Feb. 27 (Bloomberg) -- President Barack Obama made a plea to business leaders to pressure Republicans to compromise to stop automatic federal spending cuts that he warned would slowly damage the U.S. economy.
“This is not a cliff, but it is a tumble downward,” Obama said tonight in Washington at the winter meeting of the Business Council, an organization of 136 U.S. business executives from large corporations.
The president spoke two days before $85 billion in automatic spending cuts begin to take effect, with officials in both parties signaling that a deal to head them off is unlikely.
In the first weeks after the reductions start kicking in, “a lot of people may not notice the full impact,” he said, “but this is going to be a big hit on the economy.”
Obama has invited congressional leaders to a meeting at the White House on March 1, the deadline day. House Speaker John Boehner told fellow Republicans today that he doesn’t expect it to be a negotiating session.
The parties are far apart on how to replace the cuts totaling $1.2 trillion over nine years, with $85 billion in the remaining seven months of this fiscal year. Democrats insist tax increases must be part of a replacement plan, an approach Republican leaders oppose.
Getting a deal means “Democrats have to accept the need for entitlement reform,” Obama said. “But it also means Republicans are going to need to accept additional revenues.”
“If the business community speaks out for such a sensible, balanced and responsible approach, then eventually it will get done,” he said. Obama later took questions from the group in a closed-door session.
Dow Chemical Co., whose Chief Executive Officer Andrew Liveris is chairman of the Business Council, supports “a balanced and bipartisan approach” to deficit reduction “as opposed to short-term fixes,” Nancy Lamb, a company spokeswoman, said in a statement e-mailed prior to Obama’s speech.
Obama administration officials have indicated they expect that Republican congressional leaders will relent and negotiate an agreement that includes curtailing tax breaks for top earners once the spending reductions begin to have an impact in home districts, which may take weeks.
The spending cuts, known as sequestration, will reduce economic growth by 0.5 percentage point this year and wipe out 350,000 jobs if they remain in place through December, according to the median forecast of 26 economists surveyed by Bloomberg last week.
A majority of the economists also said they expect a resolution of the standoff between Obama and congressional Republicans, with the median forecast of 21 responses predicting a compromise in 30 days. Such an outcome would result in little erosion to growth, the survey showed.
Investors have signaled they aren’t concerned about the impact on the world’s largest economy. U.S. stocks rose, sending the Dow Jones Industrial Average to a five-year high. The Standard & Poor’s 500 Index rose 1.3 percent to 1,515.99 at 4 p.m. in New York. The Dow added 175.24 points, or 1.3 percent, to 14,075.37.
Treasury 10-year notes fell for a second day. The benchmark 10-year yield rose two basis points, or 0.02 percentage point, to 1.90 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices.
Investors have cooled to defense and aerospace firms, which would be disproportionately hit by the spending cuts. The Standard & Poor’s Aerospace and Defense Index gained 7.2 percent in the past 12 months, trailing the 10.9 percent gain for the broader Standard & Poor’s 500 Index.
United Technologies Corp. CEO Louis Chenevert, a member of the Business Council’s executive committee, warned sequestration would reduce his company’s profits this year and in 2014. United Technologies received 17.5 percent of its $57.7 billion of revenue from U.S. government contracts last year.
“Sequestration, in my view, looks more likely,” Chenevert said Feb. 21 at the Barclays Capital Industrial Select Conference in Miami. “We continue to wait for more clarity. I think the impact on our business would be limited in 2013 at this point in time.”
The spending cuts will reduce earnings per share by as much as 10 cents this year “in the worst case scenario,” Chenevert said. The Hartford, Connecticut-based company predicted in December that its full-year profit will be between $5.85 to $6.15 a share.
Republicans Boehner and Mitch McConnell, the Senate minority leader, and Democrats Harry Reid, the Senate majority leader, and Nancy Pelosi, the House minority leader, will attend the March 1 meeting. Boehner said at a closed Republican caucus that he considers it a “listening session,” Representative Lynn Westmoreland of Georgia said.
Obama has until 11:59 p.m. on March 1 to issue an order officially putting the cuts into effect.
Pelosi, of California, said in a statement that Democrats will press for “a balanced, bipartisan solution to avoid the unemployment and economic uncertainty” the cuts would cause.
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