March 1 will be here in no time, and the rhetoric regarding sequestration will ramp up as we approach that magical date where automatic spending cuts take place. Washington insiders do not believe a bipartisan agreement can be reached in time. The President will propose cuts and tax increases in equal proportion, and the House is adamantly opposed to it.
Just to be clear, we believe the sequestration will add to the downside business cycle pressure in the US that will be building in the second half of this year, but in and of itself, the sequestration is not recessionary. Indeed, in the larger sense the cuts are needed and will benefit all taxpayers and benefit recipients in the future.
Medicaid, Medicare, and food stamps are not touched by sequestration, but every other government account is affected by roughly the same amount. The Congressional deal in January reduces the 2013 cuts to $85 billion from the previously mandated $110 billion. A drop of 7.3% is expected for most Pentagon accounts while a 5.1% loss is expected for most domestic agencies.
These are not the severe austerity moves seen by Greece and other nations, but federal jobs will be lost as budgets are cut. Some defense contract workers will also see reduced hours, no pay raises, or some job losses. Unfortunately, some agencies are threatening the most painful kind of cuts, such as a lack of rangers at national parks at peak seasons. This headline move is neither necessary nor responsible. But on the positive side, the reduction in force at the government level can be a good thing for the private sector as good, trained, knowledge workers will be looking for work.