Since the fiscal cliff debate began last summer, the U.S. Department of Defense has been urging lawmakers to fend off the upcoming sequestration cuts that threatened to gut military spending once they became law. Now, with the Draconian spending decreases set to kick in on March 1, the Pentagon is preparing for the first wave of cuts. To help offset some of the mandatory spending, Defense Secretary Leon Panetta announced earlier this week that 800,000 civilian employees will be furloughed.
The sequestration, the result of a failed supercommittee in 2011, will result in a $500 spending reduction over the next 10 years. This on top of the roughly $480 billion, decade-long program that the Pentagon previously announced as part of the Obama administration's internal budget-reduction measures. The Defense Department has struggled to come up with $46 billion in legally-mandated cuts, and as such{,} has turned to its civilian workforce to produce some additional savings.
"In the event of sequestration, we will do everything we can to be able to continue to perform our core mission of providing for the security of the United States," Panetta wrote in a memo published on February 20. "But there is no mistaking that the rigid nature of the cuts forced upon this department, and their scale, will result in a serious erosion of readiness across the force."
Given the relatively large private defense sector in the United States, these cuts could create unpredictable consequences for the U.S. economy as a result of 800,000 consumers seeing significant reductions in their pay. Investors should watch their portfolios closely and may want to consider other asset classes, such as cash flow real estate, to hedge against any potential losses.