Unless Washington can surprise us with a last minute deal, the sequestration budget cuts will begin on March 1.Sequestration is the series of $85 billion worth of spending cuts that’ll ripple across the U.S. government.
Most agree that the sequester is bad news.
However, the actual impact of the sequester is deeply misunderstood, write UBS economist Maury Harris and Kevin Cummins.
“For instance, the Democratic Congressional Campaign Committee has sponsored digital ads in 27 congressional districts represented by House Republicans who are thought to be vulnerable on the issue of large sequestration-related defence spending cuts in their districts,” they write. “In these ads it is stated that 700,000 jobs nationwide are at risk. And that is just a third of the 2.1 million job loss projected in an input/output study commissioned by the Aerospace Industries Association.”
“Our view is that investors should not over-react to these typical large estimates, which are publicized/headlined whenever specific economic sectors are either threatened by government spending cuts or angling for more government funding.”
Here are three key clarifications Harris and Cummins provide in their latest report to clients (verbatim):
1. Actual near-term spending cuts in fiscal 2013 will be only around half of the “sequestered” $85 billion in budget authority. Outlays lag budget authority, which is the concept embodied in the sequestration process.
2. The defence industry for some time already has been adjusted its headcount for the prospects of multi-year defence spending cuts. In thinking about such companies’ near-term horizon, it is worth noting that the sharp drop in defence Department contract awards so far this year was preceded by a spike late last year.
3. Likely periodic government worker furloughs of just a few days per month will “spread the pain” via a lower workweek versus severe outright job cuts of affected government employees. There still is a potentially meaningful diminution of such workers’ purchasing power, although their actual spending will reflect their individual views about whether there will be a temporary or permanent pay check reduction.
As far as the consumer is concerned, confidence has been notably resilient.
“So far consumer confidence has held up better than during the debt ceiling debate in the summer of 2011, when headlines trumpeted the possibility of a US government debt default,” they write. “Perhaps this reflects the public not being as aware of the sequester. However, considering the “false alarms” during the past two years in the ongoing budget battles in Washington DC, the public might be increasingly discounting whatever is stated and projected by our politicians.”
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