Pentagon braces for furloughs in sequester: How big a hit to economy?

The Defense Department has put its hundreds of thousands of civilian employees on notice: They will probably face steep pay cuts under a furlough program if Congress proceeds with the automatic federal spending cuts that are poised to take effect in March.

The furloughs would come alongside other big defense cuts, due to the so-called budget sequester, that would affect both military readiness and the wider economy.

“In the event of sequestration, we will do everything we can to be able to continue to perform our core mission,” Defense Secretary Leon Panetta wrote in a memo to employees this week. “But … the rigid nature of the cuts forced upon this department, and their scale, will result in a serious erosion of readiness across the force.”

For the economy, the Pentagon is both a major employer and a major buyer of goods and services. Forecasters say the defense portion of the sequester would put a noticeable dent in overall spending – felt most in states such as Virginia that have lots of civilian defense workers or weapons contractors.

It’s not yet clear whether the sequester will go into effect as scheduled on March 1, or how long after that it might take for the politically divided Congress to agree on some different budget plan.

The sequester plan, which stems from a 2011 Budget Control Act, is designed to help bring down federal deficits through across-the-board spending cuts,  if Congress can’t agree on a better plan.  

Defense cuts would account, under the law, for half the total. That amounts to about $45 billion in the current fiscal year.

Furloughs – asking most of some 800,000 civilian employees to work four days for every five they do currently – would start in April after a required notification clock ticks down.

That would be a big pay cut to those families – 20 percent. But the resulting savings of about $5 billion would account for just a fraction of the overall defense cuts, for the fiscal year ending in September. And that amount of money would put only a small dent in US consumer activity, which makes up about two-thirds of a $15.8 trillion economy.

The sequester would affect military readiness, which is one reason some budget analysts expect that Congress wouldn't allow it to stay in effect for very long.

For the economy, the $45 billion in defense cuts would be an amount equal to about 0.3 percent of one year’s gross domestic product.  That doesn’t mean the cuts would reduce this year’s GDP by that exact amount. But forecasters say the overall sequester cuts, defense and nondefense, could slow the pace of economic growth by half a percentage point or so.

In an economy that may be growing at only a 2 percent annual rate, that’s a significant hit.

Economists generally don’t see it causing a recession. But manufacturers warn of significant job losses, centered heavily in the defense sector.

Overall, this would slow US job growth in the private sector – perhaps costing 1 million jobs. The Bipartisan Policy Center, a Washington think tank, has estimated that the economy might add 3 million jobs over the next two years with the sequester in place, versus 4 million without it.