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

Photogallery Pistorius Sentenced, Taken to Prison

Pistorius, convicted of culpable homicide in shooting death of girlfriend Reeva Steenkamp, will likely serve about 10 months of five-year sentence, before completing it under house arrest More

UN to Aid Central Africa in Polio Vaccinations

Synchronized vaccinations will be conducted after Cameroon reports a fifth case of the wild polio virus in its territory More

WHO: Ebola Vaccine May Be in Use by Jan.

WHO assistant director Dr. Marie Paule Kieny says clinical trials of Ebola vaccines are underway or planned in Europe, US and Africa More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
After Decades of Pressure, Luxembourg Drops Bank Secrecy Rulesi
X
October 21, 2014 12:20 AM
European Union finance ministers have reached a breakthrough agreement that will make it more difficult for tax cheats to hide their money. The new legislation, which had been blocked for years by countries with a reputation as tax havens, was approved last week after Luxembourg and Austria agreed to lift their vetoes. But as Mil Arcega reports, it doesn’t mean tax cheats have run out of places to keep their money hidden.
Video

Video After Decades of Pressure, Luxembourg Drops Bank Secrecy Rules

European Union finance ministers have reached a breakthrough agreement that will make it more difficult for tax cheats to hide their money. The new legislation, which had been blocked for years by countries with a reputation as tax havens, was approved last week after Luxembourg and Austria agreed to lift their vetoes. But as Mil Arcega reports, it doesn’t mean tax cheats have run out of places to keep their money hidden.
Video

Video Kobani Refugees Welcome, Turkey Criticizes, US Airdrop

Residents of Kobani in northern Syria have welcomed the airdrop of weapons, ammunition and medicine to Kurdish militia who are resisting the seizure of their city by Islamic State militants. The Turkish government, however, has criticized the operation. VOA’s Scott Bobb reports from southeastern Turkey, across the border from Kobani.
Video

Video China Political Meeting Seeks to Improve Rule of Law

China’s communist leaders will host a top level political meeting this week, called the Fourth Plenum, and for the first time in the party’s history, rule of law will be a key item on the agenda. Analysts and Chinese media reports say the meetings could see the approval of long-awaited measures aimed at giving courts more independence and include steps to enhance an already aggressive and high-reaching anti-corruption drive. VOA’s Bill Ide has more from Beijing.
Video

Video US ‘Death Cafes’ Put Focus on the Finale

In contemporary America, death usually is a topic to be avoided. But the growing “death café” movement encourages people to discuss their fears and desires about their final moments. VOA’s Jerome Socolovsky reports.
Video

Video Ebola Orphanage Opens in Sierra Leone

Sierra Leone's first Ebola orphanage has opened in the Kailahun district. Hundreds of children orphaned since the beginning of the Ebola outbreak face stigma and rejection with nobody to care for them. Adam Bailes reports for VOA about a new interim care center that's aimed at helping the growing number of children affected by Ebola.
Video

Video Young Nairobi Tech Innovator on 'Track' in Security Business

A 24-year-old technology innovator in Nairobi has invented a tracking device that monitors and secures cars. He has also come up with what he claims is the most robust audio-visual surveillance system yet. As Lenny Ruvaga reports from the Kenyan capital, his innovations are offering alternative security solutions.
Video

Video Latinas Converting to Islam for Identity, Structure

Latinos are one of the fastest growing groups in the Muslim religion. According to the Pew Research Center, about 6 percent of American Muslims are Latino. And a little more than half of new converts are female. VOA’s Carolyn Presutti travelled to Miami, Florida -- where two out of every three residents is Hispanic -- to learn more.
Video

Video Exclusive: American Joins Kurds' Anti-IS Fight

The United States and other Western nations have expressed alarm about their citizens joining Islamic State forces in Syria and Iraq. In a rare counterpoint to the phenomenon, an American has taken up arms with the militants' Syrian Kurdish opponents. Elizabeth Arrott has more in this exclusive profile by VOA Kurdish reporter Zana Omer in Ras al Ayn, Syria.
Video

Video South Korea Confronts Violence Within Military Ranks

Every able-bodied South Korean male between 18 and 35 must serve for 21 to 36 months in the country’s armed forces, depending upon the specific branch. For many, service is a rite of passage to manhood. But there are growing concerns that bullying and violence come along with the tradition. Reporter Jason Strother has more from Seoul.
Video

Video North Carolina Emerges as Key Election Battleground

U.S. congressional midterm elections will be held on November 4th and most political analysts give Republicans an excellent chance to win a majority in the U.S. Senate, which Democrats now control. So what are the issues driving voters in this congressional election year? VOA National Correspondent Jim Malone traveled to North Carolina, one of the most politically competitive states in the country, to find out.
Video

Video Comanche People Maintain Pride in Their Heritage

The Comanche (Indian nation) once were called the “Lords of the Plains,” with an empire that included half the land area of current day Texas, large parts of Oklahoma, New Mexico, Kansas and Colorado.The fierceness and battle prowess of these warriors on horseback delayed the settlement of most of West Texas for four decades. VOA’s Greg Flakus reports from Lawton, Oklahoma, that while their warrior days are over, the 15,000 members of the Comanche Nation remain a proud people.
Video

Video Turkey Campus Attacks Raise Islamic Radicalization Fears

Concerns are growing in Turkey of Islamic radicalization at some universities, after clashes between supporters of the jihadist group Islamic State (IS) or ISIS, and those opposed to the extremists. Pro-jihadist literature is on sale openly on the streets of Istanbul. Critics accuse the government of turning a blind eye to radicalism at home, while Kurds accuse the president of supporting IS - a charge strongly denied. Henry Ridgwell reports from London.

All About America

AppleAndroid

World Currencies

EUR
USD
0.7878
JPY
USD
106.98
GBP
USD
0.6230
CAD
USD
1.1220
INR
USD
61.226

Rates may not be current.