The partial US shutdown, which started in December, 2018, is reaching almost a month now, with no resolution in sight yet.
This partial shutdown is getting to be the longest in the history of the US, with economic implications getting severe.
What is the economic impact?
In the period of the shutdown, there was a mixed reaction from the markets.
While the US Dollar Index fell by 0.5%, the S&P 500 improved by 11% after a stock market crash in December, 2018.
The 10-year bond yields softened only marginally in the same period to 2.7%.
Financial markets seem to have so far ignored the shutdown event risk.
They have been focusing on hopes of a positive outcome from US-China trade negotiations and favourable policies of Federal Reserve.
This risk may, however, come to the fore in case the issue remains unresolved.
How will a prolonged shutdown impact?
Uncertainty in the US government, the US-China trade war, and concerns of an impending slowdown continue to pose risks for the US economy.
This shutdown has particularly increased the uncertainty of the state of the economy and the movement of interest rates.
If it continues for longer, it will likely hamper business confidence and government data releases such as Nonfarm payrolls, inflation.
It remains a challenge for the Fed to decide on interest rate hike without reliable data and definitive signs of continued recovery.
There are also increased concerns on growth despite the guidance for two Fed rate hikes in 2019 in their previous meeting.
Moreover, the total cost of the US-Mexico border is estimated at $25 billion, which will be around $200 per US household.
So, even if the current demand of $6 billion is approved, this could only be a short-term resolution.
A prolonged standoff over the borrowing cap increases the risk of a ratings downgrade from Aaa/AA+.
Can an emergency be brought?
The Donald Trump administration is still firm on its demand for $6 billion to build a wall on the US-Mexico border.
Given the ongoing tensions, the possibility of a national emergency cannot be ruled out.
President Trump requires two components to build the wall
the authorisation to start the construction
the land to build the wall on
Currently, a significant portion of the land on which the wall is to be built is private property of citizens.
In case of an emergency, the President has the powers to unilaterally authorise construction without Congress’s approval.
However, he cannot seize private property in an emergency without paying the market price for it.
The question then would be if Trump can reallocate funds from the defence budget or would it be disallowed by the courts.
What are the other recent U.S. government shutdowns?
2017 - In 2017, the U.S. avoided a near shutdown.
Congress had not allocated funds for the FY 2017 budget, which covered October 1, 2016, to September 30, 2017.
The continuing resolution funded the government during the 2016 presidential election and transition.
The government thus avoided a shutdown on April 28, 2017, when the continuing resolution, passed on September 30, 2016, expired.
The Senate and House approved the spending bill on May 1, 2017. It appropriated $1.1 trillion in spending.
Trump asked Congress to cut $10 billion from all other departments. Included in that budget was $1.6 billion for a border wall with Mexico.
In August, 2017, he promised his administration would shut down the government if Congress did not include funding for the wall.
Democrats oppose the wall; they would prefer to use the funds to keep Obamacare subsidies and the other domestic spending programs.
2013 - The government shutdown began on October 1, 2013.
The Republican-controlled House submitted a continuing resolution without administrative funds for Obamacare.
The Senate rejected the bill and sent one back that included Obamacare. The House ignored that bill.
It sent one back that delayed the mandate that everyone should buy health insurance and deleted the subsidies for Congress and their staffers.
The Senate ignored that bill and the government shut down.
Ironically, the shutdown did not stop the rollout of Obamacare.
1995 - This was one of the longest shutdowns in the U.S.
The government shut down twice from November 13 to November 19, 1995, and December 5, 1995, to January 6, 1996.
This was driven by a budget issue over introducing a balanced budget amendment to the Constitution.
When no budget deal was reached, the government shut down.
By January 1996, conflicting sides negotiated an agreement that cut some spending and raised some taxes, balancing the budget over the next seven years.
