Effects of Sequestration…thus far

3

Well we’re about 6 weeks into the sequester and apparently the sky hasn’t fallen yet. Each day on Wall Street seems to be better than the day before. It seems that each day the Dow and S&P are going to new all time highs. Yet, I have to wonder “are we letting ourselves in for a very rude awakening?”

When sequestration became the law of the land, it seemed that most people may have thought an apocalyptic event was going to occur. I take a different view. I’ve always believed that the impact of the sequester wouldn’t be felt immediately but slowly over time it would have an impact on the economy. Its almost liken to those old vampire movies whereby the vampire comes back night after night and sips a little more blood until eventually there’s nothing left.

Case-in-point, this week for the US markets we had very little economic news to drive the markets. Each day the market was going higher and higher making and breaking new all time highs. On Friday however we had major economic news:

Core Retail Sales – Down 0.4%
Retail Sales – Down 0.4%
PPI – Down 0.6%
Consumer Sentiment -Down nearly 7 percent from the prior month

The markets clearly did not like these numbers and proceeded to sell off immediately when the markets opened. The Dow dropped 77 points at the open and spent the rest of the day in negative territory. The S&P fared no better as it fell 13 points from the open and liken to the Dow spent the rest of the day in negative territory. Add in a not so stellar Jobs Report from Friday, April 5th and I think we can see that people aren’t feeling too positive about future prospects and as such aren’t spending money. Unfortunately the US economy is driven by 70 percent consumer spending and when consumers stop spending; that’s a telltale sign all is not well. When the economy creates 88,000 net new jobs yet 198,000 are expected that’s not too good either.

In my previous articles concerning this subject, I had stated that sooner or later the effects of the sequester would come home to roost. Sadly I suspect this is starting to happen now. On Wednesday, April 10th President Obama revealed his version of the 2014 budget. As expected he reduced expenditures on programs such as Medicare and Social Security but placed a 28% ceiling on deductions for wealthy Americans. If you read some of the headlines this past Wednesday you would think a deal had been struck and the sequester was dead. Nothing is further from the truth as nothing has been agreed upon. Both the Senate and House of Representatives must come to terms before it is presented to President Obama for approval. Obama’s budget has virtually no chance of passing as the GOP will not allow revenue increases (aka tax hikes).

The notion of Congress forgoing pay after April 15th is null and void. When the Senate met in March they agreed to fund the US government for the remainder of the fiscal year that ends on September 30th. By doing so they insured that they will get paid. A measure was brought up for Congress to donate 20% of their pay to charity as a sign of solidarity with those government employees effected by the sequester. But that is voluntary. So for now everything is status quo. That will change as we get closer to September as a fierce battle will erupt over the debt ceiling and it will probably happen during the summer. As far as Wall Street is concerned, they’re loving it. They’ll ride the market up as far as it will go. The only problem is once the sequester impact is seen and felt by the economic reports, that will change. Want proof? Look at what happened this past Friday.

Get the 5 most predictable currency pairs

About Author

Mastrandrea is the author of Market Tea Leaves. Market Tea Leaves is a free, daily newsletter that discuses and teaches market correlation. Market Tea Leaves is published daily, pre-market in the United States. Interested in Market Correlation? Want to learn more? Signup and receive Market Tea Leaves each day prior to market open. As a subscriber, you’ll also receive our daily Market Bias video that is only available to subscribers.

3 Comments

  1. Pingback: US Economy: Why We’re Here and How did this Happen? | Forex Crunch

  2. The impact hasn’t been felt because the first furloughs take effect late April early May.

    My spouse is an air-traffic controller, and their furloughs haven’t begun yet.

    People will notice in the next 2 weeks or so.

    • Nick Mastrandrea on

      Hi Ken,

      Thank you for writing. I appreciate the comments and wish you and your spouse the very best. I always knew the impact would take some time which is why few are paying attention. Hopefully these articles will wake them up.

      Thank You and Kind Regards,

      Nick Mastrandrea