact of past shutdowns hasn’t tended to be broadly significant for capital markets,” says Haworth. “Even if there is a temporary decline in economic activity, it hasn’t been a major concern for investors.”
Total return of Standard & Poor’s 500
|
Dates of shutdown |
Duration of shutdown |
Total return 3 months prior to shutdown |
Total return during shutdown |
Total return 3 months after resolution of shutdown |
|---|---|---|---|---|
|
12/16/95 to 1/6/96 |
21 |
6.30% |
0.16% |
6.92% |
|
10/1/13 to 10/16/13 |
16 |
5.24% |
1.66% |
7.90% |
|
12/22/18 to 1/25/19 |
35 |
-17.10% |
10.43% |
10.90% |
Dates of shutdown
12/16/95 to 1/6/96
Duration of shutdown
21
Total return 3 months prior to shutdown
6.30%
Total return during shutdown
0.16%
Total return 3 months after resolution of shutdown
6.92%
Dates of shutdown
10/1/13 to 10/16/13
Duration of shutdown
16
Total return 3 months prior to shutdown
5.24%
Total return during shutdown
1.66%
Total return 3 months after resolution of shutdown
7.90%
Dates of shutdown
12/22/18 to 1/25/19
Duration of shutdown
35
Total return 3 months prior to shutdown
-17.10%
Total return during shutdown
10.43%
Total return 3 months after resolution of shutdown
10.90%
Source: U.S. Bank Asset Management Group.
In all three instances of extended shutdowns, markets managed positive performance during and immediately after the shutdown. In two of the three instances (1995 and 2013), markets performed positively in the months leading up to those shutdowns. In 2018, markets were down prior to the shutdown, but other contributing factors may have been at play, including the Federal Reserve’s decision to hike short-term interest rates during that period.
“A variety of issues impact the markets, even during stressful times like government shutdowns,” says Haworth. He also notes that given the frequency of government shutdown threats, the market response tends to be muted. “The market won’t start pricing these in until we actually see a shutdown, and a financial impact from it,” says Haworth.
While political issues such as the debt ceiling dispute, the federal government budget impasse as well as the new administration’s potential major economic initiatives garner significant headlines, it’s important for investors not to allow these issues to distract them from long-term investment objectives.
Talk with a wealth professional to discuss your current portfolio to make sure your assets remain properly positioned to meet your financial goals consistent with your time horizon and risk tolerance.
Government operations are funded by appropriations bills approved by legislative bodies. Those bodies are required to pass budget measures on a regular basis (in the case of the federal government, annually) to provide the needed funding for the government to operate. If policymakers fail to agree to appropriations measures on a timely basis, it can result in a shutdown of government operations. It means, in essence, there is no money available to fund most areas of the government, usually not including essential services like the military or law enforcement. Federal government shutdowns can also occur if Congress fails to extend the U.S. Treasury’s ability to issue debt to cover the government’s bills.
In the case of a federal government shutdown, most of what are considered “non-essential” government functions cease operations. This is because funding is not available to pay employee salaries and cover other expenses of administering functions on a daily basis. What are considered “essential” government services, most related to public safety, such as branches of the military and law enforcement, remain operational. Certain individual government benefits, such as Social Security, Medicare and Supplemental Nutritional Assistance Program benefits, for example, continue to be paid even in a government shutdown.
Since 1980, the federal government has partially shut down on at least 10 different occasions. Between 1980 and 1986, four shutdowns occurred lasting only one day. Three other shutdowns extended just 3-5 days. Since 1995, however, three government shutdowns occurred that lasted much longer. In December 1995 and January 1996, a partial federal government shut down lasted 21 days. In October 2013, a 16-day partial shutdown occurred, and in December 2018 into January 2019, the most recent occurrence, the federal government was partially shutdown for 35 days.
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