Will Sequestration = 2.14 Million Lost Jobs?

Dr. Stephen S. Fuller at an AIA conference last October presenting an analysis that one million defense industry jobs could be lost as a result of expected defense budget cuts. This was the pre-cursor to the study released this week.

As the threat of sequestration looms ever larger, the results of a new study released this week (on Tuesday, July 17) by the Aerospace Industries Association (AIA) indicate that more than 2.14 million U.S. jobs—including about 270,000 federal jobs—could be lost if sequestration goes into effect on January 2, 2013. According to George Mason University Professor Stephen Fuller, who conducted the study, “The Economic Impact of the Budget Control Act of 2011 on DOD and Non-DOD Agencies” for the AIA, most federal job losses would come from non-defense agencies, since military pay is expected to be exempt from cuts and because most non-defense agencies’ procurement budgets are not as big as the Defense Department’s, meaning more of their cuts will come from their payroll accounts. The report concludes that federal job cuts would include 48,147 civilian employees at defense agencies and a whopping 229,116 at other agencies.

“The results are bleak but clear cut,” said Fuller, speaking at a press briefing on Tuesday. “The unemployment rate will climb above 9%, pushing the economy toward recession and reducing projected growth in 2013 by two-thirds. An already weak economy will be undercut as the paychecks of thousands of workers across the economy will be affected, from teachers, nurses and construction workers to key federal employees such as border patrol and FBI agents, food inspectors and others.” While most states can expect to experience five-digit job losses, the report projects that California (expected to lose 225,464), Virginia (207,571) and Texas (159,474) will be the biggest losers. The District of Columbia and Maryland come in fourth, and fifth, with projected job losses of 127,407 and 114,795, respectively.

Defense industry CEOs testifying before the House Armed Services Committee the following day (Wednesday, July 18) echoed that message, warning of job layoffs and disruptions in manufacturing, and saying that they expect to have to start informing employees just before the November 2012 election that their jobs would be terminated in January if Congress fails to make a budget deal, triggering billions of dollars in budget cuts. “From an industry perspective, because of the specter of sequestration, the near-term horizon is completely obscured by a fog of uncertainty,” said Robert Stevens, chairman and CEO of Lockheed Martin Corp.

In an attempt to help disperse that fog, the House passed the Sequestration Transparency Act of 2012 (H.R. 5872) that same day.The bill would require the White House to provide details as to how it will apply sequestration across all federal agencies. Armed Services Committee Chairman Rep. Buck McKeon (D-Calif.) praised the bipartisan vote (the House bill passed easily, 414 to 2) as signaling the need to avoid the sequester. Yet although the Senate has already approved a similar bill of the same name (S. 3228), the two are not identical, meaning the Office of Management and Budget (OMB) is under no legal obligation to comply.

With hundreds of billions of dollars in cuts to federal programs on the line, this is clearly an issue that will impact federal leasing.  In fact, many agencies have already adopted a posture of uncertainty, leading them to execute short term renewals or leases with termination rights.  The effect has been an overall decrease of the average lease term   among GSA leases.  This has been particularly damaging to property investors – especially closed-end funds – that expect to renew their government tenants, create asset value and exit the investments.  Federal agencies suffer as well.  Shorter term renewal leases have made most tenants captive, ensuring higher rents and lower landlord capital contributions.