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Economy
5:02 pm
Fri February 1, 2013

Pentagon Remains Big Target In Likely Budget Cuts

Originally published on Fri February 1, 2013 6:17 pm

The economy shrunk in the fourth quarter — for the first time in three years — and one of the critical reasons was a drop in defense spending. Apparently, contractors took precautionary steps and held onto money in case the federal government failed to avert the fiscal and tax crisis known as the fiscal cliff.

But there's now a new deadline — automatic budget cuts, known as sequestration, which may hit at the beginning of March.

The Effect On Contractors

Kevin Graybeal sells components for electronic systems. His buyers are big defense contractors like Northrop Grumman.

This past year, he saw some of his contracts drop 50 percent; others have just gone away.

"I see it as companies just bracing for what's going to come and doing their best to plan in such an uncertain environment," he says. "You think 10 years ago people were coming up with five- or 10-year plans. And right now no one knows what to do six months from now."

Or even one month from now.

At the Pentagon, automatic spending cuts will start in March unless Congress comes up with a way to stop them. The military will face almost $50 billion in cuts this year alone.

What Might Be Cut

That means more of Graybeal's contracts could disappear. There's more: Military pilots might be told to stop training; ship repairs might be put on hold; Pentagon civilian employees are being told to expect furloughs — however, uniformed personnel are exempt.

"Every activity within the Department of Defense will have to be cut by the same percentage," says Todd Harrison, a defense analyst with the Center for Strategic and Budgetary Assessments. "It'll be about a 9 percent cut off of every account."

So how do you cut 10 percent of a Joint Strike Fighter?

"Well, you cut back — instead of buying 29 of them this year, we might just buy 26 or maybe even 25. In some cases that means they have to go back and break contracts."

Harrison and other analysts say those across-the-board spending cuts are likely to go into effect, but maybe for just a short time — perhaps a month or so.

"If it only goes into effect for a month, that won't be enough time for the furloughs to kick in," Harrison says.

But even if the automatic cuts don't happen — or don't last long — Congress is looking at slicing the budget deficit, and the Pentagon is still a big target.

"There's little doubt that if the two parties can agree on a formula for deficit reduction, a significant amount of the savings are going to come from the Pentagon," says Loren Thompson, a defense analyst at the Lexington Institute.

"And that will have an impact on defense workers in the broader economy," he says.

Finding Savings

Experts predict the cuts won't be $50 billion, but maybe half of that, each year for the next decade. So where does the Pentagon find those savings?

Gordon Adams was a defense budget analyst during the Clinton administration. He says as the war in Afghanistan winds down, the Pentagon can save money on expenses like maintenance. For example, there's no rush to repair armored vehicles.

"How fast do we put things though the depot? How much training do we do, and how frequently, and with whom? How much are we going to lay in stocks of fuel supplies?" Adams says.

And with little appetite for another ground war, some analysts say there could be more cuts in the Army and Marine Corps, along with fewer armored vehicles.

The new strategic focus is on Asia and the Pacific. That means there will be winners and losers in the defense industry.

Harrison says aircraft systems and shipbuilding will probably "fare well," but production for other military equipment might not.

"Other parts of the industry, though, that build ground vehicles, tanks, I think that they're likely to get hurt disproportionately," he says.

Not just yet. Salesman Graybeal might be hurting, but Northrop Grumman is predicting strong profits for this year.

Copyright 2013 NPR. To see more, visit http://www.npr.org/.

Transcript

MELISSA BLOCK, HOST:

And those job numbers come in the same week that we heard the U.S. economy had shrunk for the first time in more than three years. Much of the slowdown in the last quarter of 2012 was because of a big unexpected drop in military spending. And looking ahead, military spending is likely to fall even further.

NPR's Tom Bowman has that story.

TOM BOWMAN, BYLINE: Kevin Graybeal sits in a coffee shop outside Baltimore. He's busy working his phone. Graybeal sells components for electronic systems. His buyers, big defense contractors like Northrop Grumman, which has offices just down the road. This past year, he's seen some of his contracts drop 50 percent, others have gone away.

KEVIN GRAYBEAL: I see it as companies just bracing for what's going to come and doing their best to plan in such an uncertain environment. You know, you think 10 years ago people were coming out with five- and ten-year plans. And right now, no one knows what to do six months from now.

BOWMAN: Or one month from now. Automatic Pentagon spending cuts will begin in March unless Congress comes up with a way to stop them. What it means is that the military will face another almost $50 billion in cuts this year alone. That means more of Kevin Graybeal's contracts could go away. There's more. Military pilots might be told to stop training. Ship repairs might be put on hold. Pentagon civilian employees are being told to expect furloughs. Uniform personnel are exempt. Todd Harrison is a defense analyst with the Center for Strategic and Budgetary Assessments.

TODD HARRISON: Every activity within the Department of Defense will have to be cut by the same percentage. It'll be about a 9 percent cut off of every account.

BOWMAN: So how do you cut 10 percent of a Joint Strike Fighter?

HARRISON: Well, you cut back. Instead of buying 29 of them this year, we might just buy 26 or maybe even 25. In some cases, that means that they may have to go back and break contracts.

BOWMAN: Harrison and other analysts say those are across-the-board spending cuts are likely to go into effect, but maybe just for a short time, perhaps a month or so.

HARRISON: If it only stays into effect for a month that won't even be enough time for the furloughs to kick in.

BOWMAN: But even if the automatic cuts don't happen or last long, Congress is looking at cutting the deficit, and the Pentagon is still a big target.

HARRISON: There's little doubt that if the two parties can agree on a formula for deficit reduction, a significant amount of the savings are going to come from the Pentagon.

BOWMAN: Loren Thompson is a defense analyst with the Lexington Institute.

LOREN THOMPSON: So now we'll have an impact on defense workers in the broader economy.

BOWMAN: Thompson and others predict the cuts won't be $50 billion, but maybe half of that each year for the next decade. So where does the Pentagon find those savings? Gordon Adams was a defense budget analyst in the Clinton White House. Adams says with the war in Afghanistan winding down, the Pentagon can save money on things like maintenance. There's no rush to repair armored vehicles, for example.

GORDON ADAMS: How fast do we put things through the depot? How much training do we do and how frequently and with whom? How much are we going to lay in stocks of fuel supplies?

BOWMAN: And with little appetite for another ground war, some analysts say there could be more cuts in the Army and Marine Corps, along with fewer armored vehicles. The new strategic focus is on Asia and the Pacific. That means there will be winners and losers in the defense industry.

HARRISON: Things like your aircraft systems, your shipbuilding, I think they will probably fair well.

BOWMAN: Again, Todd Harrison.

HARRISON: Other parts of the industry, though, that build ground vehicles, tanks, I think that they're likely to get hurt disproportionately.

BOWMAN: Not just yet. Salesman Kevin Graybeal might be hurting, but Northrop Grumman is predicting strong profits for this year. Tom Bowman, NPR News, Washington. Transcript provided by NPR, Copyright NPR.