“The concern is valid,” says Rajeev Dhawan, who directs the economic forecasting center at Georgia State University in Atlanta. “Yesterday's headline number [puts] pressure on the Congress to come to some kind of a solution on the sequester.”
Consider that economists are generally forecasting growth of about 2 percent in gross domestic product this year, and in the fourth quarter a $47 billion decline in defense spending was, by itself, sufficient to drag down the rate of GDP growth by nearly 1.3 percent.
When the economy “paused” (that’s the word the Federal Reserve used Wednesday), planners in private businesses and at the Pentagon caused the downshift partly in response to uncertainty about the “fiscal cliff,” the scheduled tax hikes and spending cuts that loomed at the time.
The tax side of that uncertainty has been largely addressed, but the spending cuts were merely postponed until the end of February.
Both Democrats and Republicans have said they’d like to address federal budget deficits through planned adjustments, rather than the automatic cuts – which would be divided equally between defense spending and a large swath of non-defense programs.
Budget experts tout the idea of a bipartisan accord, for example, that would focus on reforming entitlement programs, while dealing a less-severe hit to the economy in the form of sudden spending cuts. It’s far from clear, however, that the automatic spending cuts will be avoided.