Why no sign of 'sequester' cuts in perky April jobs report?

Economic doom and gloom were supposed to follow the 'sequester' cuts in federal spending, but there's no evidence in the April jobs report that the labor market has been hurt. Just wait, warn some economists.

The new jobs report that came out Friday showed little sign that "sequestration" – those much-maligned automatic federal spending cuts that kicked in because Congress and the White House could not agree on a better way – has had an effect on the labor market, at least so far.

Defying ominous Obama administration warnings about the $85 billion in cuts, the unemployment rate in April dropped slightly to 7.5 percent, its lowest level since 2008, and the economy created a better-than-expected 165,000 new jobs, the Labor Department reported. 

That’s not surprising, say economists.

Sequestration began only as of April 1, so its impact has not really hit the economy yet. Moreover, many federal agencies intend to cut their budgets through furloughs – a cut in hours – rather than in outright layoffs. And some programs, such as research grants, are made in advance, so any cuts may come later. 

“I expect sequestration to drip into the [economic] numbers over a period of months, not all at one time,” says Scott Brown, chief economist at the brokerage firm Raymond James & Associates, in St. Petersburg, Fla.

Some economists say that drip will hit with a splat in a few months' time. That’s the view of Mark Zandi, chief economist at Moody’s Analytics in West Chester, Pa., who believes the "sequester's" peak impact will be felt this summer and into the fall.

“My sense is that July, August will be when the fiscal headwinds will be flowing the hardest,” he wrote in an e-mail to the Monitor.

The Congressional Budget Office, in an analysis of the effects of sequestration, has predicted that sequestration will cost the US economy 750,000 jobs this calendar year. Some private economists such as Mr. Zandi say that might be high – that the figure will be closer to 500,000 jobs. But if either number is to be close, the losses will have to start registering soon because only eight months are left in the year. This would imply a loss of between 62,500 and 93,750 jobs per month if sequestration's impact on the job market were to start next month.

The jobs numbers for April don’t seem to show much in the way of reductions. In the case of the federal government, 8,000 employees were cut from the workforce. But 3,500 of them came from the US Postal Service, which has been downsizing for months.

Under the sequester, many federal agencies are furloughing their employees by requiring them to take off a specific number of days without pay, rather than laying them off altogether. Furloughs are saving a lot of jobs, says Zandi. “Lost hours but not lost jobs,” he writes.

Another subtle impact of the sequester may be that companies are slowing or stopping their hiring, says economist Sung Won Sohn of University of California, Channel Islands.

“We have a Navy base and there are many contractors, from people who do cleaning on the base to people who supply small machines,” says Mr. Sohn. “They are saying their business has been hurting because of sequestration, but I don’t think the pain is severe. I don’t think they are letting people go, but they are not hiring any more people.”

Universities that count on the federal research contracts say what they are most feeling is uncertainty.

“You get these signals of uncertainty from the Congress that then transfer in different ways to different programs and different program managers in completely unique ways,” says Michael Crow, president of Arizona State University, a major research university. “One person says, ‘Your program is not affected,” and another person says, ‘Your program is completely and totally eliminated from now until eternity.' ”

However, many universities will probably see federal grants cut in the future, says G.P. “Bud” Peterson, president of Georgia Institute of Technology in Atlanta.

“I am on the National Science Board of the National Science Foundation, and the NSF is not cutting back on existing grants but they will be cutting back on future grants that they award,” says Dr. Peterson. “And I think that’s caused the faculty to worry a little bit about their continued funding, particularly in life sciences where they work fairly large groups.”

Peterson says he understands that sequestration is supposed to go on for some time. But, he says, “I don’t think it’s supposed to reduce innovation and the creation of new jobs and new businesses.”

It remains to be seen if that happens.