The U.S. economy likely won't face a major threat from sequestration, but Virginia is among the states that stand to suffer the most from the $85 billion in automatic federal budget cuts scheduled to take effect March 1, an economist told a Richmond-area business gathering Monday.
"I don't think [sequestration] will be all that menacing for the economy, but we don't know," said Mark Vitner, a senior economist with Wells Fargo & Co.
Vitner spoke at a meeting organized by Virginia Commonwealth University's Real Estate Circle of Excellence. He predicted a continued, modest economic recovery and an increase in long-term interest rates sooner than expected.
The Washington and Norfolk regions are among the nation's metro areas that would suffer the most from the expected cuts in defense and nondefense spending, given the economic significance of federal contracts in those areas, Vitner wrote in a report this week.
"The potential impact from reduced federal outlays could affect everything from biomedical research to homeland security," Vitner and Wells Fargo economist Michael Brown wrote in the report. "Cuts in nondefense outlays would likely trigger significant furloughs, layoffs at civilian contractors and generally less business for supporting services, including law firms, caterers, airlines and hotels."
In his talk Tuesday, Vitner noted the budget cuts could undermine general confidence in the economy and jostle financial markets.
"I think the most likely outcome is we are going to find out that a lot of government agencies have already cut spending" in anticipation of sequestration, he said.
Virginia has had a "fairly broad-based" economic recovery since the recession, outpacing the recovery in most other states, but that boost has come in part from federal government spending, he said.
Job growth in the state slowed later in 2012, in part because of concerns about the impact of federal budget cuts.
Despite sequestration and other uncertainties such as Europe's ongoing economic woes, Vitner said he expects U.S. GDP this year to grow at a slightly better rate than the 2.1 percent average since the recession ended.
"We think it is going to actually ramp up a little bit more than that, mainly because housing has gone from being a drag on the economy to a modest positive," he said.
The surprise decline in GDP in the fourth quarter was mostly the result of a drop in defense spending, a drawdown in inventories and a widening trade deficit, Vitner said. Excluding those factors, "the private sector was growing pretty solid," he said.
He predicted a modest decline in the national unemployment rate this year, with more discouraged job seekers re-entering the labor market as job prospects slowly improve.
With the economy growing at a 2 to 2.5 percent annual rate, Vitner said interest rates cannot remain at their current lows, and the Federal Reserve Bank will soon "turn off the spigot" on quantitative easing.
"I think sometime in the spring of next year, the Fed will be raising interest rates," he said.
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