McCarthy's historic ousting sows fear over a government shutdown

The threat of a federal government shutdown is back on after a group of Republicans ousted House Speaker Kevin McCarthy. It was the first time in American history that a lawmaker revolt dethroned a House speaker.

McCarthy’s ousters have paved the way for weeks of government dysfunction that could paralyze Congress at a critical time. Lawmakers have until Nov. 17 to extend government funding or risk a shutdown—something they narrowly avoided last week when they struck a deal at the 11th hour.

In the meantime, Rep. Patrick McHenry (R-NC) has assumed the role of temporary House speaker until lawmakers can decide on a permanent replacement.

“The House will be paralyzed; we can expect week after week of fruitless ballots while no other business can be conducted,” said Representative Tom McClintock, a Republican from California.

While government shutdowns are nothing new—the U.S. has experienced 22 shutdowns since 1976—the latest upheaval in Congress appears to be more than just political grandstanding.

Some lawmakers have been blunt about what could happen next.

Political infighting breeds uncertainty

Perhaps the most candid answer came from Pennsylvania Republican Brian Fitzpatrick. In a meeting with fellow lawmakers, Fitzpatrick said, “If we vacate the chair, the government will shut down.”

Well, the chair has been vacated, and the path forward implies more infighting than reaching a funding resolution.

The political wrangling to come “will put this House in a stalemate and paralyze our ability to fight for our constituents and instead create a fight amongst one another,” said Oklahoma Republican Stephanie Brice.

Experts were bracing for a temporary shutdown even before the political quarrel involving McCarthy.

Last week, Goldman Sachs gave 90% odds that the government would temporarily shutter. The Committee for a Responsible Federal Budget, a nonpartisan organization, said the chance of a shutdown was 87%.

While it’s too early for oddsmakers to give sensible predictions about what happens after Nov. 17, analysts warn that the uncertainty alone could throw a wrench in an already stagnating economy.

The straw that will break the camel's back?

In addition to shutting down 'non-essential' government services, disagreements about funding could be the final straw that tips the economy into a recession.

“The big risk is if the negative consequences from the shutdown are what ultimately tip the economy into a recession or investors into a panic,” said Callie Cox, a U.S. investment analyst at trading firm eToro.

Depending on its length and severity, a shutdown could also sow fear in the markets, according to Michael Crook, the deputy chief investment officer at Mill Creek Capital Advisors.

“If the shutdown extends more than two to three weeks, we could see some deterioration in confidence, but longer-term interest rates are the main driver of markets right now,” he added.

The U.S. economy has avoided a recession this year, but real GDP growth is forecast to slow to less than 1% in the second half of 2023, according to S&P Global Ratings.

This slowdown could leave the U.S. economy more vulnerable to government shutdowns in the near term.