What do AIM members expect from the sequester?

The mandated reductions in federal spending, divided between defense and non-defense accounts, which took effect in March will of course be felt directly by some government contractors. Other employers may suffer some consequences as a result of reductions in certain services, such a federally-funded workforce development programs.

Many economists have been concerned about macroeconomic effects ” a slowdown in overall growth because of reduced federal spending ” although the prospective increase in tax rates, largely averted, was considered the more dangerous part of the ‘fiscal cliff.’ And a substantial body of opinion holds that the cuts won’t hurt (or not much) in the short run, and will be beneficial in the longer term.

Member responses to a special question on AIM’s March Business Confidence Survey indicate that the direct impact of the spending cuts is limited ” only 3 percent of respondents cited direct effects (which they are already feeling).  A plurality of respondents, 57 percent expected indirect negative effects; and 40 percent did not foresee negative effects from sequestration.

Responses from manufacturers and from employers in other sectors were virtually identical; but there were clear differences by size. All of the companies reporting direct impact were in the medium size range (the respondents did not happen to include large defense contractors or healthcare/research institutions).  The small and medium-size groups otherwise responded similarly, with slightly more expecting negative effects than discounting them. Among larger employers, by contrast, more than three out of four (76 percent) expected negative indirect effects from the spending cuts.

These results are generally in line with past surveys showing small employers most concerned about government spending while larger ones are more likely to value government programs.

On this evidence, direct benefits (contracts) do not appear to be a major factor; but it is not clear to what extent the divergence is an effect of, for example, different tax situations, ability to access programs, or simply varying political and economic views. The balance of responses does hint at why fiscal issues, at least on the spending side, may be challenging for business organizations.