Navigating Federal Budget Cuts & Market Implications

February 23, 2025

As we navigate an evolving economic landscape, it’s important to assess how federal budget cuts may impact the broader U.S. economy and, consequently, investment portfolios.

 The federal government is the largest employer in the United States, with approximately three million civilian workers. Recent proposals for mass layoffs could impact up to 475,000 jobs—around 16% of the federal civilian workforce. To date, the Trump administration has implemented approximately $55 billion in spending cuts—less than 1% of the federal government’s $7 trillion annual budget. However, achieving the Department of Government Efficiency’s (DOGE) ambitious goal of cutting $2 trillion in spending will be highly challenging. Since entitlement programs, interest payments, and defense spending account for over 77% of total expenditures, meeting this target would require significant reductions across all other categories and possibly even within those three major areas.

Economic Impact of Budget Cuts

 If these budget reductions are fully implemented, they could have a considerable effect on the U.S. economy. Federal spending accounts for approximately 20% of U.S. GDP, meaning a $2 trillion cut could result in a 5.7% reduction in economic output. To offset this contraction, other components of GDP—Consumption, Investment, and Net Exports—would need to grow by approximately 7.1% just to prevent negative GDP growth. However, achieving this growth will be difficult given inflationary concerns, the potential impact of tariffs, and a likely rise in unemployment. Deep spending cuts combined with new tariffs could push the economy into a recession. However, there is a silver lining: tariff assessments have been postponed until April, and first-quarter GDP figures are unlikely to reflect significant declines, as budget cuts thus far account for just 0.78% of GDP. Any adverse economic effects may be delayed until the second or third quarter as further spending cuts and tariffs take effect.

Unemployment Outlook

 An economic slowdown often leads to layoffs, and we are already seeing this trend in the private sector. Combined with potential federal layoffs, the unemployment rate could begin rising in the coming months. Additionally, job losses from government contractors could add further pressure.

 This puts the Federal Reserve in a challenging position. The central bank must balance inflation control with growing concerns about unemployment. So far, inflation has been brought down without a significant spike in joblessness, but the road ahead may be more difficult.

Portfolio Positioning Considerations

Given the Federal Reserve’s hawkish stance on inflation and heightened concerns about rising unemployment, we believe asset inflation stemming from interest rate reductions is unlikely in the near term. In a climate of heightened inflation and economic uncertainty, we favor sectors that have historically performed well in defensive environments, including:

 Healthcare & Pharmaceuticals – Demand for medical care, prescription drugs, and healthcare services remains steady regardless of economic conditions.

 Consumer Staples – Essential goods such as food, beverages, household products, and personal care items remain in demand. Supermarkets, discount retailers, and producers of essential goods tend to maintain steady revenue.

 Utilities – Electricity, water, and natural gas are necessities that consumers and businesses cannot significantly cut back on. Utility companies often have regulated pricing and long-term contracts, making them stable during downturns.

 Defense & Aerospace – Although there is talk of reducing defense spending by 8%, governments typically maintain military budgets even in recessions, making defense contractors relatively recession-proof. Increased geopolitical tensions also drive demand for defense technology.

 Waste Management & Environmental Services – Garbage collection, recycling, and environmental services are essential regardless of economic conditions. Companies in this sector benefit from steady government contracts and consumer demand.

 Insurance & Risk Management – People continue to pay for life, health, and auto insurance even during recessions. Property and casualty insurers tend to remain stable as well.

 Energy (Oil & Natural Gas) – Supply-demand imbalances may continue to drive strength in this sector.

Discount & Value Retailers – Consumers often shift to discount stores and private-label brands during recessions. Companies specializing in low-cost essentials tend to see increased demand.

 Precious Metals & Commodities (Inflation Hedge) – Gold remains a valuable hedge against economic instability and inflation. While it does not generate cash flow, its safe-haven status makes it an important part of a diversified portfolio.

 Technology (AI-Focused) – While technology is not traditionally considered a defensive sector and is more sensitive to interest rate movements, we still favor AI-driven companies due to their high earnings growth rates, strong operating profit margins, and healthy balance sheets. Companies in this space often have high cash reserves and low to no debt, making them well-positioned to weather economic uncertainty.

Final Thoughts

 Managing a portfolio in today’s rapidly changing environment requires a disciplined and flexible approach. This is a time to be cautious and focus on resilience rather than trying to "hit home runs." As always, our team at Alpha Capital Wealth Advisors remains committed to helping you navigate these economic challenges with a disciplined and strategic investment approach.

 We encourage you to reach out with any questions about your portfolio strategy.

 Alpha Capital Wealth Advisors, LLC is a registered investment adviser. The information provided is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Please consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future results.mance.