Sequestration: When Will You Feel the Pain?

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Published March 01, 2013

| FOXBusiness

The president has been busy touring the country this week warning Americans about the damaging effects of the automatic spending cuts, but some experts say his cautionary tales might be a little trumped up.

In a speech Tuesday at a shipbuilding factory, President Barack Obama said "the sequester will weaken America's economic recovery. It will weaken our military readiness. And it will weaken the basic services that the American people depend on every single day."

Democrats and Republicans continue to struggle to reach an agreement on how to turn off the $85 billion in spending cuts that will start today when the president signs off on them. The sequester was designed in 2011 to act as a poison pill to motivate Congress to create a long-term budget plan. But that didn’t happen, and now we’re facing down the barrel.

The administration has warned the cuts will bring flight delays, school cancellations, furloughed government workers, meat shortages and shutter some national parks because of the cuts. A fact sheet released by the White House says the sequester threatens “thousands of jobs and the economic security of the middle class...” Economists expect the sequester to pose a drag of around 0.6-percentage point on the still shaky economy in 2013.

But experts say most Americans won’t feel the cuts right away, predicting it will take time for them to ripple throughout the economy. It's only if the standoff continues for several months that we might start to feel the pinch.

“There are different possibilities on how this might play out, it’s either going to be Armageddon or all smoke and mirrors,” says Greg O’Donnell, founder and CEO, O'Donnell Financial Group. "All our problems are self inflicted…we aren’t going to know until the political gamesmanship stops what the real impact is of these cuts.”

Last week Obama said the “meat cleaver” cuts would likely lay off thousands of workers in national security, education and clean energy fields. "Firefighters and food inspectors could also find themselves out of work – leaving our communities vulnerable. Programs like Head Start would be cut, and lifesaving research into diseases like cancer and Alzheimer’s could be scaled back."

When it comes to trimming the budget, Charlie Smith, principal at Fort Pitt Capital Group in Pittsburgh has no problem with Congress’ choice of cutting instrument.

“It’s an eloquent way of making the cuts because they are across the board, when you allow politicians to take a scalpel and pick and choose, no one will choose, and they will not make the cuts.”

Here's a breakdown of what consumers can expect when the deadline hits and how their lives might be impacted:

Consumer Spending

Consumer confidence tends to reflect, in part, the amount of certainty coming out of Washington and the recent instability on Capitol Hill has Americans worried and keeping the purse strings tight.

“We saw it for the first time in August 2011 with the debt ceiling vote, consumer confidence plunged about 15 points. It then recovered, but then again in December and January, confidence faded again with the uncertainty with the series of tax cuts expiring,” says Greg Daco, economist with IHS Global Insight.

Lagging consumer confidence decreases spending, which makes up about two-thirds of the country’s GDP.

Americans receiving Emergency Unemployment Compensation benefits would see their benefits cut by as much as 9.4%, the White House reports, which equals an average loss of $400 for recipients. 

Small Businesses

Small businesses could feel the pinch under the cuts because loan guarantees from the Small Business Administration could be reduced by up to $540 million.

“The SBA is a lender of last resort,” says Molly Brogan, vice president of public affairs for the National Small Business Association. “Small businesses go there because no other bank will lend to them right now. Right now lending programs aren’t particularly robust and putting a pinch on those will be felt in small businesses and hiring because if businesses don’t have access to capital they don’t hire.”

Brogan, says federal contractors are going to get hit with a “one-two punch” if the cuts go live.

“We think it’s very likely that federal contractors are going to face an increased workload for less money and will face stiffer competition if agencies are working with smaller budgets. They will want to farm out to larger companies that can provide more for less instead of choosing three or four smaller contractors to work with.”

Education

Education Secretary Arne Duncan warned this week 40,000 teachers could be laid off if the cuts are executed.  

“All the individuals that depend on public funding and assistance on the education front could potentially feel a pull back on their options if the cuts hit,” says Daco.

Head Start could face a cut immediately following the deadline, forcing 70,000 children to go without the program, according to the White House. Duncan added that 14,000 teachers, teacher assistants, and staff who work in the Head Start program could also lose their jobs.

Experts say many school districts won’t feel the cuts until next year because many programs like special education and Title I education funds are pre-funded. With that said, the uncertainty of the size of their budget could make it difficult for schools to plan for next year, which starts now.  

Consumer Safety and Security 

The White House says the spending cuts will impact the IRS, FBI and FEMA. Specifically, the FBI and other law enforcement entities could see a reduction in capacity equal to more than 1,000 federal agents.

The U.S. Agriculture Department reports the spending cuts would force it to furlough nearly one-third of its roughly 100,000 employees and close 670 of the Forest Service's recreation sites.

In a letter to Sen. Barbara Mikuls, (D-MD), Agriculture Secretary Tom Vilsack said the spending cuts would reduce funding for USDA programs by almost $2 billion in 2013. 

The furlough could also lead to a nationwide shutdown of meat and poultry plants, which could bring 15 days of lost production costing around $10 billion. Consumers would also experience limited meat and poultry supplies, which due to the laws of supply and demand, could push prices up.

The letter also claimed that up to 600,000 low-income women and infants could be cut from the WIC program that provides supplemental food and nutrition education if the budget cuts last for the rest of this fiscal year.

Travel

The sequestration could increase travelers’ headaches.

“These across-the-board cuts may punish travelers with flight delays, long security lines at Transportation Security Agency checkpoints and multi-hour waits to clear Customs and Border Protection,” the U.S. Travel Association said in a release.  

However, the Department of Homeland Security has said staffing at airports will remain stable for the first few days following March 1.

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