As sequestration looms, contractors don’t fret

The notion that the cuts will not happen “is what the management teams of these companies think is the most likely case scenario,” said William Loomis, managing director at the financial services firm Stifel Nicolaus. He said analysts do not buy into their optimism. “We don’t have a lot of confidence in the numbers because of it.”

Several analysts caution that large contractors are certainly working on contingency plans behind the scenes in case sequestration goes through.

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An earlier round of budget cuts is already hurting the industry, executives acknowledge. Federal spending reductions squeezed profit margins and stunted hiring last year for contractors, a trend driven home by Wednesday’s report from the Commerce Department that defense cuts pushed the economy into contraction in the fourth quarter.

In Virginia

Virginia’s secretary of finance said in a report late last year that jobs in professional and business services, the sector that includes federal contracting, grew only half as quickly as forecasters expected in 2012. That slowdown was a prime reason that the state lagged the national average in job growth last year.

Sequestration brings the threat of much greater pain. An economists’ report prepared last year for the Virginia Economic Development Partnership estimated that the defense and non-defense components of the sequester would push the Virginia economy into recession and eliminate more than 80,000 jobs a year for two years.

The job losses would probably begin immediately, said Ann Battle Macheras, vice president of the regional economics division at the Federal Reserve Bank of Richmond’s research department.

“I don’t want to sugar-coat it that we wouldn’t feel it,” Macheras said. “There’s some pulling back that would occur right away.”

Contractors were one of the first groups to cry out about those possible economic effects, warning that the cuts would damage not only their bottom lines and their workforces but also the broader defense industry. The companies attended rallies this summer and announced that they were considering issuing layoff notices to all of their employees.

But the Labor Department and the Office of Management and Budget persuaded companies not to issue those notices, a signal that seemed to calm the industry and suggest that sequestration might not happen — a sentiment bolstered by the delay of the January deadline. Macheras said that probably amounted to “mixed signals” from the Obama administration to the industry.

The Aerospace Industries Association, the main defense industry lobbying group, has sent loud and constant signals that sequestration would be devastating, including a news release Wednesday. Meanwhile, small manufacturers who supply the larger contractors are beginning to speak out about how sequester cuts would affect their businesses, said Chad Moutray, the chief economist at the National Association of Manufacturers.

Moutray said he holds out hope that Wednesday’s report on gross domestic product — and the large effects of spending cuts it showed — will push Democrats and Republicans back to the bargaining table to find a sequester alternative.

“Hopefully, this is a little bit of a wake-up call,” he said. “This is real. Government spending contracted 1.2 percent of GDP. That’s a big hit, and it’s just the beginning.”