Whether the US government will shut down this week will depend on the next 24 hours.

Congress's "temporary agreement" reached at the end of September is about to expire, and the US government is once again on the brink of a "shutdown" crisis. If Congress fails to reach an agreement on funding by midnight on Friday, there may be a partial government shutdown starting from Saturday.

House Speaker Mike Johnson announced two steps over the weekend to avoid a government shutdown, which will be voted on in the House of Representatives on Tuesday local time. However, Johnson's plan may still be thwarted in the face of the joint resistance from the Republican Party and the White House, especially the opposition from hardline conservatives.

With less than 24 hours before the House vote, hardline conservatives still have the opportunity to derail Johnson's proposal. US President Biden also has weapons at his disposal and may issue a clear veto threat.

However, optimists believe that the House and Senate will once again come up with a stopgap measure to avoid a government shutdown. BTIG, a well-known investment bank on Wall Street, believes that although the possibility of a government shutdown is still as high as 40%, it is still unlikely.

Joint resistance from the Republican Party and the White House, opposition from hardline conservatives

Over the weekend, Johnson announced two steps to avoid a government shutdown - a "staggered continuing resolution" aimed at extending funding for certain agencies and projects until January 19, and for other agencies and projects until February 2.

Johnson said his plan would buy time for lawmakers to negotiate the personal spending bill demanded by fiscal conservatives. He also said on social media site X:

The spending addiction in Washington can't be kicked overnight, but I won't allow the year-end spending spree to continue under my leadership.

The House plans to vote on the plan on Tuesday local time. However, Johnson's plan may still be thwarted in the face of joint resistance from the Republican Party and the White House, especially the opposition from hardline conservatives.

According to the latest reports, the plan faces opposition from at least eight extreme conservatives who want immediate spending cuts or changes to immigration laws as conditions for the temporary measure.

Scott Perry, chairman of the House Freedom Caucus, said on X:

I won't support a status quo that doesn't acknowledge fiscal irresponsibility, changes nothing, and encourages a do-nothing Senate and a fiscally ignorant president.

The opportunity for hardline conservatives to disrupt lies in the complex parliamentary rules of the House, which are so cumbersome that legislation often requires a special individual rule proposed by the powerful House Rules Committee.

However, even if the committee advances the resolution, hardliners still have a chance for another opportunity. Technically, the entire House must approve the rules proposed by the group before considering Johnson's plan.

It is worth mentioning that the opposition from conservatives means that Johnson needs to win the support of some Democrats.Currently, the Democratic Party's response to Johnson's plan has been tepid, but there are early signs that the plan may receive support from both parties.

Connecticut Senator Chris Murphy told the media:

I don't like the rhetoric from the House, but I am willing to listen.

However, Debbie Wasserman Schultz, a senior Democratic member of the House Appropriations Committee, sharply criticized the Republican proposal, calling it "recklessly opening the door to a double shutdown."

The White House criticized Johnson's plan as "an unserious proposal" that will inevitably lead to a government shutdown. Biden may issue a clear veto threat, damaging the prospects for Democratic support in the last vote.

But on Monday afternoon, Biden indicated that he was inclined to oppose issuing a veto threat and noted that he was in negotiations with bipartisan leaders in the Senate.

Biden said at the White House, "I'm not going to make judgments about what I will veto or what I will sign," and he will "wait and see" the progress of the temporary funding negotiations.

Dysfunction in American Politics

In the second half of the year, the United States was on the brink of defaulting on its debt, leading Fitch to downgrade the country's sovereign debt rating, and former Speaker of the House McCarthy lost his job. The House has been in a state of "leaderless" for nearly a month.

As the only top credit rating agency that currently gives the United States the highest rating, Moody's downgraded the country's rating outlook from "stable" to "negative" last Friday, citing risks to the country's fiscal strength and a divided Congress.

If Congress fails to reach an agreement on funding issues by midnight on Friday, the U.S. government will shut down on Saturday, temporarily furloughing hundreds of thousands of federal workers and delaying government contracts and vendor payments. Military personnel, law enforcement officers, and other essential employees will continue to work but without pay until the deadlock is resolved.

Initially, a government shutdown may have a relatively small impact on the economy, but as millions of workers go unpaid, private contractors fail to receive payment, and consumer uncertainty increases, the impact will gradually accumulate.

The University of Michigan's Consumer Confidence Index fell to a six-month low in early November's preliminary reading. This could mean that consumer confidence has been affected due to the threat of a government shutdown, leading them to be more concerned about the future economic situation. This concern may lead to reduced consumer spending, further negative effects on the overall economy.

Shutdown Probability as High as 40%

Currently, most analysts believe that the likelihood of a U.S. government shutdown is low.

BTIG analysts Isaac Boltansky and Isabel Bandoroff said in a recent memo:

Our view is that Speaker Johnson's honeymoon period with his party (the Republicans) is coming to an end, but we believe he still has enough room to secure a 'clean' continuing resolution through the House, extending government funding until January next year."

At the highest level, we do not believe this shutdown should be viewed as a major event for investors, as it does not touch on the core issue of the debt ceiling, and any disruptions to economic activity will be compensated for after an inevitable agreement.Height Capital Markets analyst Benjamin Salisbury stated in a report:

We still believe that the possibility of a government shutdown this week is relatively low (less than 40%), and we expect some Democrats to support the plan, although the outlook remains uncertain.

The two-stage continuing resolution reinforces our view that avoiding a government shutdown aligns with the political interests of the Republican Party, and Congressman Johnson is likely to have enough conservative credibility and right-wing support to push for a compromise that receives support from both Republicans and Democrats.

However, this delay only postpones the deadlock on spending levels and priorities to the first quarter of 2024, without resolving the issue.

Beacon Policy Advisors analyst Andrew Lokay straightforwardly stated that the government is not expected to shut down this weekend.

Although Johnson's continuing resolution does not provide the spending cuts that fiscal hawks were hoping for, it at least gives the House Freedom Caucus (HFC) a victory in the details of the funding process.

The end-of-year omnibus bill, led by leadership, has become somewhat of a nightmare for conservatives who dislike both excessive overall spending and missing opportunities to push for spending cuts and policy amendments.

Johnson's proposed continuing resolution will defer the funding debate to next year, eliminating the possibility of pushing such an omnibus bill before the Christmas deadline.

According to Goldman Sachs' latest report, the most likely scenario is another extension, although a government shutdown in November is becoming increasingly risky.

The two main questions at the moment are: how long will the next extension last? And what are the additional conditions? Goldman Sachs believes that the solution is to extend until mid-January or mid-December next year, with the former being more likely, and providing financial aid to Israel as the most probable additional policy.

Goldman Sachs points out that the risk lies in the higher likelihood of a shutdown after the next extension. If Congress continues to avoid a shutdown through temporary extensions, the eventual result will be automatic spending cuts taking effect in May next year, leading to a decrease in fiscal expenditure of approximately $120 billion.