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The Globe and Mail

Corporate America using U.S. budget cuts as scapegoat

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Corporate America is lamely blaming U.S. budget cuts for stunted earnings. As first-quarter results come in, forced deficit reduction is filling a role previously held by the weather, China and other spurious excuses. Delta and IBM are among the culprits, but Washington-inflicted damage is trivial. Even so, lawmakers could all but end any financial disruption.

In March, the first round of sequestration cuts hit, which lop $1-trillion off projected government spending over a decade. These kicked in because legislators couldn't reach a negotiated deal on how to restructure the budget. The law reduces mostly discretionary programs. For contractors like Lockheed Martin, the U.S. military's largest weapons supplier, the direct impact may be substantial. For others, it really shouldn't be.

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That hasn't stopped them from pointing fingers at Uncle Sam. IBM characterized the federal spending measures as a drag on its U.S. performance. 3M also piped up. Airlines have been particularly vocal because of flight delays and cancellations caused by air traffic controller furloughs.

The numbers suggest the U.S. budget is a weak scapegoat. IBM, for example, generates 43 per cent of its revenue domestically. It partly blamed a rare quarterly earnings miss on a 13-per-cent decline in federal government work. Based on that figure, even if IBM improbably derived half its U.S. business from that source, the impact on the bottom line would have been less than 3 per cent. Delta Air Lines similarly noted its defence business was down 15 to 20 per cent. That may sound serious, but it represents just 3 per cent of revenue in the corporate division – and less than 1 per cent of the overall top line.

In reality, deficit reduction shouldn't be much of a factor for the bulk of the private sector. Even so, some of the policy fallout could be prevented. Instead of, say, obligatory leave for air traffic controllers, Congress could instead direct the Federal Aviation Administration to cut its budget by 8 per cent by reducing salaries, shedding underperforming workers or targeting slower markets. It might even force companies to face up to their own harsh realities instead of misdirecting shareholders.

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