UBS: Everyone Made The Same Flawed Assumption About Sequester-Related Job Cuts

maury harris ubs

To many people’s surprise, the U.S. economy has been returning to a normal pace of growth.

In fact, the recent string of strong economic data has caught Wall Street’s economists off guard, and they have been revising up their Q1 GDP growth forecasts to almost 3 per cent.

UBS’s U.S. economics team led by Maury Harris has long held a 3.0 per cent forecast for growth, largely due to the belief that easier credit conditions would boost job growth.

And as many sounded alarms about sequestration budget cuts would do to jobs, Harris’ team argued that fears were overblown.

They reiterate that point in a new note to clients today:

Our overall payroll forecast of 200,000 per month reflects flat to slightly higher payrolls at the state and local level, where revenues continue to rebound, and a just over 100,000 annual decline in Federal payrolls. Our public sector employment projections are very much under various job loss estimates stemming from the $85 billion Federal spending sequester in fiscal 2013. The major flaw in sequester- related government job loss estimates is that they typically are generated by simply dividing spending cuts by average wages and salaries for Federal workers. However, the sequester instead is being implemented primarily through furloughs entailing one- or two-day drops in the monthly workweek per worker. Such furloughs “spread the pain” and do not entail major headcount cuts.

Harris notes that despite the ongoing stream of news about policy dysfunction, business and consumer sentiment has been resilient, which is particularly encouraging.