Is a Sequester Tipping Point Coming?

When $85 billion in broad spending cuts went into effect in March the world didn't end. Kids weren't kicked out of school en masse, hundreds of thousands weren't laid off, the economy didn't tank. Sequestration was overhyped and the deluge never came. But it may begin to pour this summer.

The across-the-board reductions may gain more visibility this summer largely as big defense cuts go into effect. Starting in early July, the Defense Department will begin 11-day furloughs for hundreds of thousands of its civilian employees nationwide, and the local reports are rolling in.

In Wyoming, more than 400 people will be affected, according to The Billings Gazette. In Montana, more than 500 at Malmstrom Air Force Base will see furloughs, according to The Great Falls Tribune. And nearly five times as many will be affected in Minnesota, according to The Minneapolis StarTribune.

Starting July 1, [Air Reserve electrician Dustin] Hawkins will be among more than 2,400 federal Department of Defense employees in Minnesota forced to work a reduced, four-day week for several months. Those furloughs will be spread across 63 sites statewide, but Duluth's 148th Fighter Wing, Camp Ripley in Little Falls and St. Paul's 133rd Airlift Wing — the units with the highest concentration of federal employees — face the brunt of the cutbacks.

Some federal furloughs have already begun, but the onslaught of Defense Department furloughs—roughly 680,000 civilian employees in total—will take a more noticeable toll. Under the heading "it's just the beginning," Bank of America economists wrote in a recent analyst note that the effects on government-worker income seem to be coming.

We expect aggregate government-worker income to decline in May given that furloughs started in late May. The first day of government wide furloughs was on May 24, when roughly 115,000 federal workers, or 5% of the total federal work force, stayed home without pay. However, with the majority of the furloughs not kicking in until the beginning of July, including the Pentagon's 680,000 furloughs beginning July 8, the real income shock will not show up until the July personal income and outlay report on Aug. 30.

Other economists have said that the furloughs will begin to affect growth this quarter. And the effects of sequestration won't be manifested in furloughs alone. Even nongovernment employees will feel the effects as July Fourth celebrations are canceled in several states.