Government spending cuts are reshaping the employment landscape in the United States, with notable repercussions for job postings and overall economic activity. Richmond Fed President Thomas Barkin recently reiterated these worries, pointing out the continuing unpredictability of the U.S. economy. The debate over fiscal policy is picking up momentum. This is particularly the case in Washington D.C., where its impacts are felt most severely.
National and local data demonstrate a direct connection between government spending cuts and lost jobs. Now, this trend has been pretty obvious over the past few months. As agencies do more with less, those organizations dependent on federal funding put strain on the organizations, resulting in decreased federal job postings. This trend is doubly disturbing for job-seekers in the D.C. Government contracting and public sector employment are important anchors in the local economy.
Beyond the fiscal drag, Barkin emphasized that we are seeing a dampening effect on business activity all over the country. The latest figures suggest that the economy is following a trajectory similar to that of the past two years, characterized by slow growth and cautious consumer sentiment. This standstill makes it extremely difficult for those businesses that depend on government contracts to survive. Their ability to expand operations is contingent on having consistent, long-term funding.
Additionally, Barkin noted one persistent factor has hurt the mood of consumers and business people alike—inflation expectations. High and wide-ranging inflation rates create an uncertainty that hangs heavily over the market, complicating companies’ ability to effectively plan out what’s to come. This reality exacerbates a fear of the unknown that sucks reallocation from our economy and limits economic dynamism.
In the D.C. area, where federal contracting and spending is the most important economic driver, the sting of such cuts are perhaps most acutely felt. For local businesses that supply government agencies, demand has dried up. Consequently, many are retrenching their workforce or stopping hires even before that. These changes have far-reaching ripple effects beyond just the number of workers employed. They raise long term economic growth rates and inject increased market confidence.
Barkin’s observations echo what we’ve heard from other economists. They have all, to their credit, acknowledged a larger trend of tepid performance throughout much of our economy. The inflationary pressures and continuing uncertainty about the future of federal investment in our industries has made the prospect for new growth seem dim, if not impossible. The double whammy of fiscal constraints and inflationary expectations results in a climate hostile to investment and hiring.
Further, as companies work through these challenges, they are becoming more short of what businesses are being hired for. LinkedIn’s analysis has found that job postings are down as employers appear reluctant to hire and grow their staff. This conservative bent is a result of the unpredictable economic landscape. A large number of these organizations are choosing to push hiring back or rebuild their teams to respond to the new reality.
The far-ranging ramifications of these trends go well beyond the short-term impact on job creation. When we see employment opportunities dry up and stagnant business dynamism, the prospects for any sustained long-term economic growth erode. Policymakers should keep these examples in mind as they chart a new course for fiscal policy in the years to come.