• October 2013

What Are the Economic Risks From Sequestration?

By Chris Chmura, PhD
President and Chief Economist
Chmura Economics and Analytics

With all the hype about sequestration, there is uncertainty about which regions and industries are at risk across the nation for economic shifts. Consider the following:

Contract Spending Was Declining Before the Sequester

Even though sequestration did not officially start until March 2013, an analysis of federal contract awards—a measure of government spending in the private sector—shows that more than three-fifths (61%) of the 372 metropolitan statistical areas (MSAs) in the country saw a reduction in federal contract awards from 2011 to 2012.

In 56 MSAs, the cuts exceeded $100 million. In contrast, federal contract awards rose during that period in 146 MSAs, according to data from USASpending.gov and research by our team at Chmura Economics & Analytics.

For the entire country, federal contract spending fell 2.5 percent from 2011 to 2012. A 2.2 percent increase in non-defense contract spending was more than offset by a 4.5 percent contraction in defense contract spending over this period.

Winners and Losers by MSA

In order to identify the community impacts of the recent spending cuts, Chmura analyzed which MSAs have been impacted most by the recent defense and non-defense spending cuts. As expected at the aggregate level, some of the largest MSAs have seen the most dramatic cuts from 2011 to 2012. The Chicago MSA topped the list with a $2.3 billion cut in federal contracts from 2011 to 2012, followed by the Washington, D.C., and New Orleans MSAs.

Table 1:
Federal Contract Cuts by MSA, 2011 to 2012

  • Chicago-Naperville-Joliet, IL-IN-WI: -$2,288,432,738
  • Washington-Arlington-Alexandria, DC-VA- MD-WV: -$1,398,744,828
  • New Orleans-Metairie-Kenner, LA: -$1,277,721,434
  • San Diego-Carlsbad-San Marcos, CA: -$1,243,383,949
  • New York-Northern New Jersey-Long Island, NY-NJ-PA: -$1,219,358,422
  • Dallas-Fort Worth-Arlington, TX: -$1,217,563,028
  • St. Louis, MO-IL: -$1,113,631,346
  • Hartford-West Hartford-East Hartford, CT: -$940,568,439
  • San Jose-Sunnyvale-Santa Clara, CA: -$839,994,654
  • San Antonio, TX: -$819,757,315

After adjusting for the size of the MSAs’ labor markets, several much smaller areas stand out for the level of cuts they have experienced over this period. These MSAs are more dependent on federal contract award spending and at greater risk for an overall economic contraction as sequestration continues.

At greatest risk is the Coeur d’Alene MSA in Idaho, where federal contract award cuts were equivalent to $13,571 per worker, with the majority of the decline due to reductions in spending by the Department of Treasury on precious metal purchases. Second on the list was the Oshkosh MSA in Wisconsin at $6,746 of cuts in contract awards per employee, with all of the decline caused by a drop in Department of Defense spending for armored vehicles and parts.

Similarly, by aggregate dollar amount, a few of the largest MSAs have seen the largest gains in government contracts over this period, but after adjusting for the size of the labor market in these metro areas, several smaller U.S. cities stand out in terms of potential gains.

The Boston MSA topped the list of winners with $1.8 billion in additional contract awards from 2011 to 2012. Based on the number of workers in the MSA, Kennewick, Washington, was the biggest winner, with a gain of $7,360 in contract awards over the same period.

The labor market impact of these spending cuts will vary widely depending on the type and nature of the federal spending.

Table 2:
Federal Contract Cuts per Worker by MSA, 2011-2012

  • Coeur d’Alene, ID: total cuts -$692,282,917 / cuts per worker = -$13,571
  • Oshkosh-Neenah, WI: -$603,335,383 / -$6,746
  • Crestview-Fort Walton Beach-Destin, FL: -$398,842,810 / -$5,259
  • South Bend-Mishawaka, IN-MI: -$586,350,898 / -$4,730
  • Hinesville-Fort Stewart, GA: -$73,558,170 / -$3,861
  • Binghamton, NY: -$341,976,087 / -$3,341
  • Mobile, AL: -$478,834,935 / -$2,926
  • New Orleans-Metairie-Kenner, LA: -$1,277,721,434 / -$2,499
  • Manhattan, KS: -$128,017,116 / -$2,468
  • Augusta-Richmond County, GA-SC: -$395,149,857 / -$1,946

Table 3:
Federal Contract Gains by MSA, 2011-2012

  • Boston-Cambridge-Quincy, MA-NH: $1,791,999,766
  • Albuquerque, NM: $1,737,698,244
  • Baltimore-Towson, MD: $1,684,469,762
  • Pittsburgh, PA: $1,359,817,875
  • Seattle-Tacoma-Bellevue, WA: $1,173,248,173

Table 4:
Federal Contract Gains per Worker by MSA, 2011 to 2012

  • Kennewick-Richland-Pasco, WA: Federal contract gains = $805,015,881 / dollars gained per worker = $7,360
  • Idaho Falls, ID: $353,191,830 / $7,231
  • Amarillo, TX: $773,016,940 / $7,053
  • Pascagoula, MS: $341,217,596 / $6,506
  • Bellingham, WA: $462,753,830 / $5,755

Every industry in each metro area will have a different economic impact based on the size of its local supply chain and the spending spillover from its directly-employed workers. For example:

  • Hampton Roads’ dependence on shipbuilding means that welders and mechanical engineers may be impacted by federal spending cuts.
  • Northern Virginia’s high concentration of professional and business-services employment suggests occupations including computer systems analysts and management analysts may be impacted by a reduction in federal contract spending.
  • It stands to reason that theses spending cuts have become a driving force for the labor markets in many of the nation’s MSAs, both big and small.

Industries at Risk

While the effects in each metro area will depend on unique regional factors, Chmura has analyzed total contract spending by industry across the United States to identify industries that may be most vulnerable to declining federal contract spending. Ranked by total federal cuts, firms classified as facility support services saw the largest declines from 2011 to 2012 at $4.4 billion, followed by nonresidential building construction at $3.2 billion.

The calculation of the dollars cut per worker represents those industries that are most likely to lay off workers due to sequestration. Of the 10 industries with the largest cuts per worker over this period, five are manufacturing.

Topping the list in the dollars cut per worker is other transportation equipment manufacturing at $81,954. This industry includes firms that specialize in manufacturing parts and vehicles that do not fit neatly into other NAICS codes, including motorcycles, bicycles, golf carts, and race cars. Of particular note for this article, it also includes military armored vehicle, tank, and tank component manufacturing.

Spending Cuts by End Uses

Chmura also analyzed total contract spending by product and service code to determine the end uses most vulnerable to declining federal contract spending. Tables 7 and 8 show the largest contractions and gains in federal government contract spending among product and service codes from 2011 to 2012.

Service code Y, construction of structures/facilities, showed the largest contraction during that period, losing over $5.7 billion in spending. Meanwhile, total federal contract spending on product and service code A, research and development, increased $2.5 billion from 2011 to 2012.

Table 5:
Federal Contract Cuts per Worker by Industry, 2011 to 2012

NAICS Industry Description

  • 3369 Other Transportation Equipment Manufacturing: Federal Contract Cuts = -$2,679,188,161 / Dollars Cut per Worker = -$81,954
  • 5612 Facilities Support Services: -$4,379,350,897 /-$34,056
  • 3159 Apparel Accessories and Other Apparel Manufacturing: -$360,449,130 /-$29,010
    4812 Nonscheduled Air Transportation: -$997,682,865 / -$24,968
  • 2379 Other Heavy and Civil Engineering Construction: -$1,441,957,641 / -$14,384
  • 4242 Drugs and Druggists’ Sundries Merchant Wholesalers: -$1,708,672,282 / -$9,103
  • 3342 Communications Equipment Manufacturing: -$714,052,172 / -$6,523
  • 3341 Computer and Peripheral Equipment Manufacturing: -$962,444,811 / -$6,104
  • 4247 Petroleum and Petroleum Products Merchant Wholesalers: -$546,152,303 / -$5,811
  • 3361 Motor Vehicle Manufacturing: -$875,524,551 / -$5,061

Table 6:
Federal Contract Gains per Worker by Industry, 2011 to 2012

NAICS Industry Description

  • 3241 Petroleum and Coal Products Manufacturing: Federal Contract Cuts = $3,390,148,648 / Dollars Gained per Worker = $30,424
  • 3366 Ship and Boat Building: $2,934,228,408 / $18,476
  • 4831 Deep Sea, Coastal, and Great Lakes Water Transportation: $501,620,194 / $12,814
  • 9271 Space Research and Technology: $124,773,000 / $6,895
  • 3254 Pharmaceutical and Medicine Manufacturing: $1,575,378,788 / $5,844


Even before the sequester took effect, federal government contract spending was declining, driven by a drop in defense contract spending. Understanding which regions, industries, and products and services are most vulnerable to cuts in federal government contract spending is important, allowing regions and industries to make preparations appropriate to their risk.

Unfortunately, the data on contract spending provided by the US government have significant limitations. The methodology developed by Chmura to improve the accuracy of the contract spending data will help shed light on who is most at risk from cuts in federal contract spending.

Click here for more information about Chmura, its methodology, and additional economic reports: www.chmuraecon.com.

About Chris Chmura

Chris is the president and chief economist for Chmura Economics & Analytics, a quantitative research and economic development and workforce consulting firm in Richmond, Virginia, that she founded in December 1999.

She received her PhD in Business with a major in Finance and a minor in Economics from Virginia Commonwealth University in Richmond. Her Masters in Economics is from Clemson University as is her undergraduate degree in Business Administration. Prior to spending eight years in banking, Chris was an associate economist at the Federal Reserve Bank of Richmond for seven years.

Chris currently serves on the Governor’s Economic Advisory Board of the Commonwealth of Virginia and the Governor’s Commission on Economic Development & Job Creation. She is a former member of Governor Kaine’s Commission on Climate Change, the Virginia Commonwealth University Foundation Board of Trustees, and the Board of the National Association of Business Economics.

Her interest rate and housing activity forecasts are available in Virginia Economic Trends, the quarterly economic report published by Chmura Economics & Analytics.