Here are some good thoughts via Macroeconomic Advisers on the sequestration and the overall impact. They’re calling for 700,000 jobs lost and -0.6 off of GDP if the cuts go into effect. Whew.
Of course, the equity market is whistling past the graveyard here as we reach a point where you can buy almost any dip and make money on the long side. Most of the time I feel like I understand what’s going on, but then the market reminds you that you can never understand Mr. Markets bi-polar disorder. Maybe the folks at MA can provide some guidance:
A sequestration of federal spending, scheduled to take effect on March 1, is now less than two weeks away. Little progress has been made in negotiating a bargain that avoids or delays the automatic spending cuts implied by the sequestration. Accordingly, we now put the odds of a sequestration at close to 50%, and rising.
- Our baseline forecast, which shows GDP growth of 2.6% in 2013 and 3.3% in 2014, does not include the sequestration.
- The sequestration would reduce our forecast of growth during 2013 by 0.6 percentage point (to 2.0%) but then, assuming investors expect the Federal Open Market Committee (FOMC) to delay raising the federal funds rate, boost growth by 0.1 percentage point (to 3.4%) in 2014.
- By the end of 2014, the sequestration would cost roughly 700,000 jobs (including reductions in armed forces), pushing the civilian unemployment rate up ¼ percentage point, to 7.4%. The higher unemployment would linger for several years.
The macroeconomic impact of the sequestration is not catastrophic. Nevertheless, the indiscriminate fiscal restraint would come on the heels of tax increases in the first quarter that total nearly $200 billion, with the economy still struggling to overcome the legacy of the Great Recession, and when the FOMC is constrained in its ability to offset the additional fiscal drag with a more accommodative monetary policy. By far the preferable policy is a credible long-term plan to shrink the deficit more slowly through some combination of revenue increases within broad tax reform, more carefully considered cuts in discretionary spending, and fundamental reform of entitlement programs.
The impact of the sequestration would not be a macroeconomic catastrophe. Nevertheless, the indiscriminate fiscal restraint would occur on the heels of tax increases that total nearly $200 billion in the first quarter, with the economy still struggling to overcome the legacy of the Great Recession, and when the FOMC is constrained in its ability to offset the additional fiscal restraint. Furthermore, spending cuts that are so arbitrary in their allocation and timing can’t possibly be optimal from a public policy perspective. The preferable policy is a credible long-term plan to shrink the deficit more slowly through some combination of tax increases within broad tax reform, more carefully considered cuts in discretionary spending, and fundamental reform of entitlement programs.