News / Economy

    US Markets Take Spending Cuts in Stride

    Specialist Patrick Kenny, foreground right, works his post on the floor of the New York Stock Exchange, March 1, 2013.
    Specialist Patrick Kenny, foreground right, works his post on the floor of the New York Stock Exchange, March 1, 2013.
    Reuters
    Broad spending cuts designed to hit most U.S. government programs with all the subtlety of a sledgehammer are set to take effect at midnight Friday, yet investors have so far barely batted an eyelash.
     
    The $85 billion in across-the-board "sequestration" cuts were expected to eventually cause airport delays, disrupt public services and result in lower pay or layoffs for millions of government workers.
     
    What they were not likely to do, at least as far as financial markets were concerned, was cause enough damage to derail a U.S. economy that has lately been gaining momentum.
     
    Some also saw the prospect of weaker growth and higher unemployment caused by the spending cuts making it likelier the U.S. Federal Reserve will keep monetary policy ultra-loose for longer.
     
    "The stock market isn't worried. It's at five-year highs, and the sequester gives the Fed all the more reason to keep its foot on the gas," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.
     
    Markets have also had a long time to weigh how the sequester could affect growth and believe it will not trigger a recession.
     
    "Most of us believe that sequestration is not something that will make us fall off the cliff, since the cuts will be worked in relatively slowly," said Bill Stone, chief investment strategist at PNC Wealth Management in Philadelphia, which has $115 billion in assets.
     
    "Granted, no one really knows what will happen with sequestration, and there's always a general unease around the unknown, but even if the estimates are right and GDP drops by half a percent, that's not a fatal blow."
     
    Stock markets in the U.S. and Europe edged lower on Friday on weak European economic data, though encouraging figures on the U.S. manufacturing sector helped temper losses.
     
    The MSCI world stocks index fell 0.46 percent on Friday, while the U.S. dollar rose 0.6 percent against a basket of currencies, its highest in more than six months.
     
    However, the implications of the spending cuts for the world's biggest oil consumer sent crude oil prices lower.
     
    U.S. crude oil fell about $1.51 a barrel to $90.54 while Brent crude traded at $110.35, off session lows.
     
    Wall Street stocks traded nearly unchanged, paring losses after data showed that the pace of growth in U.S. manufacturing rose to its fastest in more than a year and a half in February.
     
    The benchmark Dow Jones industrial average is less than 1.0 percent below a record high, up more than 7.0 percent this year. The more widely followed Standard & Poor's 500 is less than 4.0 percent from entering record territory.
     
    Even an index of stocks in a sector seen at the cross-hairs of the spending cuts, the Philadelphia Stock Exchange Defense Index, hit an all-time high on Thursday. The sequester will hit the U.S. military particularly hard, with defense programs set to be cut about 13 percent. Yet the index, down 0.04 percent on Friday, has gained nearly 7.0 percent this year.
     
    Investors said continued support from the Fed, after Chairman Ben Bernanke mounted a strong defense of the central bank's stimulus policy this week, would blunt the cuts' effects.
     
    What's more, markets have been down this road before. In late 2012, investors and CEOs fretted over fears that the sequester, initially set to take effect in January along with $500 billion of tax increases, would cause a new recession.
     
    A deal struck by Republicans and Democrats on New Year's Day averted most of the tax hikes but postponed the spending cuts until March 1. Major U.S. stock indexes rallied anyway, with the S&P 500 up 6.0 percent and the Dow up 7.0 percent this year.
     
    Belt-tightening
     
    Economists are not as relaxed. Many say government belt tightening will put a brake on growth this year, whether or not the sequester happens.
     
    The Congressional Budget Office, whose calculations are the building blocks of many Wall Street forecasts, estimates fiscal tightening will knock about 1.5 percentage points from economic growth this year.
     
    The spending cuts from the sequester make up a third of that, or 0.6 percentage points. A tax hike enacted in January will also drag on the economy, as will other spending cuts.
     
    The labor market would also suffer, ending the year with 750,000 fewer jobs than it would have if the sequester were avoided, according to CBO estimates.
     
    To be sure, these worries have pushed some investors into the relative safety of U.S. government bonds, with the benchmark 10-year yield slipping to 1.84 percent this week after hitting 2.06 percent, its high for the year, on Feb. 14.
     
    "There are concerns about the sequestration causing a dramatic slowdown in the economy," said Dan Heckman, senior fixed-income strategist at Minneapolis-based U.S. Bank Wealth Management. "The budget negotiation related to the sequestration adds a great deal of uncertainty."
     
    Bernanke, speaking to lawmakers on Wednesday, urged Congress to try to push spending cuts further into the future to shield a fragile economy.
     
    "If you slow the economy, that hurts your revenues," he said. "That means your deficit reduction is not as big as you think it is."
     
    Many investors, though, say the cuts, while annoying and painful, are too small a percentage of federal spending to do serious damage to the economy or have much impact on the deficit, which has exceeded $1 trillion for four years.
     
    Still time on the clock
     
    The question appears to be the duration of the budget cuts. If it is only a few weeks, the impact on growth and on employment could be marginal because some budget cuts will not translate into immediate spending cuts.
     
    The Defense Department, for example, will probably not begin furloughing some 800,000 civilian workers until late April, after which these workers will work one day less per week. Budget cuts for capital spending could also be delayed.
     
    The CBO estimates that only about half of the $85 billion in budget cuts planned from March through September would translate into lower spending during that period.
     
    Once the furloughs and other spending cuts take hold, though, workers will feel the pinch, especially the 2.8 million people employed by the federal government.
     
    "Their income is going to shrink considerably," said Omair Sharif, an economist at RBS in Stamford, Connecticut.
     
    Tim Ghriskey, chief investment officer at Solaris Asset Management, said he thinks markets are betting all this will force Republicans and Democrats to the bargaining table.
     
    President Barack Obama met congressional leaders in the White House on Friday for last-minute budget talks, but no deal was struck.
     
    "The grace period is probably a month or two," Ghriskey said. "But if it becomes clear that these arbitrary cuts are starting to do damage and there's no sign of compromise, that's when the market could start to react."

    You May Like

    Native Americans Ask: What About Our Water Supply?

    They say they have been facing a dangerous water contaminant for decades - uranium – but the problem has received far less attention than water contamination by lead in Flint, Michigan

    Pakistan's President Urges Nation Not to Celebrate Valentine's Day

    Mamnoon Hussain criticizes Valentine's Day, which falls on Sunday this year, as a Western import that threatens to undermine the Islamic values of Pakistan

    Mother of IS Supporter: Son Was Peaceful, 'Role Model'

    Somali-American Abdirizak Mohamed Warsame pleaded guilty Thursday to charges of conspiring to provide material support to Islamic State militants

    Featured Videos

    Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
    Two-thirds of World Faces Water Shortagei
    X
    February 12, 2016 7:31 PM
    Four billion people — or two out of every three on the planet — do not have enough water to meet their basic needs. That is far greater than previously thought, according to a new study that presents a more accurate picture of the problem. As VOA's Rosanne Skirble reports, the findings will help policymakers and the public craft solutions to address the threat.
    Video

    Video Two-thirds of World Faces Water Shortage

    Four billion people — or two out of every three on the planet — do not have enough water to meet their basic needs. That is far greater than previously thought, according to a new study that presents a more accurate picture of the problem. As VOA's Rosanne Skirble reports, the findings will help policymakers and the public craft solutions to address the threat.
    Video

    Video Gateway to Mecca: Historical Old Jeddah

    Local leader Sami Nawar's family has been in the Old City of Jeddah for hundreds of years and takes us on a tour of this ancient route to Mecca, also believed to be the final resting place of Adam's wife, Eve.
    Video

    Video New Technology Aims to Bring Election Transparency to Uganda

    A team of recent graduates from Uganda’s Makerere University has created a mobile application designed to help monitor elections and expose possible rigging. The developers say the app, called E-Poll, will make Uganda's democratic process fairer. From Kampala, VOA's Serginho Roosblad reports.
    Video

    Video As Refugees Perish, Greek Graveyards Fill

    Aid workers on the Greek island of Lesbos say they are struggling to bury the increasing number of bodies of refugees that have been recovered or washed up ashore in recent months.  The graveyards are all full, they say, yet as tens of thousands of people clamor to get out of Syria, it is clear refugees will still be coming in record numbers. For VOA, Hamada Elrasam reports from Lesbos, Greece.
    Video

    Video Russia Bristles at NATO Expansion in E. Europe

    Russian Foreign Minister Sergei Lavrov is meeting Friday with the head of NATO after the Western military alliance and the United States announced plans for the biggest military build-up in Europe since the Cold War. Russia has called NATO's moves a threat to stability in Europe. But NATO says the troop rotations and equipment are aimed at reassuring allies concerned about Russia as VOA's Daniel Schearf reports from Moscow.
    Video

    Video To Fight Zika, Scientists Target Mosquitoes

    Mosquitoes strike again. The Zika virus outbreak is just the latest headline-grabbing epidemic carried by these biting pests, but researchers are fighting back with new ways to control them. VOA's Steve Baragona takes a look.
    Video

    Video Mosul Refugees Talk About Life Under IS

    A top U.S. intelligence official told Congress this week that a planned Iraqi-led operation to re-take the city of Mosul from Islamic State militants is unlikely to take place this year. IS took over the city in June 2014, and for the past year and a half, Mosul residents have been held captive under its rule. VOA's Zana Omar talked to some families who managed to escape. Bronwyn Benito narrates his report.
    Video

    Video Scientists Make Progress Toward Better Diabetes Treatment, Cure

    Scientists at two of the top U.S. universities say they have made significant advances in their quest to find a more efficient treatment for diabetes and eventually a cure. According to the International Diabetes Federation, the disease affects more than 370 million people worldwide. VOA’s George Putic reports.
    Video

    Video NATO to Target Migrant Smugglers

    NATO has announced plans to send warships to the Aegean Sea to target migrant smugglers in the alliance's most direct intervention so far since a wave of people began trying to reach European shores.
    Video

    Video Russia's Catholics, Orthodox Hopeful on Historic Pope-Patriarch Meeting

    Russia's Catholic minority has welcomed an historic first meeting Friday in Cuba between the Pope and the Patriarch of Russia's dominant Orthodox Church. The Orthodox Church split with Rome in 1054 and analysts say politics, both church and state, have been driving the relationship in the centuries since. VOA's Daniel Schearf reports from Moscow.
    Video

    Video Used Books Get a New Life on the Streets of Lagos

    Used booksellers are importing books from abroad and selling them on the streets of Africa's largest city. What‘s popular with readers may surprise you. Chris Stein reports from Lagos.
    Video

    Video After NH Primaries All Eyes on South Carolina

    After Tuesday's primary in New Hampshire, US presidential candidates swiftly turned to the next election coming up in South Carolina. The so-called “first-in-the-South” poll may help further narrow down the field of candidates. Zlatica Hoke reports.
    Video

    Video Smartphone Helps Grow Vegetables

    One day, you may be using your smartphone to grow your vegetables. A Taipei-based company has developed a farm cube — a small, enclosed ecosystem designed to grow plants indoors. The environment inside is automatically adjusted by the cube, but it can also be controlled through an app. VOA's Deborah Block has more on the gardening system.
    Video

    Video Exhibit Turns da Vinci’s Drawings Into Real Objects

    In addition to being a successful artist, Renaissance genius Leonardo da Vinci designed many practical machines, some of which are still in use today, although in different forms. But a number of his projects were never realized — until today. VOA’s George Putic reports.

    World Currencies

    EUR
    USD
    0.8869
    JPY
    USD
    112.70
    GBP
    USD
    0.6894
    CAD
    USD
    1.3922
    INR
    USD
    68.241

    Rates may not be current.