Sequestration: Which States Are Most Vulnerable?

by Mark Vitner, Senior Economist and Michael A. Brown, Economist -- Wells Fargo Research Feb 18, 2013 (excerpts)

Over the course of the past few weeks, it has become more and more likely that the sweeping set of automatic federal spending cuts known inside the D.C. Beltway as “Budget Sequestration” will take place as scheduled beginning on March 1. In order to assess the potential regional impact of these budget cuts, we have identified those states that have the greatest exposure to federal funding cuts. We utilize the metrics calculated by the Pew Center on the States for federal spending as a percentage of state GDP.1 We then identify those states that are most susceptible to defense and those most susceptible to nondefense spending cuts. Even a cursory review of the data shows that the process of budget sequestration will harm certain states disproportionally. In general, the greater Washington, D.C. area and southern states will be the hardest hit, while states in the Midwest and along the West Coast will likely be impacted to a lesser extent. While the impact of budget sequestration could be severe, there is some reason to believe that at least some of the cuts may be partially reversed in the months ahead….

Among the states most likely to be impacted is Hawaii, home to the U.S. Navy’s Pacific Fleet, which could see layoffs and reduced income growth, which in turn would weigh on economic growth….

Top 10 States With Exposure to Defense Cuts

Federal Defense Spending as a % of 2010 State GDP

Total Federal Spending as a % of 2010 GDP

                                                         Defense                        Total
Hawaii                                                14.6                               15.8
Alaska                                                10.5                               13.3
District of Columbia                               9.8                               19.8
Maryland                                              9.8                               19.8
Virginia                                                9.8                               19.8
Kentucky                                              8.0                                9.9
Alabama                                              7.0                                8.9
Missouri                                               5.9                                7.6
Connecticut                                          5.3                                5.8
Arizona                                                5.2                                6.6
Source: Pew Center On The States and Wells Fargo Securities, LLC

Read: The Entire Report (pdf)

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