Monday, March 4, 2013

Why the Sequester is So Bad and Ill-Timed

At the end of every week, Barry over the the Big Picture posts a "succinct summation of the weeks' events."  Consider these points from last week:

2. Dow Jones Industrial Average made new 52 week highs for 6th week in a row.
3. U.S ISM Manufacturing index climbed to 54.2 from 53.1 in January.
4. Initial jobless claims better than expected (344k vs 360k)
5. Ford posts best February sales since 2006
6. Chicago PMI jumps to 56.8 11 month high
7. Orders for durable goods rose 1.9% (Ex-transport), increasing for 5th consecutive month.
8. New Home sales surge 15.6%
9. Home Depot’s profit jumped 32%, proxy for housing recovery.
10. Case Shiller Home Prices climbed 6.8% v one year ago and 0.88% from a month ago. Largest year over year gain since 2006.
11. Pending home sales up 4.5% to the highest levels since April 2010
12. Thomson Reuters/University of Michigan index of consumer sentiment climbed to 77.6 from 73.8 in January. Consumer Confidence jumps to 69.6 from 58.4

Stocks are at new highs, manufacturing is rebounding, autos sales are doing well, durable goods orders increased and the housing sector is healing. The sum total of all these events is very positive and indicates the underlying economy wants to shift into a higher gear.

And then comes the effects of the sequester, also from Barry's summation post:

7. The sequestration has arrived, an estimated 750,000 jobs will be lost.

Politico had a good summation of the first few rounds of effects, and they aren't good. Here are some high points from the story:

Sequestration officially starts Friday — most likely at 11:59 p.m., though Obama could act sooner — when the Office of Management and Budget issues a notice ordering agencies to make cuts of about 9 percent for most nondefense programs and about 13 percent for defense programs.
Programs that dole out funding as an intermediary — like public rent assistance, farm loans and food programs — will see immediate cuts. The same goes for the Farm Service Agency’s loans, particularly those for small, family-owned farms, which face a cut of $5.4 million, resulting in 890 fewer direct farm aid loans.
Monday, the bulk of the furlough notices will start going out.
Commercial fishermen won’t like the news coming from the National Oceanic and Atmospheric Administration, which has warned that the budget cuts to its at-sea observers and fishery stock assessments could impede the opening of commercial fishing seasons in federal waters. Among the most high profile species: halibut season in California, Oregon, Washington and Alaska, which is scheduled to begin March 23.
At the Department of Education, $60 million will be cut from the Impact Aid program, which covers districts without large property tax bases, including students who live on military bases and Indian lands.
Teacher layoffs, changes to after-school programs and slicing off days for the 2013-14 school year also will start happening in March, Education Secretary Arne Duncan told reporters Wednesday. “Every school district, every superintendent worth their salt, every school board, they’re making their budgets now in the spring for the fall,” he said, adding that the pink slips will start coming in force from March to May.
The Agriculture Department’s programs for the poor also will see cuts in March, including the Women, Infants and Children program, which must cut its rolls by about 300,000 participants. Case workers will begin placing some who apply on a wait list, particularly those who are homeless or are non-breastfeeding mothers.
Fire season kicks in by mid-March, with the immediate budget cuts putting the Forest Service in a precarious place as it comes off one of the worst years on record in 2012 with the third-highest number of acres burned in U.S. history. Prep work takes place all year, but the $1 billion budget will be hit immediately.

The bottom line is there will be a slow but constant cutting in various programs, which will then in turn ripple out through the economy as a whole.  This at a time when the underlying numbers want to move higher.