Defense cuts may slow area economy

By Marjorie Censer and Peter Whoriskey
Washington Post Staff Writers
Saturday, September 11, 2010

After surging in size and profits during the post-9/11 era, the defense industry in metropolitan Washington is bracing for a major contraction and significant layoffs that economists said could produce a drag on the regional economy for years.

Already, there have been signs that announced cuts in national defense programs are having an impact: Six hundred executives at Bethesda-based Lockheed Martin are accepting the company's offer of a buyout. ITT Defense and Information Systems, based in McLean, this year combined seven business units into three and cut 1,000 workers. Hundreds were let go this year from Northrop Grumman operations in Maryland.

Those losses are just the beginning of what many expect to be a much broader set of reductions at local companies.

After making cuts in military hardware budgets last year, Defense Secretary Robert M. Gates last month took aim more directly at the Washington region's defense industry, calling for reducing spending on "support contractors" by 10 percent each of the next three years. This region is a hub of contractors providing professional, administrative and computer services.

"As the defense budget shrinks, it will be impossible for the companies here to escape unscathed," said Loren Thompson, chief operating officer of the Lexington Institute and a consultant to several major defense contractors. "There will be many thousands of layoffs in the greater Washington area."

Several in the industry said the downturn could be as severe as it was in the early 1990s, when, among other things, the Navy largely pulled out of Crystal City.

"We're seeing the start of another down cycle," said Randy Jayne, managing partner for executive search firm Heidrick & Struggles's aerospace, defense and aviation practice.

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 now amounts to about 37 percent of the regional economy, up from 33 percent in 2000, said John McClain, deputy director of the Center for Regional Analysis at George Mason University.

Over the same period, the volume of defense procurement contracts in the area almost tripled, rising from $12 billion to more than $35 billion, according to McClain's statistics.

If the significant cuts come as expected, McClain said, the local economy could stall, as it did in the mid-'90s.

The campaign to rein in defense costs began in earnest in April 2009 when, in dramatic fashion, Gates put an end to several big-ticket military programs.

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