The Slow Bleed of Sequestration

You may not notice it at first, but sequestration will undermine the chance for a robust economic recovery.

Federal spending cuts known as sequestration officially kicked in today, but most of us probably haven't noticed. In the first days of sequestration, airport security lines won't be markedly longer. Teachers won't be thrown out of classrooms. Unsafe food won't suddenly appear on supermarket shelves (at least no more than it already does).

But don't let these noncatastrophic consequences fool you: The slow bleed of sequestration will hurt the U.S. economy and undermine perhaps its best chance for a robust recovery.

To understand how little margin of error exists when it comes to the economy, look no further than today's consumer spending data: U.S. incomes dropped by the most in 20 years in January as higher taxes kicked in, including a 2 percent increase in the payroll tax rate. Disposable income -- the money we have left after paying Uncle Sam -- dropped 4 percent after adjusting for inflation, the biggest decline since monthly records began in 1959.

Consumers responded not by cutting spending but by saving less: Personal consumption increased 0.2 percent while the U.S. savings rate dropped to 2.4 percent from 6.4 percent in December.

Sequestration will only compound the pain as $85 billion in spending that would otherwise have flowed to states and federal agencies is choked off. Economists estimate sequestration will cost 750,000 jobs in 2013 alone. Federal agencies will soon begin "furloughing" workers or forcing them to take unpaid leave, and some agencies project several weeks' worth of lost paychecks. That will further depress income, giving consumers even less money to spend into the economy.

The Congressional Budget Office estimates sequestration will reduce gross domestic product by 0.6 percentage points this year. The bloodletting will actually be far worse when combined with the other deficit-reduction measures already enacted, and CBO projects the rate of economic growth will slow by 1.5 percentage points

Perhaps the worst part about this is that it's happening against a backdrop of what had seemed, at least for a while, to be a healing economy. The housing market, the source of so much pain for so long, has become a bright spot, with housing starts up nearly 24 percent from a year ago and new home sales up nearly 30 percent. The unemployment rate, still too high at 7.9 percent, is nevertheless on a downward trajectory.

So while sequestration may not pose an immediate threat it, will surely undercut an economic recovery that is tantalizingly within reach. As President Barack Obama said at a news conference today, "Washington sure isn't making it easy."

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