Analysis: Even brief spending cuts could hit U.S. economy hard

WASHINGTON Wed Feb 6, 2013 6:53pm EST

The U.S. Capitol building is seen as the sun begins to set under heavy cloud cover in Washington November 20, 2008. REUTERS/Jim Bourg

The U.S. Capitol building is seen as the sun begins to set under heavy cloud cover in Washington November 20, 2008.

Credit: Reuters/Jim Bourg

WASHINGTON (Reuters) - The U.S. economy could take a big hit from automatic government spending cuts even if Congress only leaves them in place for a month or two.

The cuts were meant to be so painful that they would force Congress to find a more thoughtful way to tighten the budget.

But many analysts assume they will take effect as scheduled, forcing federal offices to furlough some of their 2.8 million workers and trim spending on everything from paper clips to missiles.

It is anyone's guess, however, how long lawmakers will be able to stomach the economic pain. The duration of the austerity measures will determine the force of the blow to the economy. Some analysts think having the cuts in place for more than a few months could trigger a brief recession.

The Congressional Budget Office said on Tuesday the cuts would translate into $42 billion less in federal spending between the beginning of March and the end of September.

If $6 billion in spending is cut in March - which would be the average decline over a seven-month period - economic growth would be stunted by roughly seven-tenths of a percent in the first quarter, said Omair Sharif, an economist at RBS in Stamford, Connecticut.

"You are going to feel the pain right away," Sharif said.

Expectations for growth during the first quarter are already lackluster. Analysts polled by Reuters last month said they expected the economy to grow at a 1.5 percent annual rate in the first quarter, though some have since raised forecasts.

If the cuts continued into the second quarter, the austerity could erase almost all the growth expected during that period, Sharif said. After the second quarter, the impact would lessen.

Sharif's calculation only takes into account the direct effect on growth from spending cuts. The loss of income at government contractors and among furloughed employees would also hurt the economy throughout the year by reducing consumer spending and business investment.

Pentagon officials have said up to 800,000 of the military's civilian employees would work one less day a week because of the cuts.

The Air Force said it would have to curtail orders for Lockheed Martin Corp's F-35 fighter jet and delay a new version of the MQ-9 Reaper drone being built by privately held General Atomics.

Congress has been scrambling to find a way to postpone the budget cuts, but has shown little sign of progress.

In its report this week, the CBO projected that the economy would grow 1.4 percent this year if the austerity measures kick in. At that pace, the jobless rate would average 8 percent in the fourth quarter, just above the 7.9 percent reading from January.

Most Wall Street banks expect the cuts, known as the "sequester" in Washington parlance, to take effect at least briefly.

Kevin Logan, chief U.S. economist at HSBC in New York, does not. He acknowledges there is a good chance he is wrong and says the cuts could push the United States into a brief recession.

"The full implementation of the sequester over a short period of time could very well be the trigger," he said.

(Reporting by Jason Lange; Editing by Tim Ahmann and Stacey Joyce)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (8)
Harry079 wrote:
“The cuts were meant to be so painful that they would force Congress to find a more thoughtful way to tighten the budget.”

No it was a way to get the debt ceiling raised again and make it look like they would have to get serious about spending cuts after the election.

Feb 06, 2013 7:05pm EST  --  Report as abuse
OneOfTheSheep wrote:
So now we know the TRUTH. The American economy is being “supported” at it’s current UNSUSTAINABLE level by the HOT AIR of government printing press money with NOTHING behind it!

There is, therefore, NO WAY the budget deficit, the budget or debt ceiling problems can ever be fixed without triggering the next DEPRESSION.

Thanks. I’ll sleep better tonight.

Feb 06, 2013 7:17pm EST  --  Report as abuse
MassResident wrote:
As Robbie the robot would have put it “This does not compute”. The FED is printing as much money every month as the “sequester” would reduce spending over an entire year! If “quantitative easing” stimulates the economy then the FED’s twelve times larger stimulus must make the sequester irrelevant. How can the FED apply and remove this kind of stimulus with little or no effect and a tiny budget cut push us into recession?

Frankly, this article looks like an attempt at self fulfilling prophesy. It follows the rule that if you tell people something often enough they will start believing it and act accordingly. Swings in the economy are good for stock market speculators and politicians. The economy is not made in Washington, although it can be destroyed there.

Feb 06, 2013 7:23pm EST  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

Recommended Newsletters

Reuters U.S. Top News
A quick-fix on the day's news published with Reuters videos and award-winning news photography and delivered at your choice of one of four times during the day.
Reuters Deals Today
The latest Reuters articles on M&A, IPOs, private equity, hedge funds and regulatory updates delivered to your inbox each day.
Reuters Technology Report
Your daily briefing on the latest tech developments from around the world from Reuters expert tech correspondents.