Hurray! The election is over, and thank goodness that television commercials can return to normal. And while there may be a collective sigh going up around the nation regardless of the election outcome -- hey, it's over, and that's something to celebrate -- one thing that hasn't changed is the looming problem of sequestration. If you haven't heard, this is a big problem -- one that the election didn't help. Let me explain.
This election was one of rising tempers, slander, and outright attacks from one candidate to another, but when all was said and done, very little changed. Obama is still president, Democrats still control the Senate, and Republicans still control the House. This may not seem like an issue, but consider that the Senate and the House have been gridlocked for the past year over any budget solution. And a budget solution is exactly what's needed to avoid sequestration.
How this affects your pocketbook
On Wednesday, Boeing (NYSE: BA) announced that it's laying off 30% of its managers (from 2010 levels, no less) to reduce company costs and preserve profit margins in an ever-decreasing defense market. While Boeing said the cuts were not in preparation for the possibility of sequestration, that very statement alone is enough to cause concern. Think about it: If Boeing is cutting 30% of its managers because of planned defense spending cuts, how much worse will it be if sequestration goes through and the cuts get exponentially deeper?
Moreover, Boeing isn't the only company downsizing. Over the past few years, Lockheed Martin (NYSE: LMT) has reduced its management by 25%. Lockheed has also stated that if sequestration goes through, it may have to cut an additional 10,000 jobs. Another defense player, Northrop Grumman (NYSE: NOC), while not as forthcoming as Lockheed on the possible impact from sequestration, has already laid off nearly 600 aerospace workers in Southern California and is looking to cut 350 electronic systems workers, mainly in the Baltimore area. Now, 350 may not sound significant, but that is in addition to the 700 jobs already cut from that sector. And that's just a snapshot from two sectors before sequestration takes effect.
I don't work in defense, so who cares -- right?
A report from the House Appropriations Committee details the consequences of sequestration:
- 9.1% unemployment rate.
- 1.4 million jobs lost.
- Major cutbacks at the Securities and Exchange Commission, dramatically affecting enforcement, examinations, and disclosure.
- Cutting Commodity Futures Trading Commission staff, which would delay Industry registration applications and implementation of the landmark Dodd-Frank Wall Street Reform and Consumer Protection Act.
- 900,000 participants dropped from the Women, Infants and Children (WIC) Supplemental Nutrition Program.
- An end to child care for 80,000 low-income children.
- 200,000 fewer participants in Section 8 housing, resulting in evictions.
- 100,000 fewer people served by Homeless Assistance Grants, putting them on the streets.
- As many as 1,000,000 fewer patients served in community health centers.
- 2,400 fewer NIH research project grants.
- As many as 45,000 fewer breast and cervical cancer screenings for low-income women.
- 1,600 fewer NSF research and education grants, supporting 19,300 fewer researchers, students, and technical support staff.
- 100,000 fewer children nationwide enrolled in Head Start.
- 20,000 fewer Head Start employees.
- 12,000 fewer special education teachers and aides because of a reduction in special-ed grants. This would affect more than 500,000 students with special needs.
- 16,000 fewer teachers and aides nationwide because of a reduction in Title I grants.
- 4,300 fewer at-risk youth in the Job Corps education and skills training program.
Sounds like a nightmare
That's only part of the report detailing the consequences of sequestration. The fact is, sequestration could be one of the most devastating problems the U.S. economy has faced in a long time. And while it might sound like it's primarily relegated to federal programs and spending, the effect it'll have on both public and private sectors is nothing short of devastating.
Take, for example, Apple (NASDAQ: AAPL). I know people love their iPhones and iPads, but when push comes to shove, these are things we can live without. I know -- "Blasphemy!" you cry. "Not my iPhone!" But if unemployment makes it up past 9%, the unemployed are probably not going to be concerned with upgrading to the latest and greatest Apple product. That, in turn, will affect Apple sales, which will affect Apple's stock price, which will affect Apple's ability to hire and employ people.
The same can be said for Ford (NYSE: F), Home Depot (NYSE: HD), and Williams-Sonoma (NYSE: WSM). All three of these companies are in the industries that CNBC says were hit hardest by the recession, and all three represent different sectors that will probably be negatively affected again if sequestration goes into effect.
The thing with the health of an economy is that when one part suffers, it eventually affects the other parts. Consequently, while sequestration will have its most immediate impact on federal programs, the public and private sectors can't suffering as well.
So what can we do?
The House has to pass a budget resolution by the end of the year to avoid sequestration. But, just as with the last recession, there is a possible silver lining for the savvy and patient investor.
Yes, companies are going to be hit hard, and stock prices will probably tank. But the strong companies will survive and will probably see their stock prices rise again.