Balancing Defense and the Budget

Bob Trice, senior vice president of Lockheed's business development unit, said the defense industry is likely to see fewer new weapons programs. For Lockheed, "we're already laser-focused on [information technology] and we will continue to be and we'll do the same with logistics and maintenance."

Raytheon of Waltham, Mass., has begun to diversify by making several acquisitions to bolster its cyber-security capabilities. It also has landed two lucrative training deals: One is a contract worth as much as $11 billion with Falls Church-based CSC and General Dynamics to do training for the Army; another is a 10-year contract to provide training support to the Federal Aviation Administration's air traffic controllers for $437 million.

Some companies had hoped to compensate by selling their goods to other nations. But with the world economy also faltering, the expected increases in overseas military sales could be less than anticipated because governments in the Middle East and Asia -- once seen as growth markets -- won't have money to spend on new weapons systems.

"It leaves the outlook for defense spending going from being strong to being dim," said Philip Finnegan, a defense industry analyst at the Teal Group in Fairfax. "It's not a rosy outlook."

Not everyone is so gloomy. Loren Thompson, a defense industry consultant, thinks the credit crisis could work to the industry's advantage if policymakers are looking for ways to jump-start the economy.

"If you want to stimulate the economy you can give a tax break so someone can go buy a TV that's been built in Korea or if you buy weapons it all gets spent here, in the U.S.," Thompson said. "All the bad economic news of the last month works to favor defense stocks and defense companies."

In the past eight years, the Pentagon's defense budget has jumped 86 percent, from $361 billion to $672 billion in inflation-adjusted dollars. General Dynamics, for example, got a huge boost to its sales after winning contracts totaling $1.7 billion to build and service armored vehicles for the Army capable of withstanding roadside bombs in Iraq. Lockheed Martin, the world's largest defense contractor, has also benefited because it manages two of the Pentagon's biggest fighter-jet programs. Northrop Grumman of Los Angeles, which has a large presence in the Washington area, and General Dynamics both have a piece of a $4 billion deal to help build two Navy submarines.

But the prospects for such programs have dimmed some in recent months. Even before Congress approved its $700 billion plan to bail out Wall Street, analysts projected defense spending for future weapons programs to tighten. The Pentagon is struggling to meet rising personnel costs as it tries to increase the number of Army troops and Marines. And it has estimated that it may need tens of billions of dollars just to repair and replace tanks, armored trucks and other equipment used in Iraq and Afghanistan.

"The Pentagon has gotten anything it wanted mainly because of the wars," said Rep. John P. Murtha (D-Pa.), chairman of the House Appropriations defense subcommittee.

"We're going to be to the point where they're going to have to come to some real justifications of what's needed. You can't have everything and you're not going to get everything."

Boeing's Future Combat Systems -- a new generation of weapons, combat vehicles, robots and sensors whose systems can communicate with one another through a wireless network -- may be curtailed. It has been criticized for its high cost and complexity.

Likewise, a future destroyer program designed by Northrop Grumman could be on shaky ground, as the Pentagon questions what the Navy can afford.

Lockheed could see an end to production of the F-22 fighter as policymakers debate whether Air Force needs both that aircraft and the less expensive F-35 Joint Strike Fighter. Although Lockheed argues that any cutbacks in the number of F-35 planes ordered could raise the price.

Such decisions will likely be influenced by the next president. Neither John McCain nor Barack Obama have offered many specifics.

McCain recently said he's going to try to save $160 billion -- in part -- by cutting back on the Pentagon's procurements of big weapons systems.

Richard Danzig, a U.S. Navy secretary during the Clinton administration and an Obama adviser, has said he expected that military spending would remain constant during a Democratic administration but that priorities could shift. He said there is likely to be a focus on "cyber warfare" and unmanned aerial vehicles -- areas that some companies are beefing up in anticipation of possible deals.

But any decisions on individual weapons systems will likely factor in the government's other priorities, whether it be the economic downturn or long-standing issues like Social Security funding.

"This is certainly going to be a very different period than the last eight years have been," said Steven Kosiak, a defense budget analyst at the Center for Strategic and Budgetary Assessments, a Washington policy group.