How budget sequestration could impact restaurants

In the weeks leading up to the March 1 deadline for federal lawmakers to avoid spending cuts mandated by budget sequestration, pundits and politicians warned that the resulting falloff in federal spending would devastate the economy, with every industry, including restaurants, vulnerable to large decreases in sales.

Yet foodservice experts speculated that the sudden pullback in government spending likely would not hamper the entire national economy at once. Instead, they said, it would more acutely affect certain regions tied to the tourism or defense industries and put more pressure on restaurant chains in those areas.

“The sequester’s effect will be felt more in pockets,” said restaurant industry analyst Malcolm Knapp. “The impact is likely to be staggered, so we likely will not see it right away. We just had a really good jobs number for February, but by May, maybe we won’t.”

Sequestration will result in $1.2 trillion in federal spending cuts, including $85 billion this year. Projections from the Congressional Budget Office said the pullback could lead to 750,000 fewer jobs, mostly in the ranks of government employees. The White House Office of Management and Budget estimated, for example, that $206 million would be cut from the Food and Drug Administration and that more than $320 million would be slashed from airport security, in addition to billions of dollars withheld from the Pentagon.

Both parties of Congress are attempting to find a solution to reallocate the mandatory cuts, and neither side likely wants to risk further pressure on gross domestic product growth through a government shutdown, Knapp said, “so the sequester amount [of cuts] will stay, it’s just a question of how it’s done.”

“It’s not like a household budget,” he said. “When government spending diminishes — leave out the ideological questions of whether or not it should — final demand is reduced. It’s that simple. We’re still going to get a reduction in that spending. In the very short term, you won’t be able to see the effect from the sequester. It will take at least two months probably to get these cuts going.”

When the follow-on effects of the budget cuts start happening, areas tied to government employment and military bases are likely to see the largest impact, Knapp said. Because lawmakers are trying to maneuver Pentagon cuts to spare the readiness of uniformed military, the civilian contractors in places like Northern Virginia or manufacturers elsewhere would see the greatest drop in demand.

“Virginia is guaranteed to be hard-hit,” Knapp said. “There are a lot of civilian contractors there, though they’re scattered through the country, too. … Ironically, some very Republican areas will get hit, like those with airplane manufacturing in the South, Texas and California. New Mexico has a lot of military research and development labs, and something like this will really show up in a small state like that.”