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Sequestration effects won’t be felt right away

Written By: Andrew Hedlund on March 13, 2013 No Comment
Sequestration has taken hold and may slow growth quite a bit in the long term. (Photo courtesy of 401 (K) 2013/Creative Commons)

Sequestration has taken hold and may slow growth. (Photo courtesy of 401 (K) 2013/Creative Commons)

While many economists and politicians expect sequestration to eliminate a substantial number of jobs, the effects of it won’t be felt right away.

If not undone, sequestration — the name for the dreaded $85 billion cuts in federal spending — could eliminate 750,000 jobs that could have been saved or created by the end of the year, according to the nonpartisan Congressional Budget Office. But the country won’t be going over the brink just yet.

“In March we probably aren’t going to see much of the effects yet,” said Adam Hersh, an economist at the Center for American Progress Action Fund. “I think that that the (Office of Management and Budget) are still figuring out how they are going to start implementing these cuts.”

Mesirow Financial forecasts a more positive outlook, in part, because they put faith in Congress to reach a solution by the end of the year.

They forecast 500,000 jobs being lost and a 0.2 percent increase in the unemployment rate, said David Nice, an associate economist at Mesirow Financial. The Mesirow-projected year-end unemployment rate is 7.7 percent, the same rate as in February.

The firm’s hope for a solution is not misplaced. There has been a renewed push to reach a “grand bargain,” a deal that would encompass entitlement reform and more tax revenues to help rein in the budget deficit.

“It would add so much certainty to the market,” Nice said, “and I think having that in place, having long-term certainty on programs like Social Security and Medicare would be great for the economy. People would be able to make investment decisions, life decisions moving forward because they actually know what’s going to happen to them.”

As time wears on, the economy will be affected by the budget cuts though. The CBO has forecasted the cuts would shave 0.6 percent off GDP growth this year.

A report released by Comerica Inc. on Tuesday forecast the unemployment rate remaining at or above 7 percent through the first quarter of 2014. Similarly, a Northern Trust Co. report released the same day showed the unemployment rate above 7 percent for the rest of the year.

“It’s going to mean that unemployment will continue to remain elevated for the near future,” Hersh, the Center for American Progress Action Fund economist, said.

The Northern Trust Co. report predicted the annual change in this year’s GDP, 1.6 percent, would be lower than 2012’s 2.2 percent growth rate.

“You’re basically kicking someone while they’re down,” Nice said. “It’s not like the economy is booming and then you’re trying to do some cuts. The economy is growing at such a slow place.”

Both the public and private sectors will feel the government’s fiscal belt-tightening.

“The private sector is going to be hurt as well from the sequester because the government doesn’t do that many things on its own,” Hersh said.

The government does a fair amount of business with private-sector companies, particularly in the defense sector. Many well-known companies are contractors to the federal government in this industry, such as Boeing Co., Lockheed Martin Corp. and General Dynamics Corp.

The sequester might just be enough to push the country back into a recession, something both Hersh and Nice agreed on. With an anemic GDP expansion of 0.1 percent in the fourth quarter of 2012, the economy is barely in positive growth territory.

“If the full force of the sequestration is played out, it’s very possible to see a recession,” Nice said.

This ominous data comes on the heels of a strong February jobs report. Initial estimates by the Bureau of Labor Statistics showed a net gain of 236,000 jobs, somewhat combatting the notion that the economy might not be able to withstand the higher taxes and reduced spending.

Hersh does not put stock in this idea though. Revisions for these numbers come in the ensuing months, and Hersh expects them to be revised downward. The range for revisions is quite large — up to 90,000 either up or down, he said.

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