Why the chances of a government shutdown are now higher than when the week began

Lawmakers headed back to their districts Thursday night after some drama-filled days in Congress left the US government more likely to shut down than when the week began.

The back-and-forth began in earnest on Tuesday with the launch of an impeachment inquiry by House Speaker Kevin McCarthy to mollify the most conservative reaches of his caucus. But it immediately became clear that that move wouldn’t lessen the political pressure around a shutdown.

By Thursday, House Republicans had failed to make progress in an area that usually is one of the easiest places to find agreement: defense appropriations. The scuttling of action there — at least for this week — left McCarthy and members of the far-right Freedom Caucus in a tense standoff with f-bombs being tossed behind closed doors and personal attacks online.

"I showed frustration in there because I am frustrated with some people in the conference," McCarthy said afterwards before the cameras.

Meanwhile, the financial world looked on from afar with dismay as the developments increased the odds that a shuttering of the government’s doors, and perhaps even a protracted shutdown that could extract sizable economic costs, grows more and more likely by the day.

"The likelihood of a government shutdown in two weeks has increased to at least 60 percent," wrote Greg Valliere, the chief US policy strategist at AGF Investments, in a note to clients Friday morning. He added that McCarthy is contending with a "'burn it all down' caucus in the House, which wants a shutdown — and the ouster of McCarthy as speaker."

EY chief economist Greg Daco added in a Yahoo Finance Live appearance that a shutdown could subtract about one tenth of a percentage point from GDP each week the government doors are closed.

That fact, when combined with the ongoing UAW strike and the resumption of the student loan payments, "could add up to a significant drag on growth in the fourth quarter."

Another area with (non) developments: The Senate

While the House of Representatives was clearly the center of inaction this week, developments on the other side of the Capitol were hardly more promising for observers hoping to avoid a shutdown.

The week began with Senate Majority Leader Chuck Schumer planning for the upper chamber to advance a so-called "minibus" appropriations package that would cover different areas and increase pressure on the House to act.

But then the process hit a serious snag when Sen. Ron Johnson (R. Wisc.) objected to the amendment process and employed a maneuver that scuttled voting for the week.

"And now all of a sudden, you have a group, a small group in the Senate, trying to mimic the Freedom Caucus in the House," said a visibly frustrated Schumer afterwards. He promises to push his measure through over Johnson's objections next week.

The path ahead

Lawmakers in both chambers are set to return Monday. By that point, they’ll have less than two weeks before a first key deadline — the end of the government’s fiscal year on Sept. 30 — in what could be months of fighting ahead.

Unless Congress acts, the government will shut down that night.

The most likely move to at least temporarily avert that outcome would be a short-term extension of government funding, known in Washington lingo as a continuing resolution, but the path to a bipartisan agreement on even a stopgap measure is far from certain.

House Republicans are reportedly mulling an idea that would pair an extension of a few weeks with border provisions but the Senate would almost surely ignore the idea even if McCarthy has the votes to get it passed.

The White House and Senate — including Republicans like Senate Minority Leader Mitch McConnell — meanwhile are pushing for a continuing resolution that would be focused instead on disaster relief and funding for Ukraine and could keep the government open through the end of the year.

In a note this week, analysts at Goldman Sachs maintain that the chances of a shutdown remain high but the pressing need for disaster relief money for Hawaii, Florida, and elsewhere could "raise the odds that Congress passes at least one extension before any shutdown."

In a Yahoo Finance Live appearance Thursday, National Economic Council Deputy Director Bharat Ramamurti made clear that the White House was ready to lay the blame for any shutdown at the feet of McCarthy. He said the White House and Senate are aligned but "the issue is that, as has happened multiple times in the past, House Republicans are taking an extremist stance that's jeopardizing the basic functioning of government."

For his part, McCarthy promises that when House lawmakers return next week, they won’t be going anywhere until a shutdown is averted.

"We’re not going to leave," he promised reporters on Thursday, adding "nobody wins in a government shutdown."

Ben Werschkul is Washington correspondent for Yahoo Finance.

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