How Will a Government Shutdown Affect Middle Market Business?

The specter of a government shutdown looms this fall as Congress and President Obama return from recess to face the country's budget challenges. There will be a showdown, but will it cause a shutdown? How can you best prepare your midsize business for the worst?

A potential shutdown looms as Congress and President Obama are at odds over government spending.

First, it is important to understand what is at stake. Republican opposition to the president's health care bill is fueling the showdown. Some Republicans propose passing a continuing resolution when the fiscal year begins on October 1 that funds all aspects of the government - except the president's health care bill.

According to Treasury Secretary Jacob J. Lew, in a letter to House Speaker John Boehner, the debt ceiling will be reached sometime in mid-October. Boehner says that any increase of the debt ceiling "must be accompanied by cuts and reforms greater than the increase." The Obama administration has said it will not negotiate with Republicans in Congress over its responsibility to pay its bills.

Concerned members from both parties engaged in negotiations over the last few months but have recently abandoned their efforts because of policy differences. When and if the process starts up again is anybody's guess.

So, what can you do to prepare your midsize company for either outcome? Unless you do extensive work with the government, it does not make sense for your business to make major strategic changes.

History suggests any government shutdown will be short-lived. There have been 17 federal shutdowns in U.S. history: six during Carter's four years, eight during Reagan's eight years, one for George H.W. Bush, and two for Clinton. Since the 1980s, most have only been for two to three days.

The longest lasted 22 days - December 16, 1995, to January 6, 1996, during the scaled-down holiday season - but was widely perceived as a PR disaster for Republicans, which is why many of them oppose this option. Washington, however, continued to fund what is called "essential services," usually referred to as "spending gaps," so it was not technically a complete shutdown.

A more likely scenario is a debt-limit battle similar to the one in August 2011, where Congress and the president reached an agreement without an official shutdown on the day before reaching the debt limit, August 2.

Companies that do significant business with the federal government, however, should ensure they have extra cash on hand, just in case their contracts are temporarily suspended or furloughed federal employees cannot get checks out promptly.

Likewise, businesses that provide extensive consulting services might be unable to reach their government contacts for a few days. States with a significant number of federal employees, especially Virginia and Maryland, could see a slight income decline if furloughed workers don't get paid. This may cause modest contraction in consumer buying for that period. By contrast, large states with a much smaller percentage of government workers (e.g., Florida, Ohio, and even Illinois) would see little impact.

Ironically, the budget battles come amid growing optimism. According to the NCMM 2Q 2013 Middle Market Indicator, middle market companies are seeing positive growth, with 65 percent reporting increased gross revenue performance in the past 12 months and 43 percent saying they expect to hire workers by year's end. Confidence is also up: nearly two-thirds have some confidence in U.S. economic prospects.

Messy budget battles, however, can dampen enthusiasm. The Dow tanked during the 2011 showdown, dropping from 12,681 on July 22 to 10,817 in less than a month. The market didn't reach its July 22 peak again until the end of January, 2012. This market roller coaster can cause delays for companies looking to raise capital to fuel expansion.

For the vast majority of growing business owners, though, the good news is that any potential shutdown will likely only last a few days. Anti-shutdown pressure from voters, the media and the stock market has a way of forcing solutions.

Merrill Matthews, Ph.D., is an NCMM contributor and a resident scholar at the Institute for Policy Innovation in Dallas, Texas. Follow him at https://twitter.com/MerrillMatthews.