If mandatory federal spending cuts begin to take effect Friday, small companies are likely to experience a negative ripple effect of a slowdown in business.
The budget cuts, also known as sequestration, would hit domestic programs that fill every corner of the U.S. economy — military spending, aviation, and education programs for low-income families. But unlike larger private-sector businesses, smaller employers usually don't have buffers such as large cash reserves to ride out federal budget cuts. Most smaller firms also can't quickly pivot their business strategies to ride out a rough patch.
"Larger companies have economies of scale these days. They have cash reserves, better access to credit markets. They tend to have more of a multinational presence," said Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities and former chief economic adviser to Vice President Joseph Biden. "Small firms tend to be less insulated from this kind of a hit."
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Sequester 'Ripple Effect' Seen
To be clear, the budget cuts are likely to have a rolling, accumulated impact on small business. Companies with U.S. government contracts must decide which workers will likely be laid off as funds to keep them on payroll evaporate.
"The sky isn't gong to fall on March 1," Bernstein said.
Other budget experts note President Barack Obama's state-by-state sequester report includes improbable precision in administration statements about what could happen. "It's not clear who gets hurt by this," Paul Light, a New York University professor who specializes in the federal bureaucracy and budget, told the Associated Press.
Of course, furloughing workers is never good news, and the budget cuts will have consequences.
Unemployment would create a gradual, domino effect on Main Street. "Less income means those workers will not visit the restaurants around the corner, bring dry cleaning to small businesses at the end of the block," said Bernstein. "There's a ripple effect that hits small businesses, as well."
Small Employers Squeezed
A study released in late 2012 estimates that in 2013 alone, a sequester would put 2.14 million jobs at risk, including about 956,000 small-business jobs. The sequester would cut across all government spending including the Department of Defense, the Federal Aviation Administration, National Aeronautics and Space Administration and National Oceanic and Atmospheric Administration.
The study was conducted by Stephen Fuller, a George Mason University economist, along with analysis from the Aerospace Industries Association, a trade group that represents aerospace and defense manufacturers.
"As contracts are cancelled, re-negotiated, or otherwise reduced, small business leaders will have limited flexibility in adjusting their business model," said Fuller in the study. "While some will seek to diversify, others will just downsize."