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Why Budget Cuts Could Throw Economy Into Recession

Pawel Gaul | Vetta | Getty Images

Job losses from scheduled budget cuts known as sequester could throw the U.S. economy into another recession unless Congress acts, some analysts are predicting.

The mandatory cuts to defense and non-defense spending stem from the "fiscal cliff" deal and are to take place March 1. Every program except for benefits like Social Security and some parts of Medicare will be cut.

The Bipartisan Policy Center, an independent research group, said last week that it expects roughly a million jobs across the country to be immediately lost from the budgetary cuts. The Congressional Budget Office estimates the job losses at 1.4 million.

In a struggling economy — as the unemployment rate inched up last week and economic growth slowed — the impact of the expected job losses would be devastating, said Farrokh Hormozi, a professor of economics at Pace University.

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"There's no way the economy could handle that type of job elimination. We'd likely go into recession," Hormozi said. "For instance, the government contracts for the military would just dry up and people would be out of work or furloughed. Congress must come to some sort of deal on this. We should be creating jobs, not eliminating them. "

"The cuts scheduled are not a way to run a rational government," said Robert Frank, an economics professor at Cornell University. "Cuts of any kind at this time are not a good idea. It's recessionary. It would slow growth for sure and put people out of work."

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Steve Bell, senior director for economics at the Bipartisan Policy Center, said defense-related companies such as Raytheon and Lockheed Martin are already feeling the pain of sequester.

"Their earnings last week showed the the impact of the sequestration," said Bell. "They've lowered their estimates this year because of the expected budget cuts. This will ripple down through the sub-contracting community and private businesses that have contracts with the defense department. A lot of people will lose their jobs."

The upcoming sequestration grew out of the last minute deal to avoid the fiscal cliff that would have eliminated the Bush-era tax cuts, while implementing across-the-board cuts, or sequestration, on certain federal programs and defense spending

While Congress came to terms over taxes, it was unable to reach agreement on spending cuts, and the sequestration was delayed until March to work out a deal over which programs will actually be cut.

As it stands now, the deficit reduction sequester is designed to enforce savings of $1.2 trillion through 2021. For 2013 and each year after that, it means roughly a $55 billion cut in defense and a $55 billion cut in non-defense spending.

Timothy Nash, professor of economics at Northwood University, said even if the cuts cause some pain they are needed to get the national debt — currently at more than $16 trillion — under control.

"We might lose one point of gross domestic product with the scheduled cuts and some 800 thousand jobs, but we have to have some serious reduction of the debt," Nash argued. "We need reduction of the debt to bring confidence back into the economy. We need more revenue for sure, but we need cuts."

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The sequestration numbers were admittedly set high so that Democrats and Republicans would be forced to work out a better deal. But so far there's been no compromise since the fiscal cliff bargain — with both sides entrenched in their positions.

Republicans are calling for severe cuts in domestic spending, and a lessening of defense cuts and no more tax hikes, while Democrats say they want some cuts delayed along with possible tax increases.

"I think they'll work out a deal," said Robert Frank. "The likely outcome is that they'll at least come up with a postponement."

Others aren't so sure a deal will come in time.

"There's a sense of resignation about this. I think the full cuts are coming," said Steve Bell, who previously worked with legislators on Capitol Hill. "I think we'll have to feel the pain before something's done. I see furloughs and layoffs before people say enough is enough and an agreement is reached."

—By CNBC's Mark Koba

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