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

    Clinton, Trump and the 'Woman’s Card'

    Ask supporters of Democratic front-runner in US presidential campaign, and they’ll tell you Republican presidential candidate is playing a dangerous hand

    Russian Censorship Group Seeks Chinese Help to Better Control Internet

    At recent Safe Internet League forum in Moscow, speakers from both nations underscored desire for authorities to further limit and control information online

    Video Makeshift Pakistani School Helps Slum Kids

    Free classes in Islamabad park serve a few of the country’s nearly 25 million out-of-school youths; NGO cites ‘education crisis’

    Featured Videos

    Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
    Turkish Kurd Islamist Rally Stokes Tensionsi
    X
    April 29, 2016 12:28 AM
    In a sign of the rising power of Islamists in Turkey, more than 100,000 people recently gathered in Diyarbakir, the main city in Turkey’s predominantly Kurdish southeast, to mark the birthday of the Prophet Muhammad. The gathering highlighted tensions with the pro-secular Kurdish nationalist movement. Dorian Jones reports from Diyarbakir.
    Video

    Video Turkish Kurd Islamist Rally Stokes Tensions

    In a sign of the rising power of Islamists in Turkey, more than 100,000 people recently gathered in Diyarbakir, the main city in Turkey’s predominantly Kurdish southeast, to mark the birthday of the Prophet Muhammad. The gathering highlighted tensions with the pro-secular Kurdish nationalist movement. Dorian Jones reports from Diyarbakir.
    Video

    Video Pakistani School Helps Slum Kids

    Master Mohammad Ayub runs a makeshift school in a public park in Islamabad. Thousands of poor children have benefited from his services over the years, but, as VOA's Ayesha Tanzeem reports, roughly 25 million school-age youths don't get an education in Pakistan.
    Video

    Video Florida’s Weeki Wachee ‘Mermaids’ Make a Splash

    Since 1947, ‘mermaids’ have fascinated tourists at central Florida’s Weeki Wachee Springs State Park with their fluid movements and synchronized ballet. Performing underwater has its challenges, including cold temperatures and a steady current, as VOA’s Lin Yang and Joseph Mok report.
    Video

    Video Somali, African Union Forces Face Resurgent Al-Shabab

    The Islamic State terror group claimed its first attack in Somalia earlier this week, though the claim has not been verified by forces on the ground. Meanwhile, al-Shabab militants have stepped up their attacks as Somalia prepares for elections later this year. Henry Ridgwell reports there are growing frustrations among Somalia’s Western backers over the country’s slow progress in forming its own armed forces to establish security after 25 years of chaos.
    Video

    Video Bangladesh Targeted Killings Spark Wave of Fear

    People in Bangladesh’s capital are expressing deep concern over the brutal attacks that have killed secular blogger, and most recently a gay rights activist and an employee of the U.S. embassy. Xulhaz Mannan, an embassy protocol officer and the editor of the country’s only gay and transgender magazine Roopban; and his friend Mehboob Rabbi Tanoy, a gay rights activist, were hacked to death by five attackers in Mannan’s Dhaka home earlier this month.
    Video

    Video Documentary Tells Tale of Chernobyl Returnees

    Ukraine this week is marking the 30th anniversary of the world's worst nuclear accident, at the Chernobyl nuclear power plant. Soviet officials at first said little about the accident, but later evacuated a 2,600-square-kilometer "exclusion zone." Some people, though, came back. American directors Holly Morris and Anne Bogart created a documentary about this faithful and brave community. VOA's Tetiana Kharchenko reports from New York on "The Babushkas of Chernobyl." Carol Pearson narrates.
    Video

    Video Nigerians Feel Bite of Buhari Economic Policy

    Despite the global drop in the price of oil, Nigerian President Muhammadu Buhari has refused to allow the country's currency to devalue, leading to a shortage of foreign exchange. Chris Stein reports from Lagos businessmen and consumers are feeling the impact as the country deals with a severe fuel shortage.
    Video

    Video  Return to the Wild

    There’s a growing trend in the United States to let old or underused golf courses revert back to nature. But as Erika Celeste reports from one parcel in Grafton, Ohio, converting 39 hectares of land back to green space is a lot more complicated than just not mowing the fairway.
    Video

    Video West Urges Unity in Libya as Migrant Numbers Soar

    The Italian government says a NATO-led mission aimed at stemming the flow of migrants from Libya to Europe could be up and running by July. There are concerns that the number of migrants could soar as the route through Greece and the Balkans remains blocked. Western powers say the political chaos in Libya is being exploited by people smugglers — and they are pressuring rival groups to come together under the new unity government. VOA's Henry Ridgwell reports.
    Video

    Video Russia’s TV Rain Swims Against Tide in Sea of Kremlin Propaganda

    Russia’s media freedoms have been gradually eroded under President Vladimir Putin as his government has increased state ownership, influence, and restrictions on critical reporting. Television, where most Russians get their news, has been the main target and is now almost completely state controlled. But in the Russian capital, TV Rain stands out as an island in a sea of Kremlin propaganda.

    Special Report

    Adrift The Invisible African Diaspora

    World Currencies

    EUR
    USD
    0.8769
    JPY
    USD
    107.28
    GBP
    USD
    0.6842
    CAD
    USD
    1.2528
    INR
    USD
    66.384

    Rates may not be current.