Sequester: Front-Loaded Pain, No Gain

Tyler Durden's picture

The sequester was supposed to be such a bad outcome that it would force a compromise. The across-the-board cuts were so rigid and hurt so many favored programs, BofAML notes, the “Super Committee” was almost certain to come up with a more flexible alternative. And yet, not only did the Super Committee fail to even make a proposal, the negotiations have now devolved into a blame game – the two parties are trying to pin the blame, and the political cost, onto the other party. As we have expected for some time, the sequester will very likely hit on March 1. This well likely add further downward pressure to the economy in the second quarter, with job growth averaging less than 100,000 per month and GDP growth slowing to 1%.


Via BofAML,

The Sequester Straitjacket


How big?


Federal budget accounting is incredibly opaque. There are two key complications. First, the sequester kicks in part way into a calendar year and about half way into a fiscal year, so figuring out the size of the shock requires first getting the timeframe correct. Second, it is important to distinguish between budget authority and actual spending; the latter depends on both past and present authority. The sequester cuts $1.2bn of budget authority over a nine-year period (2013-21).


Netting out about $200bn in savings from lower interest payments, that works out to about $109bn in reduced budget authority per year. However, there are three complications in calculating the actual cuts in spending this year. First, under the fiscal cliff compromise the cuts for this fiscal year don’t start until March and they are “only” $85bn. However, there are only seven months left in the fiscal year, so on an annualized basis the cuts are equivalent to a $146bn drop in appropriations. Second, the actual cuts in spending will be less than $85bn because the sequester cuts budget authority, not spending. Programs can use leftover appropriations from past budgets to cushion the immediate cuts. The CBO estimates the actual spending cuts will be $42bn.


That doesn’t sound too bad. Unfortunately there is a third complication. Currently, defense spending is running higher than the current annual cap. This overshooting has to be made up in the remaining months of the fiscal year. Thus we would not be surprised if actual defense spending drops more than the CBO estimates. Our rough bottom-line: we expect $50bn in cuts over the remaining seven months of this fiscal year, equivalent to 0.54% of GDP over that period.


How messy?


One of the most challenging things about the sequester is that it requires the cuts to be uniformly distributed at the “program, project, activity” (PPA) level. In other words, it doesn’t just cut spending, it freezes the way spending is allocated across projects. According to the Bipartisan Policy Center (BPC), this would have a dramatic impact on the allocation spending. For example, comparing Pentagon spending requests for 2013 to the sequester caps, it would cut spending on the overhaul of the USS Abraham Lincoln by 72%, but actually increase spending on the M-1 Abrams Tank by 442%. The cuts will be particularly damaging to longer term contracts. This creates a good deal of waste and expenses.


The cuts do not all hit on March 1; many will be phased in over a number of weeks. Many budget units are still triaging their spending cuts into “immediate, eventual and never.” The Defense Department is well advanced in its planning, but even they will phase in cuts over many weeks. For example, they plan to move about 80% of their 800,000 civilian employees to a four-day work week, but only starting in the last week of April.


Despite some implementation delays, we expect the bulk of the cuts for this year to be in place by the end of April. Every week that passes increases the cuts needed to meet the fiscal year target. Thus a department facing 10% cuts over the period from March to September will need to cut spending by 14% (=7/5 × 10%) if they wait two months to start.


How painful?


While the sequester makes a relatively small dent in the long-run deficit outlook, the cuts will be significant in the short run. The Federal government has about 2.2 million civilian workers with average salaries of about $75,000. There are also about 8 million contract workers, although most of these are presumably parttime. Some forecasters look for one to two million in job cuts. CBO expects about 800,000 in “full-time equivalent” employment cuts in response to the sequester by the end of 2014, and we are inclined to go with their numbers.


We think more than half of those cuts will come from reduced hours rather than layoffs. If other agencies follow the Defense Department and put 80% of their employees on four-day furloughs, that would turn 1.8 million full time workers into part timers. If that started in late April, it would save about $11bn in budget outlays. These savings are equivalent to cutting about 400,000 jobs. Presumably some contract workers would also face reduced hours rather than unemployment. Over all, we would expect actual job losses of a few hundred thousand.


We would expect job cuts to start in March, particularly from the defense budget, as it faces the toughest cuts and has the most advanced plans. Then, if the sequester is not watered down, we would expect even bigger cuts in April. For now we are penciling in 50,000 in cuts for March, 100,000 in April, and 50,000 in May, with much smaller cuts thereafter. We will revisit these estimates over time.


The shock to GDP growth will be equally noticeable. The CBO estimates a -0.5% impact on 2013 GDP. Macroeconomic Advisors (MA) recently ran the cuts through their model and estimated that the sequester would cut growth over the four quarters of this year by 0.5%, 1.3%, 0.6% and 0.1%, respectively. This is very close to what we have been assuming all along. If anything, the near-term shock could be slightly bigger than the CBO and MA exercises because they do not include the extra cuts needed to offset overspending in the first half of the fiscal year. We expect a negative shock to GDP growth over this year of 0.4%, 1.5%, 0.7% and 0.2% respectively.


Will it stick?


As we have argued before, and as press stories now confirm, Republicans have been reassessing their tactics for extracting spending cuts. Deficit hawks can choose among three spending deadlines to extract further cuts: the March 1 sequester, the expiration of the continuing resolution on March 27 and debt ceiling in May.


The sequester could be the most politically palatable path, for several reasons.


  • Both the debt ceiling and the continuing resolution are very blunt instruments for extracting concessions. Failure to extend these budget deadlines would result in a dramatic shutdown of large parts of the government. It is, in effect, throwing the budget baby out with the bath water.
  • President Obama is now in a stronger position to “call that bluff.” He won a solid victory in the election. He does not have to run for re-election. His popularity rating is much higher than that of Congress. And the public has gotten tired of brinkmanship moments in Washington, tending to put more blame on Republicans than Democrats.
  • Deficit reduction is painful, so better to get it over with now. The sequester will kick in more than a year and a half before the mid-term election. Moreover, the sequester requires no awkward negotiation.


At this stage we expect the full sequester to go through on March 1. We then expect a furious negotiation for the rest of the month, with three possible outcomes:


  1. Cut the sequester in half or more. The sequester is going to cause some ugly headlines, creating considerable pressure to scale it back. However, cutting it significantly would be a major capitulation for fiscal conservatives, particularly if they don’t want to make aggressive use of future brinkmanship moments. It would mean giving up on trying to “balance” the tax increases from earlier this year with spending cuts. We see a roughly 20% likelihood of a major watering down.
  2. No revision. As we noted above, the sequester is not only a significant cut, it is very rigid. However, we would not rule out a breakdown in the negotiations to loosen the straitjacket. Congress does not like to surrender to the President power to reallocate funds, and reaching Congressional agreement on specific reallocations may prove impossible. We see a roughly 20% chance that the straitjacket remains.
  3. Minor cuts in spending and looser rules. The one thing the two parties will probably be able to agree on is that freezing individual line items in the budget is very inefficient and there should be some flexibility in shifting funds among related programs. We anticipate a roughly 60% likelihood that most or all of the sequester sticks, but with some funding flexibility.


Front-loaded pain

We expect the sequester to add further downward pressure to the economy in the second quarter, with job growth averaging less than 100,000 per month and GDP growth slowing to 1%. Looking further ahead, however, we expect very little further fiscal tightening over the next two years as the two parties pull back and lick their wounds.

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GetZeeGold's picture



We're so broke....we can't afford to save money.

Ray1968's picture

This changes nothing. We still spend more than we take in. We can always make the case not to cut something. We're doomed no matter what the outcome is. It will just take a little while longer.

kridkrid's picture

As Drukenmiller pointed out in the entry yesterday, if interest rates were merely at the pre-QE level, we would have an additional 500bn in annual interest payments... and yet the 180bn is going to create the chaos? If I had to bet... the upcoming takedown will be conviniently timed with the sequester so that short-sighted political scape goats can be named. Had only we done X, this all could have been avoided. Those _____ (choose the party who you accept to be the enemy) made this political instead of doing what's right for the county. Most will buy into it. Most are idiots.

eclectic syncretist's picture

In order to implement any serious policy change the FedGov has to make the people feel pain, or at least a real sense of urgency.  Severely cutting the amount of FRN's distributed by the Gov will do that with already high unemployment, $4+/gallon gas, record numbers on foodstamps, ect.  The real question one should be asking is what policy change will they make after they have created the crisis?

kridkrid's picture

I don't believe we see this the same way. There is no serious policy change that can fix anything. This isn't a problem to solve... this is a mathematical equation which requires growth towards infinity. Unfortunately, the equation can't work with only finite numbers. The trick that faces those who created the system and who have profited from it in a scale that is nearly impossible to imagine, how do you keep people off of the scent? Enter politics. Red vs. Blue, good vs. evil (depending upon the rhetoric that most interests you) the ultimate distraction. Sequester is a manufactured distraction and will be used to place blame on either side, depending on your rooting interests.

knukles's picture

Oh yeah, the Super-committee.
I'd forgotten about that one along with the Jobs Council until the Pez-I-Dindn't disbanded the Jobs Council after it Created or Saved 1,243,867,409 and 1/3 jobs.

I'm getting so forgetful in my old age. 

kridkrid's picture - Yup... the super committee. A "bi-partisan" group creates a poison pill of sorts, available for blame at "some date in the future". That date is now approaching.

Once you recognize that the problems CAN'T be solved, the purpose behind every move is open to speculation. Crisis - fix, Crisis - fix, Crisis - fix... but, of course, nothing is actually FIXED, but the equation can't be solved. How many cycles of crisis - fix before it comes apart? And on whom do you pin the blame?

LawsofPhysics's picture

correct, it's about being re-elected, not fixing anything.

Joe Davola's picture

Can't be fixed - how about we actually have a budget for a change.  Now let's throw out baseline budgeting that politicians love because they can shrug their shoulders and say the problems are just "because it's the law" - you fuckers write the laws, rewrite that one.  We keep hearing that families have to budget and live within that budget - like so much anymore, do as I say.  Super committee is a problem too - these are the ones who could get re-elected even if they blew a goat live on C-SPAN.  They won't make a hard decision.

kridkrid's picture

As the credit bubble expanded, all ships were rising. Not naturally, mind you, but all ships were rising. The family who refinanced to put an addition onto their house kept a crew employed. The guy who heads that crew was making a bunch of money and bought a boat, etc. etc. etc. The same equation was at work in the gov't.... those 2.2 million federal employees who are earning $75k/year... they're buying boats as well (and eating at restaurants, sending their kids to college, etc. etc. etc.).

All of this has peaked. And just as the ships were raised as the bubble inflated, we are going to cascade in the opposite direction. I'm not disagreeing with what you have written... but balancing the federal budget won't solve anything. It might hasten the collapse (a good thing)... but we aren't going back to the good ole days anytime soon.

LawsofPhysics's picture

Correct.  Why, becasuse driving those boats and actually doing anything requires energy.  Now please remind me, what has the EROEI been looking like lately?

Lucius Cornelius Sulla's picture

I don't care about which party the scoundrels subscribe too...they are all the same to me.  The Federal Bureaucracy is a cancer and blight that can only be cured through starvation.

kridkrid's picture

You just showed your hand. The rhetoric that you like better is Republican rhetoric. You are smart enough to realize that R's don't, on average, do a better job on spending than the D's, but you absolutely realize how horrible the D's are. In your mind, your a lesser of two evils R who supports the "true" fiscal conservative over those damn RINO's, any day of the week and twice on Sunday.

But here's the thing... even if everything above is true... not about you, I'm pretty sure that I have you pegged based on one post, but even if there is some ideology somewhere within the R party that favors smaller government... and even if there actually is some sort of ideological divide between R's and D's, IT DOESN'T MATTER. Our monetary system requires credit growth, period. Our monetary system doesn't care where that growth comes from... public or private. The system peaked in 2007/2008. Central banks are trying to pretend this didn't happen and governments, being foot soldiers for the banks, are doing their part to keep the illusion going.

EDIT: it looks like you edited your post before I finished mine. You took out the part about the gov't stealing your money. Your edited post looks less Republican... your original one was transparent.

Lucius Cornelius Sulla's picture

I didn't show my hand.  I lost faith in the political system many years ago.  I doubt that anything but cold hard consequences will prevail.  I stand by what I said.

LawsofPhysics's picture

Many have lost faith, but unless you have the means to be self-sufficient on all fronts (food, energy, etc) and the means to protect it all, the gov will eventually send someone to collect and if you can't pay the FEMA camp awaits...

Overfed's picture

They don't want to fix any damn thing. This is a march to a fascist dictatorship. For freedom.

LawsofPhysics's picture

Given that there is no policy or monetary change that will fix any of this, I'd be more concerned as to what the scope and scale of the fabricated crisis will be.  The MIC was losing favor in the late 90's and we got 911 in 2001.  Banks got greedy in the early 2000's and we had a "financial crisis" in 2008 (which was bullshit, should have let the shit show die).  See a pattern yet?

Lucius Cornelius Sulla's picture

I hope a good portion of the blame goes to Senator Patty Murray.  One of the biggest Spendocrats on the hill.  I would love to see her kicked out of the club.

insanelysane's picture

Last night a local news babe says "People are on pins and needles about the sequestor."  I had drink coming out my nose.

MiltonFriedmansNightmare's picture

Oh, the humanity....I can't even talk....

Budget cuts, well sort of....

Say it isn't so, the 7th sign, undoubtedly.

CrashisOptimistic's picture

GDP "slowing to 1%"


How do you do that when the present number is -0.1%?

Catullus's picture

And the contract breakage fees are going to be enormous. It'll be a nice AR boost to a lot government contractors.

HurricaneSeason's picture

They were contracted to buy hundreds of c-27j cargo planes from Italy and broke it.  Nobody wanted the planes in the first place, they wanted to pay Italy $30-$50 million apiece for them so they would join a coalition of the willing to use high tech weaponry to bomb people with machetes and cans of gasoline, living in mud houses. So, they lose the maintenance contract and can't sell the 36 planes that are in the process of being delivered. The inaugural flight for many of the planes will be to the desert to rust in a scrapyard. This was before sequestration. I'm sure there are many other such examples that don't make the newspaper yet they scream draconian and hollow about a 5% cut to their bloated budget. Their rallying call now is that full paychecks and retirement will still go out for everybody, but no training or maintenance. This is what the intelligence department came up with as a game plan? With more and more jobs sure to go to China for $250 a month labor in the upcoming downturn and revenues set to decline further, their plan is to have millions of untrained people standing around and a large percentage of their equipment unable to be used. No wonder the war in Afghanistan will take 20 years instead of 3 weeks.

EmmittFitzhume's picture

What's to stop these assholes from loading more spending to replace the sequester?  The fuckers add new spending all the damn time.

Mr. Magoo's picture

"GDP growth slowing to 1%" Really, any growth has been due to the huge increase in Govt spending take that away and the private sector growth would have been negative for the past 5 years. When the Govt goes bust and stops writing checks then we will see what B.S this has all been

kridkrid's picture

It's way worse than that. Growth (public and private) has been built on the creation of debt/credit for something like the past 40 years. All that has happened in the past 5 years is that gov't has backfilled as consumers and corporations are now tapped out. When the monetary system finally collapses, and credit illusion ends, we will see what B.S. this has all been. Why do you think out gov't is gearing up domestically? They know what's coming.

Spastica Rex's picture

The state/banks - sorry, that was redundant - were just using this back-fill  to smooth over a little pothole in the road to never ending consumptive happiness. I'm sure there are resources waiting in the future to pay all this back. That's what I tell my kids. Elsewise, sucks to be them.

Hohum's picture

Mr. Magoo,

You're right.  It is also interesting the GDP growth will "slow" from -0.1% to + 1.0%.  Fascinating math.

Everybodys All American's picture

These are cuts in the rate of spending. The baseline the government start with is an 8% increase every year. I repeat. This does not cut spending at all.

Mercury's picture

As we have expected for some time, the sequester will very likely hit on March 1. This well likely add further downward pressure to the economy in the second quarter, with job growth averaging less than 100,000 per month and GDP growth slowing to 1%.

I for one am willing to take that risk.

Of course most Republicans are so far gone at this point they cannot articulate the argument that if money is tight it makes sense to cut back on the cable TV bill before you stop buying food for the baby.

Obama4Ever's picture

Tell me about it. ZH: "Wah wah wah! Big oppressive government! Drones everywhere! High taxes! Obamacare!" Then later... "OMG! Spending cuts! The economy is going to tank! There won't be any benefit at all!"

ZH == cocksucking whiners. WTF is their business model? Just get as many people to visit their site? Are you telling me their profit comes from banner ad click throughs?

Too bad I've been running adblock+ I guess...


dwdollar's picture

Unless taxes are cut by an equivalent amount, I don't see how this is a net positive for the economy. It's really the worst of both worlds...

Undoubtedly the most productive and benign government workers will be sacrificed first to keep the worst of the leeches.

I think the test should be this...

If the DC economy is contracting or at least growing slower than the rest of the economy we should be making some progress as long as they aren't transferring the leeches somewhere else.

GetZeeGold's picture



Just pissed off because our glorious leader ordered the peas.....and he can't stand peas.

j0nx's picture

MDB is already alpha troll here. You are not wanted, needed nor is your troll game nearly good enough to compete with MDB. Move along troll wannabe. Move along.

Obama4Ever's picture

Thank you for your valuable feedback.

Spastica Rex's picture

I have a different perspctive. MDB is BORING. Shouldn't be too hard to be more entertaining than him/her/it. Go for it.

Lucius Cornelius Sulla's picture

Take the red pill Obama4Ever and remember; there is no turning back.

nightshiftsucks's picture

Yep thats what Obama has been saying "OMG! Spending cuts! The economy is going to tank! There won't be any benefit at all!"  You're going be my BITCH MOTHER FUCKER. I'll bet you're some piece of shit that lives in Oakland on the taxpayers dime. So let me offer you some advice,when the shit collapses and your EBT card no longer works head east to the burbs cause I have a lot of lead to feed you.

Terminus C's picture

So... this article is saying that if Congress doesn't reach a compromise a massive cut in overspending will occur and that will be bad for the economy?  That sounds like back door Keyneseism to me.  Cut the fucking deficeit to 0.  Tell the bankers to get fucked on their odious debt and start a new monetary system based on production (actual production not rehypothocated financial voodoo paper production)...

Fuck the political circus, Rome is burning.

hawk nation's picture

Please enough with this BS

Make some real cuts like maybe 30% of the total government budget and throw out most if not all of the regulations and by years end the GDP will be growing at 10% 

Dont lay anyone off just let them work four day weeks and its about time these government workers have some skin in the game by cutting their compensation by 30%. Dont like it go find a job in the soon to be thriving private sector.

while were at it increae their retierment age by 10 years since they only do about 50% of the work a private sector worker does

Oldwood's picture

Or maybe just pay government employees fornthose hours that they actually accomplish something of benefit to the taxpayer.

hawk nation's picture

Mr bankster you want to foreclose on my house come and take it from me I dare ya bitch

yogibear's picture

Everyone in the market knows Bernanke and the Federal Reserve cannot stop monetizing. Bernanke and Fed will print until a currency crisis occurs.

Obama and the democrats don't want spending cuts, they want more income.

Bernanke, Evans, Dudley and Yellen,

we all know your last announcement about holding back on buying US treasuries was a big BS!!!. You have to!

You Federal Reserve heads will keep buying until the US looses it's too late. Rates go up and it gets really horrific for DC.

NoWayJose's picture

Game plan for both sides - let sequester kick in to allow finger pointing at the other side, then restore spending cuts to 'save' the day!

Oldwood's picture

We are so screwed that all that is left is to determine who will take the blame. You can bet at the end of the day they will figure out it's our fault! By their reasoning we should have stopped them, right?

Water Is Wet's picture

FWIW, a couple weeks ago 3 people were fired at my office, 2 more quit and won't be replaced, and 16 people at a clients office were fired due to the sequester.  I'm not complaining, but the sequester already caused job cuts.

dogfish's picture

More kabuki theater

Truther's picture

Fuck you Bernancke.