Anecdotal evidence abounds, particularly among companies associated with the defense industry. The Pentagon budget is set to take a hit of nearly $55 billion in the fiscal year that ends next September, on top of other scheduled reductions. Defense contractors are already hunkering down.
Preparing for the worst, Mike Kelly, president and chief executive of Ann Arbor-based Nanocerox, a supplier of advanced materials for laser systems, missile optics and radiation detection, said he embarked on an aggressive cost-containment strategy nine months ago. Kelly laid off four of his 22 employees and converted them to contract workers, froze salaries, renegotiated health benefits and tightened controls on spending.
Kelly said he’s also trying to shift business away from the defense industry and into the commercial marketplace. But lenders and investors have no interest in financing his expansion.
“When you tell them you’re an advanced materials company and your main client is the military, they run,” Kelly said. “We started nine months ago envisioning that we’d be in a world of hurt right now. And unfortunately, we bet right.”
Kellie Johnson, chief executive and owner of Ace Clearwater Enterprises in Torrance, Calif., said her business is also suffering. The maker of custom parts for the aerospace and power industries survived the recent recession on the strength of military orders from the U.S. government and abroad, Johnson said. She predicted 7 percent growth in revenue this year. But then this summer, “the orders just stopped.”
“Now it looks like we’ll be 4 percent less than last year,” said Johnson, who has stopped filling open positions in her 192-person firm and canceled a $500,000 equipment order. Instead of doing readiness surveys to measure her capacity to ramp up production, she said, potential customers “this year are coming in and doing risk mitigation, asking, ‘Hey, if these defense cuts go through, how are you diversifying? Are you going to be around in a couple years?’
“Honestly” she said, “this is the first time in my career that I have been so extremely concerned about the future of my company.”
While concern about the cliff is rising, a consensus about how to handle it has been elusive. President Obama and other Democrats have threatened to block action on the cliff unless the Bush-era tax cuts are allowed to expire on income of more than $250,000 a year. Republicans, including presidential candidate Mitt Romney, want to maintain current tax rates for another year to give Congress time to tackle more far-reaching reforms — a position supported by the manufacturing association.
But on Thursday, a group of 80 high-profile chief executives said they are willing to accept higher taxes — accompanied by “significant spending restraint” — as part of a long-term plan to tame the $16.2 trillion national debt. Enacting such a deal, they said, would not only avert the cliff, but would also boost market confidence and perhaps spur economic growth.
“We can do this in a 10-year plan that doesn’t damage the fragile recovery,” Honeywell chief executive David Cote said during a news conference at the New York Stock Exchange just before the market’s opening bell.
Suzy Khimm contributed to this report.