Sequestration prompts firms to delay plans, rethink strategies

Apr 07, 2013
Sequestration prompts firms to delay plans, rethink strategies

For small business owners, sequestration is this year's buzzword - and a potential buzzkill for their operations, particularly if they sell products or services to the federal government.

Jack Plomgren, president of the Ghent Business Association and owner of two local Rapid Refill franchises, says many Hampton Roads entrepreneurs are laying low amid uncertainty over the impact of sequestration, a series of federal spending cuts that began last month. Designed to shave nearly $1.2 trillion from the U.S. budget over the next decade, the cuts automatically kicked in after Congress failed to reach a bipartisan solution to the country's massive budget deficit.

Back-burner business tactics
"How it affects small businesses like me is we tend to put plans on hold, we tend to not expand at the rate we were going to expand, we think twice before hiring an additional employee, we don't invest in that additional piece of equipment," said Plomgren, whose Norfolk and Virginia Beach stores provide printer supplies and services. "The stakes have a tendency to be much more severe for a small business than a big business."

And they're even higher for those that do business with the military. According to the Congressional Budget Office, 2013 cuts will include $42.7 billion in defense department spending, the lifeblood for many Hampton Roads contractors.

DoD doldrums
Indeed, sequestration will be a "major drag" on the region's economy, according to Old Dominion University economics professor Vinod Agarwal. The estimated impact this year in Hampton Roads will be nearly $1.9 billion in DoD-related reductions, said Agarwal, who spoke March 28 at "Economic Forecast 2013," an educational forum in Virginia Beach.

Hosted by the Retail Alliance, the forum attracted a number of local business owners, including Plomgren and Ben Willis, owner of Willis Furniture. Neither are defense contractors - though Plomgren occasionally receives a shipboard order for inkjet cartridges - but they both expect to be indirectly affected by the government cuts. After all, sequestration will cause the region's consumers - many of them active-duty military or civilian employees - to sequester their own finances and maybe hold off on buying that new sofa or entertainment center.

Future uncertain
"There's still so much uncertainty; it causes businesses to be unable to make plans," said Willis, whose Virginia Beach showroom evolved from his great-grandfather's original Norfolk furniture store in 1893.

Agarwal agreed that the spending cuts are spawning more questions than answers, and the numbers keep changing. That very morning, he had to update his data to reflect a report he heard on National Public Radio as he drove to the forum.

"As of yesterday, DoD was supposed to furlough its civilian employees for one day a week for 22 weeks," he said. "Today I just heard on NPR that DoD will reduce the furlough days from 22 to 14 days."

There's no doubt that sequestration will slow the region's economy to a "crawling" snail's pace, Agarwal said.

Silver linings playbook
Before sequestration, Hampton Roads' real gross regional product - which totaled $73.86 billion last year - was expected to grow by 1.7 percent to $75.1 billion in 2013. Now, as a direct result of the federal spending cuts, the region's GRP will actually decrease by 0.67 percent, Agarwal said.

"We are going to be severely affected," he told the crowd of about 30. "The Department of Defense is a major, major, major player in your life."

He did, however, offer some bright spots. The region's thriving health care industry and its growing port, which boasts the deepest channels on the East Coast, will help Hampton Roads' economy rebound from the sequestration-related slump.

"[These] are likely to help the region's economic expansion," he said.