GOLDMAN: The Economic Damage From The Sequester Is Becoming More Clear, And It Could Get Worse

Federal employment has been steadily dropping for several months, but a new note from Goldman Sachs economist Jan Hatzius suggests effects of the sequester have now cropped up other economic indicators.

“The first area where sequestration has shown up fairly clearly in the data is personal income, which registered a disappointing 0.1% monthly gain in July, due in part to a 0.5% decline in government wages and salaries,” Hatzius wrote to clients. “The decline was likely mainly due to defence furloughs, which started July 8. Absent the July furloughs, which according to the BEA reduced annualized wages by $US7.7bn that month, personal income growth would have just barely been rounded up to 0.2%.”

“We expect a similar negative effect in August, with a reversal of the entire effect in September” as furloughs subside.

Hatzius writes that many federal agencies haven’t really adhered to hiring freezes in the hopes that the federal government would end up ditching the sequester. If it continues, federal job losses could become more pronounced.

“We assume that Congress will not reverse sequestration, and the federal spending level that we project as a result is consistent with year-on-year declines in federal employment of around 100k over the next few quarters, with smaller declines thereafter,” he writes.

But in terms of the broader economy, “While it seems likely to us that there have been at least some indirect effects of federal spending restraint on the labour market, the effects remain concentrated in federal employment itself and in some industries with significant exposure to government spending,” Hatzius concludes.

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