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STRATEGY

Four Months After Sequester, the Economy Continues to Improve
 

Despite all the dire predictions and gloomy forecasts, federal spending cuts that went into effect March 1 have helped the economy. Here's why.

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Ask any business owner how the economy is doing and you'll probably hear, "not bad." Especially over the past few months.

The construction industry is certainly recovering: housing starts were up 6.8 percent in May, builder confidence reached its highest level since 2006, and mortgage applications continue to rise. Construction spending increased in April and the Architecture Billings Index has strongly rebounded. Other sectors are doing pretty well too: retail sales have steadily increased, auto sales roared back in May, and Ford's sales hit its highest level since 2007. The financial sector is now bigger and more profitable than ever, and the service sector continues to pick up. Durable goods orders are up and consumer confidence is "soaring."

More good news: household financial health is looking better and people are spending more on weddings. Economic conditions in the New York, Philadelphia, Texas, and Chicago regions are doing well, improving, and even "surging." The country's finances continue to get better and recently credit service Standard & Poor's upgraded its outlook on U.S. government debt. A survey from Capital One Bank says that small business conditions are improving and a survey from Citibank reveals a three-year high in owners' view of business conditions. Prominent economists like this one are now predicting economic growth to be between 3 percent and 3.5 percent. Not bad.

Four Months After Sequestration, the Economy is Holding Up

Of course, business conditions could still be better. For every good piece of news, you can find something else that offsets it. But the people I speak with--my clients, my readers, hundreds and hundreds of business owners, all say that the economy is getting better. And that's great news. Particularly in light of next week's anniversaries.

Anniversaries? Sure. You remember: next week the country will celebrate the 237th year of the founding of the United States. And no one back then thought the country would last a decade, let alone more than two centuries. And speaking of predictions, next week will also be the four-month anniversary of the dreaded "sequester." Remember that? Back on March 1 the government, by its own decree, forced itself to cut $85 billion from its budget this year and the outlook was scary!

At the time, President Obama warned of dire consequences. Economist Scott Sumner explained how the country got into the sequester mess and another economist detailed just how big the pending automatic sequestration cuts would be. Salon's Alex Seitz-Wald wrote a hysterical analysis explaining why Americans should all be afraid. The Washington Post's Jim Tankersley said the sequester would sock an already vulnerable economy, and even before its impact was fully felt, some said the cuts were already hurting small businesses. Devastation would reign! Airplanes would fall out of the sky. The poor would die of starvation. The sick would get sicker. The Blackhawks would win the Stanley Cup. But none of that happened. Well, almost.

Still, sequestration is no joke. Owners were affected by it. And they still are.

Jared Bernstein has done a great job tracking the effects of the sequester in his ongoing "sequester watch." What you learn from reading his blog is that the sequester has done several things. You all know that air traffic was delayed during the first few weeks of March until Congress took action. But did you also know that the budget cuts are "gutting" Indian education, "stalling" Meals on Wheels programs, "hitting" work-study funds, and "hurting" medical research? Did you not realize that the budget for our national weather service has been "slashed," our inspectors general have been "weakened," and other scientific research has been "imperiled?" Cities, like my own, are feeling it. Even the quality of life on U.S. military bases has been adversely impacted! The list goes on. And so do business owners. And so does the economy. There's a bigger picture.

Why Sequestration Hasn't Harmed the Economy

The country has to reduce the deficits and the latest Congressional Budget Office analysis shows that sequestration, both implemented and planned--along with rising tax receipts and, most importantly, an improving economy--are reducing the annual deficits at least temporarily. I and many people I know believe the deficits should be lower and more significant steps should be taken to bring the national debt under control. Even if it does hurt economic growth. For now, luckily, it hasn't.

Owners make budget cuts to maintain fiscal health all the time. While pulling back resources may also hurt company growth, and you hate that, you know it's a necessity if you want to stay in business for the long term. Smart business people cut expenses, lay off good and hardworking employees, reduce investments, and work to maintain financial stability.

And that's why, despite all the dire predictions and gloomy forecasts, the sequester has not had the negative affect on the economy that so many people predicted. In fact, I believe the March 1 sequestration has helped the economy. It is comforting to most in the business community that the government still has the discipline and self-control to go through with the cuts that it for so long threatened. It is comforting to know that the legislative branch can stand up in the face of withering criticism and dire warnings from the media and even the president to take action and keep the government's finances from going off the rails. And it is encouraging to see the economy respond: more housing, increased investments, higher sales, more stability, increased growth, even a 4 percent rise in the Dow since March 1.

The economy continues to improve. Business confidence is getting better. It's due to many factors; sequestration is just one. (Don't forget the Fed's stimulus.) Too much austerity can be a bad thing. But so far so good. So let's hope this little bit of belt-tightening continues. It's painful. But it's working. Just look at the data.

Last updated: Jun 26, 2013

GENE MARKS is a columnist, author, and small-business owner. He oversees the Marks Group, a 10-person technology consultancy to small and medium-size businesses. A certified public accountant, Marks has also worked in the entrepreneurial services arm of KPMG. He writes for The New York Times, Forbes, and The Huffington Post.
@genemarks




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