It looks like the sun will rise Friday morning (that’s good, but not surprising, news) without Congressional action to avoid the automatic spending cuts known as sequestration(that’s bad news, but probably not as bad as the worst case scenarios we’ve heard). The axe doesn’t fall decisively March 1 and the various scheduled reductions have a differential impact on the economy. Some discretion could mitigate the damage and the president may already have that authority. Further, the negative effects in the short-term may be worth it if a long-term deficit reduction strategy ensues.

For the states, there’s also the important difference between sequestration’s effect on the economy and its impact on state budgets. More on all that below.

Yesterday, the National Conference of State Legislatures warned:

The bulk of states end their legislative sessions in the spring, and will face the near-impossible challenge of balancing their budgets without knowing how much federal funding to expect. Federal money makes up 34 percent of total state spending.

…If the federal government reduces funds for state-administered programs, yet keeps in place strict standards and requirements, states would be forced  to make up for the money gap by reducing other programs, raising revenue, or some combination of the two.

The NCSL statement echoes the appeal from the National Governors Association for more flexibility in the use of federal funds.

Earlier, I posted on possible effects on our state budget.

The state budget office has estimates from Federal Funds Information for States of about $83 million in reductions of grants going through the state budget and $25 million to local governments and individuals. The Seattle Times reports the University of Washington worries about losing $83 million (not part of the grants on the state budget list) in research funding.

Hold on, says Seattle Times columnist Danny Westneat. 

…it’s an $85 billion scheduled cut in federal spending, known as sequestration. That’s not nothing, but out of a $3.5 trillion annual budget, it is 2.4 percent. More precisely, out of the discretionary budget, where the cuts are concentrated, it amounts to a bit more than 5 percent.

These cuts may hurt, but still will only slow the rate of growth of overall spending.

The stalemate underscores the increased reliance of state budgets on federal dollars, even when we acknowledge (thankfully) that Medicaid, the largest state-federal partnership) has been exempted. Given the delicate balance – or in our state’s case, imbalance – in most state budgets, small changes in federal assistance have significant effects.

Add to the direct budget impacts the drag on the economy sequestration as currently contemplated may exert. The Washington Post has a good overview of what economists’ forecast.

The U.S. economy won’t collapse when the automatic spending cuts start hitting after Friday’s deadline. A few economists even say the sequester and its indiscriminate whack at the budget could eventually help the economy grow faster than it would have otherwise.

That’s the silver lining. Here are the clouds: The sequester is coming at a particularly inopportune time in the still-fragile U.S. recovery, it promises to bite consumers and business activity quickly,

Coming after the payroll and income tax hikes at the beginning of the year, which WaPo says will knock 1 percentage point off economic growth this year, the sequestration cuts will trim growth by another 1/2 percentage point.

The Associated Press says the political standoff is already slowing the economy, a view shared by the public in the latest NBC/WSJ poll.

A majority of respondents (51%) believe the budget negotiations between President Obama and congressional Republicans make them feel less confident about economy, versus just 16% who feel more confident.

Really? 16 percent are more confident? Gotta love the optimists.

Stay optimistic.