Sequestration cuts expected to hit job market over summer

By Peter Schroeder – 05/07/13 05:00 AM ET

The sequester will take a bigger bite from the economy in the coming months as workers collect more unpaid leave and additional spending cuts are triggered, several economic experts predicted Monday.

A strong employment report in April that found the economy added 165,000 jobs underlined the sense that the labor market is improving, but observers warn it’s too early to declare the economy is safe from sequestration.

“The fiscal drag is going to reach its peak in the second and third quarter, and we know that’s going to be around 2.5 percent of GDP,” said Andrew Busch, a political and economic strategist who advised Sen. John McCain (R-Ariz.) in his 2008 presidential campaign. 

“People who think the sequester debate’s over, it’s not nearly as bad as they thought it was — to me that’s declaring victory way too soon,” Busch said.

Neither Democrats nor Republicans have changed their political messages on the sequester in the face of the positive employment data, suggesting both parties are proceeding cautiously given the possibility that the economy will turn.

Republicans have accused the White House of overselling the doom and gloom around the spending cuts, but have been cautious in reacting to the jobs figures.

A stronger economy and jobs market should benefit President Obama, who was battered by weak job growth in his first term. Yet the stronger job figures also make it harder to argue the sequester is hurting the economy.

House GOP leaders argue the sequester should be replaced with other spending cuts, and they have continued to seek to tie the cuts to Obama.

In his statement after the jobs report was released Friday, Speaker John Boehner (R-Ohio) said it contained “some good news,” but spent most of his time emphasizing policy changes to further boost the economy. That included replacing the “president’s sequester with smarter cuts.”

Rep. Kevin Brady (R-Texas), the chairman of the Joint Economic Committee, offered a slightly different take.

He said the economy so far had suffered “almost no impact” from the sequester and contended that any slowdown should be blamed on new government policies, including the president’s healthcare reform law.

Like Boehner, the White House has called for the sequester to be replaced, placing the onus on Congress.

“Now is not the time for Washington to impose self-inflicted wounds on the economy,” Alan Krueger, chairman of the Council of Economic Advisers, said Friday. “The administration continues to urge Congress to replace the sequester with balanced deficit reduction.”

Democrats have continued to hammer Republicans over the sequester, with the Democratic National Committee highlighting news articles detailing problems brought on by the sequester to local communities.

Among experts on the job market, there is near unanimity that the sequester’s effect will still be felt.

Mark Zandi, chief economist for Moody’s Analytics, said fiscal policy should shave 1.5 percentage points from gross domestic product growth in 2013.

The fiscal contraction coming this year will be the biggest pinch since the government drew down forces at the end of World War II, he added.

He also predicted the job market would worsen over the summer. “The impact will be noticeable this summer,” Zandi told The Hill.

Sequestration by itself will not lead to huge layoffs, but the economic pain it creates will be felt by the broader economy, he warned.

“Federal government employees will see few outright layoffs, but their pain will nonetheless be acute,” Zandi wrote following the April report. “Close to one million workers, about one-third of the federal workforce, will be furloughed for an average of 13 days through September.”

Scott Anderson, chief economist for Bank of the West, said Friday’s report is a positive indication the economy could shoulder the sequester, but that this is not yet a sure thing.

“This bolsters the case that the U.S. economic expansion will be able to survive the combined headwinds of sequestration and a deepening recession in Europe in the months ahead,” he said. “It does not, however, rule out a ‘Spring Swoon.’ ”

Republicans are focusing more on reducing entitlement spending than discretionary spending, which the sequester targets. That fight is expected to escalate as the White House and congressional Republicans battle over raising the debt ceiling.

The White House wants to raise taxes to reduce the deficit, while Republicans are focused on Medicare and other entitlement programs.

“The sequester is way better than raising taxes and way worse than fixing the mandatory spending programs, and Republicans know that,” said Douglas Holtz-Eakin, former director of the Congressional Budget Office and a conservative economist.