Should We Kiss the Economy Goodbye?
Aug 9th 2012 2:20PM
Updated Aug 9th 2012 4:12PM
The plan: Make something so heinous the government would do anything to avoid it.
The reality: Um, it's the government -- the people who like to play Russian roulette with deadlines, and whose bickering would put any reality show cast to shame. Getting them to agree on something is like getting the Palestinians and Israelis to have a calm discussion. In theory, it works; in reality? Not so much.
So what am I talking about? The Budget Control Act, aka, sequestration. And more importantly, what this could mean for your bottom line.
You may have heard of sequestration. If you haven't, here's a quick rundown: Sequestration is across-the-board cuts to federal programs like defense, National Weather Service, Medicare, etc., that would go into effect if lawmakers can't come to an agreement on a new budget by the end of the year. While across-the-board cuts may sound unpleasant but doable, the ramifications from these particular cuts are enough to scare even lawmakers. Sen. Lindsey Graham (R-S.C.) went so far as to say, "We do dumb things in Congress. This sequestration idea is the dumbest thing."
The bad, the ugly, and the horrible
Arguably, the companies that'll take the biggest hits are defense contractors like Boeing (NYS: BA) , Northrop Grumman (NYS: NOC) , and Lockheed Martin (NYS: LMT) -- Boeing's biggest contract, the KC-46 tanker, could face a 57% cut, according to The Economist. Northrop Grumman CEO Wes Bush stated in a recent earnings call that sequestration would lower revenue, profits, and cash flow, and Lockheed Martin went so far as to state that they "believe sequestration is the single greatest challenge facing our company and our industry." Would sequestration affect shareholders' profits? Absolutely. And that's not all.
While it's easy to see how defense companies will be affected by sequestration, what's not as apparent is the effect sequestration will have on other areas. Think General Electric (NYS: GE) only makes kitchen appliances? Think again. Along with Samsung Techwin, GE makes the F110 engine used on the F-15 and F-16. In fact, manufacturers like GE are looking at a loss of tens of thousands of jobs overall. Moreover, the White House worries that sequestration will affect everything from cancer research to FBI staffing. Hello, ripple effect.
While it may seem that sequestration is mainly a defense (and its suppliers) problem, the basics of sequestration is this: According to George Mason University economist Stephen Fuller, if it goes into effect, it could cost the U.S. economy 2.14 million jobs (increasing unemployment by 1.5%), reduce GDP by $215 billion (which is two-thirds of America's expected economic growth in 2013), and have an overall negative impact on an economy that is just starting to see improvement.
So should I move to Canada?
Maybe. I've heard the weather's nice. Plus they have maple syrup. OK, I'm not serious. The good news is Congress has until January to come up with a new budget and bypass this whole sequestration mess. The bad news is the mere idea of sequestration happening is already having a negative effect. So what does this mean for your Foolish bottom line?
If sequestration happens, the stock market will probably go on a wild ride. Yes, some companies will escape, but others will trade for new lows. I know I'll be looking at defense and what companies I think can pull through this mess. Then I'm going to stock up and hide in a cave until it all blows over.
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The article Should We Kiss the Economy Goodbye? originally appeared on Fool.com.Fool contributor Katie Spence owns shares of Northrop Grumman. She does not own shares of any other company mentioned above. Follow her on Twitter @TMFKSpence. The Motley Fool owns shares of Northrop Grumman and Lockheed Martin. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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