Analysis: Even brief spending cuts could hit US economy hard

Analysis: Even brief spending cuts could hit US economy hard

The US economy could take a big hit from automatic government spending cuts even if Congress only leaves them in place for a month or two.

The cuts were meant to be so painful that they would force Congress to find a more thoughtful way to tighten the budget.

But many analysts assume they will take effect as scheduled, forcing federal offices to furlough some of their 2.8 million workers and trim spending on everything from paper clips to missiles.

It is anyone's guess, however, how long lawmakers will be able to stomach the economic pain. The duration of the austerity measures will determine the force of the blow to the economy. Some analysts think having the cuts in place for more than a few months could trigger a brief recession.

The Congressional Budget Office said on Tuesday the cuts would translate into $42 billion less in federal spending between the beginning of March and the end of September.

If US$6 billion (S$7.43) in spending is cut in March - which would be the average decline over a seven-month period - economic growth would be stunted by roughly seven-tenths of a per cent in the first quarter, said Omair Sharif, an economist at RBS in Stamford, Connecticut.

"You are going to feel the pain right away," Sharif said.

Expectations for growth during the first quarter are already lackluster. Analysts polled by Reuters last month said they expected the economy to grow at a 1.5 per cent annual rate in the first quarter, though some have since raised forecasts.

If the cuts continued into the second quarter, the austerity could erase almost all the growth expected during that period, Sharif said. After the second quarter, the impact would lessen.

Sharif's calculation only takes into account the direct effect on growth from spending cuts. The loss of income at government contractors and among furloughed employees would also hurt the economy throughout the year by reducing consumer spending and business investment.

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