Sequestration Law Will Threaten Recent Growth In Manufacturing And Possibly Stall Obama's Manufacturing Agenda

Manufacturing was priority No. 1 in President Obama's 2013 State of the Union Address. However, those proposals will be challenged by some parts of the recently passed sequestration legislation.

Companies contracted by the government to produce materials for defense-related projects are likely to feel a serious impact from the sequester cuts as the Budget Control Act of 2011 (BCA) will hit defense spending the hardest.

"Manufacturers -- both inside and outside of the defense supply chain -- warned against this meat-grinder approach that will cost manufacturing jobs," Aric Newhouse, senior vice president for policy and government relations at the National Association of Manufacturers (NAM), said in a statement. NAM published a report in mid-2012 that determined how failure to amend the legislation would result in the loss of more than 130,000 manufacturing jobs in the coming years, peaking in 2014.

The aerospace industry, which could lose 3.4 percent of its jobs, might be hit especially hard. Additional job losses are expected in the transport equipment sector and the large nondurable sector, which includes food, textiles, chemicals and fuels.

In NAM's 2012 report, "Defense Spending Cuts: The Impact on Economic Activity and Jobs," the association predicts that cuts in defense spending will result in a significant decrease in purchases for equipment, supplies and services.

"The job loss from these cuts will increase the unemployment rate by 0.7 percent and decrease GDP by almost 1 percent," said Newhouse, NAM's senior vice president for policy and government relations.

A recent increase in new orders signals healthy demand for manufacturing companies. February figures from the Institute of Supply Management indicate that the new orders have increased since January.

However, Tim Duy, director of the Oregon Economic Forum, believes that were it not for the sequester's cuts to defense spending, manufacturing would experience stronger growth.

"The economy continues to move in the right direction and was likely poised for stronger growth in 2013 if not for tighter fiscal policy," says Duy. "The anticipated impacts of tighter policy are expected to further widen the output gap."

Manufacturers in the energy sector will also see setbacks like delays in investments for R&D now that a cut to the Department of Energy's Vehicle Technologies Program will go into effect. The department says that this will translate into a slowdown in the nation's production of cleaner and more efficient vehicles, according to the Christian Science Monitor.