The Exchange

JPMorgan Economist Cuts GDP Estimate for Sequester

The Exchange

There’s no love lost between political parties this Valentine's Day as lawmakers edge closer to the automatic cuts in federal spending referred to as sequestration.

Those reductions, an agreed-upon provision formulated during previous debt ceiling negotiations, are set to kick in March 1 if no resolution is reached, and they would carve $85 billion out of the government’s budget in the next seven months. President Obama and Democrats in the Senate are expected to unveil legislation Thursday to avoid sequestration. But the proposal, which reportedly includes items such as a minimum tax rate on those with earnings above $1 million, is not expected to make it through Republicans.

[Read More: Democrats to unveil bill to replace budget cuts]

With every day that passes, the sequester looks more likely, which has led JPMorgan economist Mike Feroli to lower his forecast for the nation's growth in 2013. JPMorgan’s previous outlook had assumed the cuts would be avoided. “That assumption is looking increasingly hard to square with the political realities in Washington, and we are adjusting our forecast to incorporate a view that most of the sequester is realized,” Feroli wrote in a note Thursday.

Still, things might not be as bad as the headline figures suggest. This being the government after all, Feroli expects that the decline in federal spending may be softened as Congress finds opportunities to boost spending in some areas "through emergency appropriations and other legislative devices.” He points out that the Congressional Budget Office is projecting that the $85 billion reduction in federal budget authority may only translate to a decline of $44 billion in spending when all is said and done.

The end toll is about a quarter of a point from JPMorgan’s previous projection for this year, with most of the pullback occurring in the second half. Feroli still expects growth of 1.5% in the first half of the year. However, he's now looking for 1.9% real GDP growth in the fourth quarter of 2013 from the fourth quarter of 2012, vs. 2.1% prior.

The effects of the fiscal cliff (both the anticipation in 2012 and the potential implications in 2013) on growth have been scrutinized after the first estimates for fourth-quarter GDP showed a contraction of 0.1% vs. expected growth of 1%, down from a 3.1% annualized expansion in the third quarter.

[Read more: Fiscal Cliff Woes Caused GDP Contraction: Heidi Moore]

What happens if no compromise is reached? AP sums up some of the effects:

"The Pentagon, for instance, would have to furlough civilian employees for up to 22 working days over six months, while 15,000 air traffic controllers would be laid off for more than two weeks. There would be the equivalent of 5,000 fewer border patrol agents and 1,000 fewer FBI, Drug Enforcement Administration and Bureau of Alcohol, Tobacco and Firearms and Explosives agents and U.S. Marshals."

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