Bloomberg News

Budget Impasse May Cost 300,000 U.S. Non-Defense Jobs

July 05, 2012

Congress Budget Impasse May Cut 300,000 Non-Defense Jobs

Cuts of beef are fed into a wrapping machine in the meat department of a supermarket in Princeton, Illinois. Photographer: Daniel Acker/Bloomberg

At least 300,000 jobs in industries including computer services, tourism, package delivery and meat processing may be lost if Congress doesn’t avert $1.2 trillion in automatic federal spending cuts starting next year.

Across-the-board reductions in non-defense spending will have a ripple effect over the next two years on companies that aren’t government contractors, according to the Bipartisan Policy Center in Washington, which made the forecast. Hundreds of thousands more jobs are at risk from additional Defense Department reductions, amid an 8.2 percent jobless rate in May.

“You are going to see reductions, frankly, in every area of the American economy,” Dov Zakheim, a former Defense Department comptroller who worked with the policy center, said in an interview.

The cuts are part of $1.2 trillion in reductions to domestic and defense programs that will start in 2013 if Congress doesn’t act. They were required after talks failed last year on a bipartisan plan to curb the U.S. deficit. The Defense Department will bear half of the reductions and other government agencies will share the rest, starting with about $55 billion in 2013.

Farm Subsidies

About $16.2 billion of that would come from mandatory programs such as Medicare and farm subsidies, according to the Center on Budget and Policy Priorities, a Washington group that advocates for programs for lower-income and middle-class Americans.

“I don’t like across-the-board meat-ax cuts,” Senator Susan Collins, a Maine Republican, said in an interview. “We should be making decisions.”

The reductions are a “swiftly ticking time bomb,” Scott Lilly, a senior fellow at the Center for American Progress, wrote on the Washington group’s website that says it promotes “progressive ideas.”

Air Traffic

The Federal Aviation Administration may close air traffic towers in smaller communities or reduce the number of air traffic controllers as the result of a potential $1.5 billion spending decline, Lilly said in a telephone interview. That may lead package-delivery services, such as FedEx Corp. (FDX:US) and United Parcel Service Inc. (UPS:US), to reduce flights, he said.

“FAA cuts would have deleterious impacts on operations,” Danny Werfel, the controller at the Office of Management and Budget, told the House Budget Committee in April. He also said about 300 national parks would be fully or partially closed.

Cuts to the National Park Service budget may delay the start of the summer season at Yellowstone National Park in Wyoming for weeks, leaving hotels and restaurants without the business tourists would bring, Lilly said.

While officials at Lockheed Martin Corp. (LMT:US), the world’s largest defense contractor, say it and other companies will stop hiring and investing as the automatic changes near, many non- defense companies are keeping quiet publicly.

‘Only Certainty’

“It would be premature to discuss specific impacts on our business from any change in federal spending, given that options are still being discussed by all sides,” Maury Donahue, manager of regulatory and public affairs communications at Memphis, Tennessee-based FedEx, said in an e-mail. Kara Ross, spokeswoman for Atlanta-based UPS, said the company had no immediate comment.

Companies have so many questions about the automatic cuts “that the uncertainty is the only certainty right now for everybody,” Stan Soloway, president of the Professional Services Council, said in a telephone interview. The trade group, located outside Washington in Arlington, Virginia, represents the government professional and technical services industry.

Fewer Hirings

The spending reductions may lead to a loss of 1 million defense and non-defense jobs in 2013 and 2014 through fewer hirings, along with attrition and layoffs, said Steve Bell, senior director of the Bipartisan Policy Center’s economic policy project. Of that number, at least 300,000 are unrelated to defense, according to Bell and Zakheim. The group was created in 2007 by four Republican and Democratic former Senate majority leaders.

The U.S. economic recovery and job creation has become a significant part of the debate in the presidential and congressional elections. The Labor Department tomorrow will issue its monthly employment report.

Guidance to Agencies

The White House Office of Management and Budget hasn’t issued guidance to federal agencies on how to put the automatic cuts in place. The Senate voted in June to seek reports from the OMB on the reductions’ effect, and from President Barack Obama on how the government would implement them. The House hasn’t adopted similar measures.

To the extent that government agencies can decide what to eliminate, “anything expendable will be at high risk,” said Daniel Gordon, associate dean for government procurement law at George Washington University Law School in Washington. “That would include, in particular, professional services and consultants, but also anything that involves investing in the future,” such as information-technology improvements.

Hewlett-Packard Co. (HPQ:US), with $3.1 billion in government contracts in 2011, and Dell Inc. (DELL:US) with $1.4 billion, are among the government’s top 50 contractors, according to a ranking of 200 federal industry leaders by Bloomberg Government. Neither company responded to requests for comment.

Support Activities

Support activities that aren’t critical to a government agency’s missions won’t “be a pleasant business to be in,” said Rob Guerra, a partner at Guerra Kiviat Inc., a business development company for federal contractors in Potomac, Maryland. Help-desk positions, such as resetting computer passwords, and companies with supplemental labor contracts for receptionists or guards are “more susceptible,” he said.

The U.S. government spent about $540 billion in 2010 and 2011 on contractors, including all goods and services bought by contract such as Air Force fighter planes and lawn-mowing services in national parks, according to Gordon.

New Commitments

“Both the government and its contractors will be reluctant to make new commitments in the months leading up to” January when the automatic cuts start taking effect, Gordon said in an e-mail. “I’d expect the government and contractors to do less hiring than normal in October, November and December. I’d also expect the federal agencies to delay decisions that commit them to spend money, whether by hiring, contracts, or grants.”

The spending reductions will affect “everything you can imagine,” Senator Mark Begich, an Alaska Democrat, said in an interview.

The FAA may have to trim $900 million in salaries for air traffic controllers, for a 10 percent to 12 percent loss of their working hours, forcing some reductions in takeoffs and landings, Lilly wrote on the Center for American Progress website on June 18.

‘Major’ Hubs

“The FAA is going to do everything to avoid cutting back services to the major hubs -- if they do that then they will devastate the rest of the country,” Lilly said in a telephone interview. “I am from Springfield, Missouri -- if they decide to do that, it basically loses its airport.”

Commercial airlines may raise fares to make up for fewer flights, passing on the hurt to travelers, Lilly said.

The U.S. Occupational Safety and Health Administration, as part of the Labor Department, would conduct fewer workplace inspections, “leading to diminished protection for workers,” said Werfel, the federal controller.

The Food Safety Inspection Service has a budget of about $1 billion and a workforce of about 10,000. The 1906 Federal Meat Inspection Act requires a federal inspector on the premises when slaughterhouses, packing plants and poultry processing facilities are in operation, according to Lilly.

Furlough Employees

“The agency may well have to furlough employees for about 20 million hours between Jan. 1 and Sept. 30, 2013,” Lilly wrote on the center’s website. That may force companies such as Hormel Foods Corp. (HRL:US), Smithfield Foods Inc. (SFD:US), Perdue Farms Inc., and Tyson Foods Inc. (TSN:US) to suspend operations for certain periods each week, he said.

“In the past, meat inspection has always been deemed to be an essential service and not subject to furlough,” said Janet Riley, a spokeswoman for the Washington-based American Meat Institute, whose members include Tyson, Hormel and Smithfield.

Tom Super, spokesman for the National Chicken Council, which represents Perdue and other poultry companies, said in an e-mail that the organization “would urge the administration once again to classify meat and poultry inspectors as essential personnel who are not subject to work stoppage due to a budget impasse or budget cuts.”

Implementing Changes

Even as government agencies haven’t spelled out how they would implement the automatic changes and companies are reluctant to share their planning, the arm of Congress that makes cost estimates for legislation and analyzes the budget is feeling the pinch.

The Congressional Budget Office is “a very small piece of the federal government, but our own decisions about whether to replace people who leave is affected by the uncertainty of what our funding will be next year,” CBO Director Doug Elmendorf said last month. “That must play out in a much, much larger scale with more significant enterprises than ours.”

To contact the reporter on this story: Roxana Tiron in Washington at rtiron@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net


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  • FDX
    (FedEx Corp)
    • $149.53 USD
    • -1.33
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  • UPS
    (United Parcel Service Inc)
    • $102.66 USD
    • -0.91
    • -0.89%
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