Sequester. No, we are not talking about a group of jurors being sequestered in order to reach a verdict.
Rather, this sequester is the latest example of US political dysfunction and describes how billions of dollars in automatic budget cuts are set to hit the world’s largest economy in the next few months.
Given the slow-burn nature of the sequester, its effect will likely become progressively stronger in the next few months. Interestingly, the stock market has largely shrugged off the sequester, with the Dow Jones continuing to inch towards a new all-time high.
For now, investors are betting that consumers will continue to spend and businesses will continue to invest. However, sentiment may change once the impact of the sequester becomes clearer.
The US economy ground to a halt in the fourth quarter of 2012 as government spending cuts took a big bite out of GDP. Sequestration will slice off a larger chunk of government spending, and unless other sectors of the US economy make up the slack, GDP growth could be flat or even negative in the coming quarters.
Moreover, the rate of monthly job gains– which remains anaemic – could slow, putting upward pressure on the unemployment rate. Perhaps then the market will begin to take more notice of the sequester.