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While Americans stash extra cash to prepare for the economic effects of the looming fiscal cliff in 2013, another more immediate concern has developed: How many people will get laid off as companies brace for spending cuts and tax hikes?
The fiscal cliff will pack a double whammy to some businesses. Companies in certain tax brackets will be paying more to Uncle Sam, while some will see their government funding disappear.
The substantial fiscal cliff effect has prompted firms to rein in spending, delay projects, defer bids - and cut staff.
In fact, a study last month from Ernst & Young, the National Federation of Independent Business, the U.S. Chamber of Commerce and other business advocates revealed the fiscal cliff could slash 710,000 jobs from the already beleaguered job market.
Fiscal Cliff: A Painful Combo
The Ernst & Young study examined the economic effects of raising taxes on capital gains and dividends and increasing the top tax rates. The top tax rates don't just affect wealthy individuals but also some flow-through businesses that pass income to owners/investors.
If the Bush-era tax cuts expire, the top tax rate will rise to 40.9% from 35%, the top tax rate on dividends will rise to 44.7% from 15% and the rate for long-term capital gains will rise to 24.7% from 15%.
The study found that all the tax increases, including the new Obamacare taxes, would cause output to fall by 1.3% and capital stock and investments to fall by between 1.4% to 2.4%.
The result, according to the report, is a "smaller economy, fewer jobs, less investment and lower wages."
That's why companies across the board are already pumping the breaks in anticipation of the tax hikes plus the whopping $110 billion in cuts that will take effect Jan. 1 unless Congress acts. In total about $1.2 trillion in automatic spending cuts in defense and nondefense projects could go into effect over the next decade.
The defense industry will be hit the hardest. Lockheed Martin Corp. (NYSE: LMT) and Pratt & Whitney are going forward with plans to issue layoff notices to thousands of employees due to looming defense cuts, which total about $55 billion to go into effect in January.
And the pink slips will start arriving soon. Law requires most companies to notify their workforce at least 60 days ahead of a job cut - meaning some employees could find out their fate around the November election.
Fiscal Cliff Layoffs: More than Defense
Other businesses accustomed to receiving government money will also suffer. The amount of federal contracts divvied out last year to small firms amounted to some $91 billion.
"There's just paralysis. People aren't making long term strategic decisions. They're inching along," Craig Parisot, COO of Invertix, a McLean, VA-based firm that develops software for the Army, Federal Emergency Management (FEMA) and others, told CNN Money.
Businesses relying on government contracts have become increasingly strained from uncertainty. Since 2009, Congress has dragged its heels on passing any kind of formal budget, relying instead on short-term extensions of existing spending levels.
But even if Congress does avoid the fiscal cliff, the unreliable future for many defense programs is already trickling down to businesses that support the industry.
"The inability of Congress to compromise and arrive at decisions on how to conduct the business of the United States means we're losing business," Dennis Chappell, VP of La Plata, MD-based Port Tobacco Consulting, told CNN Money. PTC provides resources to the U.S. military.
Ace Clearwater, an aerospace firm in Torrance, CA, began the year projecting a 7% revenue increase, but now expects sales to be flat, or even to decrease 10%, owner Kellie Johnson told The New York Times.
Johnson said the company had decided not to fill open positions in its work force, and canceled a half-million-dollar machine order to save more than $100,000.
"Everyone is sitting back and hunkering down," she said.
Related Articles and News:
- Money Morning:
How the Fiscal Cliff Will Deal a Blow to U.S. Defense Industry
- Money Morning:
Fiscal Cliff 2013 Fears Already Stifling U.S. Economy
- CNN Money:
Fiscal cliff threatens small businesses
- The Hill:
US defense firms could push forward with sending layoff notices
"Fiscal Cliff" Tax Hikes Could Cost 710,000 Jobs
BlueChip poll finds fiscal cliff threatens U.S.
- The New York Times:
Fearing an Impasse in Congress, Industry Cuts Spending