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Even before the federal spending crunch began to pinch March 1, Chi-Yeh Han Boone was already feeling the pain of the budget squeeze known as the sequester.
The co-owner and CEO of Fort Worth Gasket & Supply – which sells parts to the military – said the loss of supply contracts forced her to lay off contract workers filling orders in the company warehouse.
“If you don’t have the cash flow, with a reduction of 25 percent of revenues you have to cut staff,” Boone said.
More job cuts are on the way as the river of government spending flowing through the U.S. economy continues to slow. The $85 billion federal spending squeeze – part of a doomsday budget package originally approved last summer to force a more rational spending plan – has now lopped more than a full percentage point from gross domestic product over the past six months and eliminated tens of thousands of federal jobs.
The hit to federal payrolls is expected to show up Friday in the latest monthly job numbers for April. Most economists are expecting the report to show a net gain of 145,000 jobs, according to the economists polled by Reuters.
The pace of layoffs is expected to pick up speed this summer. The Congressional Budget Office estimates that for the full year, federal spending cuts will reduce overall employment by about 750,000 jobs. Most agencies have just gotten started.
Private economists say that budget office estimate is probably on the high side because government managers will be looking to generate whatever savings they can by temporarily furloughing workers and cutting back hours – before resorting to outright layoffs – in order to hit their 5.1 percent sequester savings mandates.
“The extent to which it’s done through hiring or through furloughs is pretty hard to get handle on,” said Chad Stone, chief economist at the Center on Budget and Policy Priorities. “Either way, there certainly will be less hiring than would otherwise take place.”
That means Uncle Sam’s belt-tightening will weigh on the job market through the rest of the government fiscal year, which ends Oct. 1.
Though the cuts officially took effect March 1, the impact is expected to build through the summer as federal agencies work to meet the Oct. 1 deadline.
“The way the sequester is designed, it’s gradual in its nature," said Gregory Daco, an economist at IHS Global Insight. “You cut budget authority, but that doesn’t mean you immediately cut spending. So the actual cuts to outlays take time to materialize.”
Those cuts will also hit other spending programs that will bring indirect pressure on non-government hiring, economists say. Cuts to federally funded, state-managed unemployment insurance programs will be concentrated in the summer months. Those cuts will hit hardest in later in the summer in states that delay implementing them.
The hit to consumer spending is expected to ripple through payrolls of industries from leisure and hospitality to retailers.
“They’re going to take a secondary hit from lower disposable income from people that are receiving benefits like unemployment compensation and other federal payments,” said Brian Kessler, an economist at Moody's Analytics.
The biggest wild card in the forecast remains the ongoing political standoff over the budget. Many agencies that have yet to announce furlough plans are still scrambling to avoid service cuts.
Some may be hoping to win a “carve out” from the sequester. The Federal Aviation Administration, for example, was recently granted a budget reprieve after air traffic control tower furloughs began snarling the nation’s airports with delays. The IRS recently announced furloughs that could delay tax refunds.
While that piecemeal process may help the agencies winning a reprieve, it could slow progress on a wider solution, Stone said.
“Carving out the squeaky wheels probably reduces in the impetus to get a deal,” he said. “And it doesn’t change the cuts that have to be made. It just focuses them on a narrower set of programs with less visibility or political interests.”
If no deal is reached, the budget cuts will continue into next winter – and beyond. The current cuts are part of a 10-year “budget control” law that caps federal spending through 2022.
But those future cuts won’t be as painful. Though they slow the growth of federal spending, they don’t reduce outlays like the current round of cuts. That means they’ll have less impact on future economic growth and hiring.
“This year, the change in (federal) spending is going to tap the breaks on job creation and the recovery,” said Kessler. “Next year is sort of a lighter tap on the gas. So adjusting to that move down is what slows growth and kills jobs.”
The hope, of course, is that the private sector economy can fill in the spending gap by creating jobs faster than the government is shedding them.
But the political gridlock over the sequester may be holding back hiring there as well. Many small business owners complain that it’s just too risky to take on new workers until they get more certainty over issues like tax reform and health care spending.
Not all business owners agree.
Boone said that as her competitors pull back, she’s developing plans to draw on savings to invest in new manufacturing equipment and hire skilled staff to expand her product line.
“It is risky. It’s a long learning curve and it’s a lot of investment in hiring and equipment,” she said. “But if I don’t take the risk to invest, the result is zero. If I take the risk to invest – and work hard and learn – we might open up a new market to make up for the business that we lost.”