'Sequester' watch: Will US spending cuts really cost 750,000 jobs?

Critics say President Obama is spinning the likely impact of 'sequester' cuts to pressure Republicans to replace them, but private-sector forecasts suggest that a loss of 750,000 jobs may not be far off.

By , Staff writer

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    Lynda Jensen teaches her first-grade class at the Willow Glen Elementary School in San Jose, Calif., in this Jan. 24 photo. The White House estimates that looming 'sequester' spending cuts threaten to lay off or furlough some 1,200 teachers and 64,000 civilian defense workers in California alone.
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President Obama has warned that new cuts in federal spending will cost the economy 750,000 jobs this year.

He’s repeating an estimate that’s been given by the Congressional Budget Office (CBO).

Will the “sequester,” the automatic spending cuts resulting from a political stalemate, really be that bad?

Recommended: Sequester 101: What happens if $85 billion in cuts hit on March 1

The question is cropping up, in part, because the days since the spending restraint took effect, on March 1, haven’t exactly been filled with layoff announcements.

Instead, one prominent headline has been about Education Secretary Arne Duncan retracting a statement that teachers are already getting pink slips because of the funding cuts. A blizzard dubbed “snowquester” is doing more to slow air travel than the sequester, despite warnings about a Congress-induced squeeze on air traffic control and security screening.

And instead of appearing terrified about economic ripple effects, investors Tuesday pushed the Dow Jones Industrial Average to its first all-time high since 2007.

All that might suggest the sequester “bang” is turning into a whimper, and that any job impact will be minimal.

Maybe that will prove to be the case. But many economists predict that, if the sequester or cuts of similar magnitude stay in place, the president’s job-cut forecast may not be far off.

“It sounds like it’s in the right ballpark,” says Paul Ashworth, chief US economist at Capital Economics in Toronto.

He says the sequester’s ripple effects on US consumption would likely shave 0.6 percentage points from gross domestic product for the year.

“That would normally lead to a loss of jobs of roughly that magnitude,” he says, referring to the CBO’s 750,000 figure.

Agreement on the number isn’t universal. Economists at Macroeconomic Advisers and Bank of America Merrill Lynch have forecasts similar to the CBO’s, while some forecasters have called for job-loss tallies that are much smaller (as few as 250,000) or larger (nearly 2 million).

However, the range of private-sector forecasts would indicate that Obama and the CBO are not merely playing a political spin game on the employment risks.

An important caveat: All this doesn’t mean the jobs issue can easily be disentangled from politics. Critics of Obama, who has waged a public campaign against the sequester in recent weeks, say he’s eager to play up any economic fallout – in the hope that it will nudge Americans to support more tax hikes and fewer spending cuts.

“He wants this to be as dire as possible,” Stephen Moore of The Wall Street Journal said on CNN Monday.

The White House has warned that the spending curbs will have impacts ranging from lost jobs to diminished military training and cutbacks in programs that support schools, low-income workers, and people with mental-health challenges.

Many pundits expect the two political parties to reach a deal, or a succession of deals, to roll back the size of the spending cuts, and to amend their arbitrary nature.

Even if the spending reduction stays in place, it doesn’t mean massive layoffs at federal agencies. Instead, many departments are planning to furlough workers, asking many to work four days a week instead of five for part of the fiscal year.

Still, those furloughs, set to begin as early as April, can be viewed as the equivalent of job cuts. They certainly affect the take-home pay and spending power of workers.

The defense contracting industry, too, may have to engage in large-scale layoffs or furloughs, if the spending cuts remain in place

But the sequester’s largest job impacts may be less visible, as reduced federal spending and furlough-related pay cuts ripple outward. The reduced consumption would mean fewer jobs at places ranging from retailers to restaurants and office-supply stores.

It would mean not just layoffs but slower creation of new jobs, forecasters say.

The bright side of the spending cuts, some economists predict, is that it could improve the outlook for stabilizing the national debt – which should help to buoy business and consumer confidence.

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