Sequestration Begins

Magnotta@AmyMagnotta, CFA, Brinker Capital

Sequestration, the automatic spending cuts that were agreed to as part of the debt ceiling compromise in the summer of 2011, came into effect on Friday, March 1. The Budget Control Act of 2011 established the bi-partisan “super committee” to produce deficit reduction legislation. As incentive for the super committee to agree to deficit reduction legislation, if Congress failed to act than the across the board spending cuts (sequestration), totaling $1.2 trillion over 10 years, would come into effect on January 2, 2013. The start date was delayed two months as part of the fiscal cliff deal. The cuts are split 50/50 between defense (which was supposed to get the Republicans to act) and domestic discretionary spending (which was supposed to get the Democrats to act).

As expected, Congress and the Administration have not been able to agree on serious deficit reduction so we now face the automatic budget cuts. The public does not seem to be as focused on sequestration as they were on the fiscal cliff. In a recent poll from The Hill, only 36% of likely voters know what the sequester is. The spending cuts are broad based, as the chart below from Strategas Research Partners shows; however, it will take some time for the cuts to come into effect.

3.4.13_Magnotta_Sequestration

Source: Strategas Research Partners, LLC

The drag on GDP growth from the sequester is estimated to be around -0.5% this year. This is not enough drag to push us into a recession if consensus estimates for 2013 growth are correct at 2-2.5%, but the effect is not negligible. The largest hit to GDP growth will likely be in the second quarter once a majority of the spending cuts have begun to take effect. If and when voters begin to feel the impact, there may be pressure on Washington to delay or eliminate the cuts.

We also face the expiration of the continuing resolution that funds the government on March 27, which, if not addressed, could result in a government shutdown. This could be a catalyst for another short-term fix. As typical in politics, whichever party is shouldering the most blame will be more likely to compromise to get a deal done.

The idea of real tax and entitlement reform that promotes growth and puts us on a long-term, sustainable fiscal path seems highly unlikely in this environment. Our elected leaders appear to lack the tenacity to make tough decisions. Sadly, kicking the can down the road is the path of least resistance and often the one that leads to reelection.

Bottom line: Fiscal policy in the U.S. will remain a risk throughout 2013. The spending cuts from the sequester alone are not enough to derail the economic recovery. However, tepid growth is likely to persist, especially in the first half of the year, as disposable incomes have fallen due to the expiration of the payroll tax cut. An accommodative Fed and an improving housing market are positives for growth.

Budgets Get an Extreme Makeover

Sue BerginSue Bergin

The tight economy and some hip personal financial management tools have done the impossible.  They’ve made budgets sexy.

No one ever used to admit that they liked to budget.  Creating a budget was tedious and uncool; sticking to it was even harder.  Thanks to recent technology, however, budgets are being seen in a new light. Today’s economy has made it necessary for more Americans to know, with certainty how much money they have coming into and going out of their household.  As consumers delve into the budgetary process, they are realizing it isn’t nearly as overwhelming and time consuming as they may have thought.

A recent study showed that most Americans follow a spending plan. Nearly half (48%) say they “loosely” follow a budget.  25% “strictly” adhere to their budgets.” Only 27% say they have no budget at all.

Household income is the primary determinant of whether someone will commit to the budget discipline.  36% of those who earned under $30,000 annually followed a budget faithfully.  Only 18% of earners whose salaries exceed $75,000 a year were as vigilant about the budgetary process.

Personal financial management sites such as Mint, Betterment, MoneyDesktop, Yodlee and PNC Virtual Wallet have given the budgeting process an extreme makeover.  They’ve simplified the budgeting process, brought it to life, and even made it fun.  Financial planning software such as the offerings by eMoney Advisor and MoneyGuidePro includes budgeting tools that make it easy for financial advisors to offer an insightful analysis to their clients on how to maximize savings and create user-friendly budgets.

The key innovations that have revolutionized the budgeting process are account consolidation, aggregation and automated expense characterization.  Once accounts are linked and tracked in many of these services, the expenses are automatically pulled in, categorized, and updated regularly.  This simplifies the task of routine budgeting and offers huge relief when it comes time to preparing mortgage and loan applications.

The transparency these services offer into actual spending habits may also be behind the positive ranking survey participants gave to inquiries about their financial holdings.  Nearly half (47%) claimed to know their checking and savings account balances, and 48% have a “rough idea.”  Only 5% say they “do not know”.

When it comes to spending, 36% say they can calculate the “exact amount” while 58% has a “rough idea” of what they pay out each month.  6% had “no idea.”

Innovative technology offers a gateway to help clients become more mindful about spending.  Until a website or mobile app comes along that effectively prevents people from overspending; however, the face-lift offered by technology is simply cosmetic.[1]


[1] Survey statistics mentioned are from CashNetUSA, September 5, 2012