As the clock ticked past 11:59 and Friday, March 1 turned into Saturday, March 2, the much-discussed sequestration went into effect. Did markets shudder at this lack of a last-minute deal? Not really – in fact, all three major U.S. markets (DJIA, S&P 500, and NASDAQ) closed up on Friday. So, how much of an impact will this roughly US$1 trillion in cuts have on the economy? Not as much as you might think.
First, the US$1 trillion in cuts goes through 2023, so it’s not a one-time hit. The impact of the spending cuts will be felt unevenly across the country. Washington D.C. will feel the bite very keenly, as will states with a large defense-industry presence (e.g. Hawaii, Alaska, New Mexico, Virginia, Kentucky, and Alabama). If the government doesn’t step in to cancel the cuts, furloughs of government workers probably won’t start before April. That means get your U.S. tax returns submitted soon if you’re expecting a refund…otherwise, you might be waiting a bit longer for an IRS employee to send your check.
Our current feeling is that the sequester will be only a mild drag on growth in 2013. The Congressional Budget Office estimates that the reduction in outlays to be less than US$45 billion (interesting blog post from CBO on their thoughts here). That’d be less than 0.3% of nominal GDP on both fiscal and calendar-year bases, and only 1.2% of all federal outlays for fiscal year 2013. Further, even with this sequestration, total federal spending for fiscal 2013 will be greater than that in fiscal 2012.
The one positive about our current situation is that, in spite of the sequester, the U.S. economy is actually pretty well positioned for growth. The manufacturing and housing sectors are robust. Job growth is improving. Consumer confidence has clawed back much of what it lost after the pay-roll tax holiday ended. Auto sales have been strong and jobless claims remain relatively low.
So, all this means that we’re actually not changing our current view on the U.S. economy. Even with a little sequester-induced weakness this year, we expect the U.S. economy to regain a full head of steam by 2014. You can see more on our economic outlook and our economic wrap-up for February here.