Debt deal expected to hit Washington area economy, defense firms

August 1, 2011

The hundreds of billions of dollars in cuts to military spending proposed in the federal debt-reduction deal would hit the Washington region’s defense industry hard, forcing layoffs and undermining the local economy for several years, analysts said.

Defense firms around Washington have already been shrinking, but the proposed cuts would slice even further into an industry that is a pillar of the region’s economy, according to economists.

The proposed budget deal would cut $350 billion from defense budgets over 10 years, in the first defense reductions since the 1990s, according to the White House. But the contraction could go much further because the deal calls for the possibility of more deficit-reduction measures by the end of the year.

Under the plan, proposed by President Obama and congressional leaders, if a bipartisan committee does not reach agreement on a second round of cuts after negotiating for about four months, a “trigger” mechanism would kick in, forcing automatic cuts of $600 billion in defense programs.

Michael S. Lewis, an industry analyst with Lazard Capital Markets, suggested that the cuts in the defense budget could rise to $650 billion. He estimated that that would reduce discretionary defense spending by 7 percent annually within five years. Other estimates go even higher.

“That would have dire consequences,” Lewis said. “Jobs would be stopped, and there would be long-term implications for the industrial base. All that expertise and production in making jet fighters and tanks will go elsewhere.”

He suggested that large programs, such as Lockheed Martin’s F-35 program and the Navy’s 30-year shipbuilding effort, could be trimmed, though he cautioned that the information about the defense cuts is still sketchy.

Given the lack of specifics, many companies are simply bracing for cuts.

But Chantilly-based TASC, which provides technical services such as systems engineering to the Pentagon and the intelligence community, isn’t changing course yet.

Dale Luddeke, the company’s chief growth officer, said it’s too early to say what might result from the debt deal, though TASC recognizes that the negotiations will affect government spending and is taking that into account as it plans for the future.

“That’s our strategic outlook, but for right now we have contractual obligations to hit,” he said.

During the defense buildup over the past decade, the Washington area’s economy became more dependent on the federal government and, in particular, defense spending.

Federal spending amounts to about 37 percent of the regional economy, up from 33 percent in 2000, according to figures from the Center for Regional Analysis at George Mason University.

Since 2000, the volume of defense procurement contracts in the area has almost tripled, rising from $12 billion to more than $35 billion, according to the center’s figures.

But over the past year, the defense industry has been reeling from changes initiated by the Pentagon, which has cut some large programs and called for contractors to become more efficient and less expensive. Bethesda-based Lockheed Martin has made some of the largest cuts, announcing in June that it is offering “voluntary layoffs” to 6,500 employees. The company had already announced that it would lay off 2,700 employees in its aeronautics and space systems businesses, and last year it offered an early-exit buyout for about one-quarter of its top executives.

Falls Church-based General Dynamics this year laid off 112 Woodbridge employees after the Defense Department ended a Marine Corps vehicle program.

Last week, some of the largest defense contractors announced flat or declining earnings. Northrop Grumman, for instance, saw both profit and sales decline in what Wes Bush, the company’s chairman, chief executive and president, called a “very dynamic” environment. He said federal customers are moving more slowly to award contracts and are spending more conservatively.

Peter Whoriskey is a staff writer for The Washington Post handling investigations of financial and economic topics. You can email him at peter.whoriskey@washpost.com.
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August 1, 2011

The hundreds of billions of dollars in cuts to military spending proposed in the federal debt-reduction deal would hit the Washington region’s defense industry hard, forcing layoffs and undermining the local economy for several years, analysts said.

Defense firms around Washington have already been shrinking, but the proposed cuts would slice even further into an industry that is a pillar of the region’s economy, according to economists.

The proposed budget deal would cut $350 billion from defense budgets over 10 years, in the first defense reductions since the 1990s, according to the White House. But the contraction could go much further because the deal calls for the possibility of more deficit-reduction measures by the end of the year.

Under the plan, proposed by President Obama and congressional leaders, if a bipartisan committee does not reach agreement on a second round of cuts after negotiating for about four months, a “trigger” mechanism would kick in, forcing automatic cuts of $600 billion in defense programs.

Michael S. Lewis, an industry analyst with Lazard Capital Markets, suggested that the cuts in the defense budget could rise to $650 billion. He estimated that that would reduce discretionary defense spending by 7 percent annually within five years. Other estimates go even higher.

“That would have dire consequences,” Lewis said. “Jobs would be stopped, and there would be long-term implications for the industrial base. All that expertise and production in making jet fighters and tanks will go elsewhere.”

He suggested that large programs, such as Lockheed Martin’s F-35 program and the Navy’s 30-year shipbuilding effort, could be trimmed, though he cautioned that the information about the defense cuts is still sketchy.

Given the lack of specifics, many companies are simply bracing for cuts.

But Chantilly-based TASC, which provides technical services such as systems engineering to the Pentagon and the intelligence community, isn’t changing course yet.

Dale Luddeke, the company’s chief growth officer, said it’s too early to say what might result from the debt deal, though TASC recognizes that the negotiations will affect government spending and is taking that into account as it plans for the future.

“That’s our strategic outlook, but for right now we have contractual obligations to hit,” he said.

During the defense buildup over the past decade, the Washington area’s economy became more dependent on the federal government and, in particular, defense spending.

Federal spending amounts to about 37 percent of the regional economy, up from 33 percent in 2000, according to figures from the Center for Regional Analysis at George Mason University.

Since 2000, the volume of defense procurement contracts in the area has almost tripled, rising from $12 billion to more than $35 billion, according to the center’s figures.

But over the past year, the defense industry has been reeling from changes initiated by the Pentagon, which has cut some large programs and called for contractors to become more efficient and less expensive. Bethesda-based Lockheed Martin has made some of the largest cuts, announcing in June that it is offering “voluntary layoffs” to 6,500 employees. The company had already announced that it would lay off 2,700 employees in its aeronautics and space systems businesses, and last year it offered an early-exit buyout for about one-quarter of its top executives.

Falls Church-based General Dynamics this year laid off 112 Woodbridge employees after the Defense Department ended a Marine Corps vehicle program.

Last week, some of the largest defense contractors announced flat or declining earnings. Northrop Grumman, for instance, saw both profit and sales decline in what Wes Bush, the company’s chairman, chief executive and president, called a “very dynamic” environment. He said federal customers are moving more slowly to award contracts and are spending more conservatively.

Peter Whoriskey is a staff writer for The Washington Post handling investigations of financial and economic topics. You can email him at peter.whoriskey@washpost.com.
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