If mandatory federal spending cuts begin to take effect Friday, small companies are likely to experience a negative ripple effect of a slowdown in business.
The budget cuts, also known as sequestration, would hit domestic programs that fill every corner of the U.S. economy — military spending, aviation, and education programs for low-income families. But unlike larger private-sector businesses, smaller employers usually don't have buffers such as large cash reserves to ride out federal budget cuts. Most smaller firms also can't quickly pivot their business strategies to ride out a rough patch.
"Larger companies have economies of scale these days. They have cash reserves, better access to credit markets. They tend to have more of a multinational presence," said Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities and former chief economic adviser to Vice President Joseph Biden. "Small firms tend to be less insulated from this kind of a hit."
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Sequester 'ripple effect' seen
To be clear, the budget cuts are likely to have a rolling, accumulated impact on small business. Companies with U.S. government contracts must decide which workers will likely be laid off as funds to keep them on payroll evaporate.
"The sky isn't going to fall on March 1," Bernstein said.
Other budget experts note that President Barack Obama's state-by-state sequester report includes improbable precision in administration statements about what could happen. "It's not clear who gets hurt by this," Paul Light, a New York University professor who specializes in the federal bureaucracy and budget, told The Associated Press.
Of course, furloughing workers is never good news, and the budget cuts will have consequences.
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Unemployment would create a gradual, domino effect on Main Street. "Less income means those workers will not visit the restaurants around the corner, bring dry cleaning to small businesses at the end of the block," said Bernstein. "There's a ripple effect that hits small businesses, as well."
Small employers squeezed
A study released in late 2012 estimates that in 2013 alone, a sequester would put 2.14 million jobs at risk, including about 956,000 small-business jobs. The sequester would cut across all government spending including the Department of Defense, the Federal Aviation Administration, National Aeronautics and Space Administration and National Oceanic and Atmospheric Administration.
The study was conducted by Stephen Fuller, a George Mason University economist, along with analysis from the Aerospace Industries Association, a trade group that represents aerospace and defense manufacturers.
"As contracts are cancelled, re-negotiated, or otherwise reduced, small business leaders will have limited flexibility in adjusting their business model," said Fuller in the study. "While some will seek to diversify, others will just downsize."
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Hit to aerospace and defense
Not surprisingly, the nation's aerospace and defense programs are especially vulnerable to budget cuts. And those programs are dependent on small businesses — often the sole suppliers of key components used to manufacture major weapons, aircraft, spacecraft and satellite systems.
Main Street, Washington disconnect
President Obama is scheduled to meet Friday with top leaders in the House and Senate, several hours past the deadline for averting automatic budget cuts. They'll discuss how to proceed on the divisive tax-and-spending issues.
The Budget Control Act of 2011 mandates about $1 trillion in sequestration budget cuts to the Department of Defense and non-DOD programs over nine years.
Meantime, for many Americans, shouts of sequester sound like politicians fanning the flames of economic doom — again.
Fred Deluca, the founder of privately held Subway Restaurants, said the government broadly is simply out of touch with small-business owners. Policies including Obamacare discourage entrepreneurship and the American dream of owning your own business, Deluca told CNBC's "Squawk on the Street" Wednesday.
"It's continuously gotten worse because there's more and more regulation. And it's tough for people to get into business, especially small business," he said. "If I started Subway today, Subway would not exist."
Not surprisingly, small-business owners' confidence was virtually flat in January, as entrepreneurs failed to recoup losses sparked by December's scare about the so-called "fiscal cliff."
While a fiscal deal was reached in January on tax increases and spending cuts, benefits have remained elusive for much of Main Street — a traditional driver of new jobs during past economic downturns.
"The only good news is that it 'budged' up, not down. If small businesses were publicly traded companies, the stock market would be in shambles," said Bill Dunkelberg, chief economist of the National Federation of Independent Business. "While corporate profits are at record levels as a share of (gross domestic product), small businesses are still struggling to turn a profit."