http://www.businessweek.com/news/2012-12-06/defense-industry-cuts-exceed-500-000-workers-over-cliff

Bloomberg News

Defense Industry Cuts Exceed 500,000 Workers Over Cliff

December 06, 2012

Defense Workers Await Losses in Fall Off U.S. Fiscal Cliff: Jobs

Workers build a seat assembly for an E-2 Hawkeye plane at the CPI Aerostructures Inc. manufacturing facility in Edgewood, New York. If all tax cuts expire and budget reductions automatically kick in, U.S. job losses range from 300,000 up to 5.5 million, according to a survey of 23 economists by Bloomberg News. Photographer: Victor J. Blue/Bloomberg

John Lutz is following the debate in Washington over the so-called fiscal cliff with more than academic interest.

Lutz’s wife has been out of work for more than a year, and he worries that he may be next if Congress and President Barack Obama fail to reach an agreement forestalling more than $600 billion in automatic spending cuts and tax increases scheduled to start taking effect in January.

Lutz, 50, supervises high-speed milling operations at Alken Industries Inc. in Ronkonkoma, New York, which makes components for military jets and helicopters. The company depends on defense contracts for most of its business, anticipates that next year’s sales will decline by 10 percent and is trying to diversify into commercial aerospace, said Kimberly Senior, chief executive officer, in a phone interview. Its workforce has been reduced to 57 employees from 72 in 2011.

“It’s kind of scary,” Lutz said. “I believe my work could be in danger. If you get all these defense cuts in the budget we’ll probably wind up eliminating some more jobs because the company will try to downsize more than what they already have.”

Obama sketched out a potential year-end deal pairing tax increases and spending cuts, while insisting Republicans accept higher tax rates for top earners as a condition for negotiations. “We have the potential of getting a deal done,” Obama said Dec. 4 at the White House on Bloomberg Television in his first interview since winning re-election.

Boehner’s Reaction

Reacting to the president’s latest comments, House Speaker John Boehner said Obama “has an obligation” to present a counterproposal that can be passed by Congress -- a test he said Obama’s current plan fails -- and that Republicans are “ready and eager” to discuss such an offer with him. The Ohio Republican has rejected rate increases and said the White House hasn’t presented sufficient spending cuts. The Republicans’ proposal Dec. 3 included $2.2 trillion in reductions and new tax revenue without raising rates.

More than 500,000 defense industry jobs could be lost next year if automatic budget reductions are triggered, said Stephen Fuller, an economist at George Mason University in Fairfax, Virginia, who prepared the study for the Aerospace Industries Association, the industry’s main lobbying group, in July.

About $1.2 trillion of U.S. spending over 10 years will be subject to automatic reductions. Half of that will be from defense and the rest from other federal agencies. In 2013, $109.4 billion of federal spending will be affected, of which the share for the Defense Department and other defense-related agencies will be $54.7 billion, according to a Bloomberg Government estimate.

‘Big Chill’

The cutbacks would “put a chill on the economy, and if this is combined with tax increases then there is no doubt in my mind that there will be a big chill,” Fuller said in an interview.

Tax rates put in place by President George W. Bush are also set to expire Dec. 31. The nonpartisan Congressional Budget Office has projected that if all the fiscal tightening occurs and taxes increase, real gross domestic product will drop by 0.5 percent next year, and the unemployment rate will rise to 9.1 percent in the fourth quarter of 2013. The jobless rate was 7.9 percent in October and November’s level will be released tomorrow by the Bureau of Labor Statistics.

The impact on jobs will be gradual because “it’s not as if spending is going to plummet overnight,” said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. “But the further you go in the year, the tighter those spending constraints will get and therefore the more jobs we will lose,” said Gault, who estimates as many as 2.3 million jobs could be lost by the end of 2013.

Job Losses

If all tax cuts expire and budget reductions automatically kick in, the job losses range from 300,000 to 5.5 million, with a median estimate of 1.5 million, according to survey of 23 economists by Bloomberg News.

The result would bump the unemployment rate next year by 0.3 percent in the first quarter and by 0.6 percent in the fourth quarter. Defense industry employment would drop 110,000 according to the median estimate, with a range of as many as 400,000 positions lost.

If lawmakers and Obama reach an agreement, the labor market impact will be modest, despite any tax increases and spending cuts such a deal might require, because they will be offset by long-term deficit reduction and fiscal sustainability, said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania.

Budget Contraction

Should no deal be made, the Pentagon’s projected budget contraction of $500 billion over the next decade would be in addition to last year’s agreement to cut $487 billion from the department’s spending over the next 10 years.

Defense industry stocks reflect the uncertainty. The Standard & Poor’s Aerospace & Defense Index (S15AERO), which includes 28 companies, has gained 9 percent in the last 12 months compared with a 12 percent increase in the broader Standard & Poor’s 500 Index during the same period.

Defense companies have been reducing headcount even before confronting job losses from the fiscal cliff. Then-Defense Secretary Robert Gates said in January 2009 the Obama administration was beginning to shut the “spigot of defense spending” that opened with the 2001 terror attacks.

The U.S. aerospace products and parts industry lost 6,100 jobs from January 2009 through September 2012, according to BLS data compiled by Bloomberg. Since 2010, Chicago-based Boeing Co. (BA:US),Alliant Techsystems Inc. (ATK:US) of Arlington, Virginia, and Lockheed Martin Corp. (LMT:US) of Bethesda, Maryland, have cut thousands of jobs, citing a slowdown in defense spending.

Jobs Cut

Robert Stevens, Lockheed’s chairman and CEO said in July that as many as 10,000 company employees could lose their jobs if the fiscal cliff takes effect. The world’s largest defense contractor, Lockheed has already cut 3,850 jobs and offered voluntary separation to 6,500 employees.

The job losses at defense contractors affect other businesses. Ells Snyder said he is worried about the deli and café he opened three years ago in Linthicum, Maryland, across the street from Northrop Grumman Corp. (NOC:US)’s Electronic Systems unit, which announced last month it would cut 350 jobs.

“It does impact us,” he said. Snyder said he is following the fiscal debate and is “mainly concerned about the uncertainty.” The deli gets about 400 customers a day, many from nearby defense contractors and government agencies.

Lunch Caps

Snyder, 60, said 2011 sales of the catering business he’s owned for 16 years fell from the year before because of budget cuts at defense companies. He has dropped the price of a catered lunch package to $9 from $15 because of a $10 cap imposed by contractors. Snyder, who employs 32 people, said he has cut hours “but luckily we have not laid people off.”

Job cuts by large defense contractors as a result of automatic budget reductions will hurt their smaller suppliers and vendors the most, said Chad Moutray, chief economist at the National Association of Manufacturers in Washington.

“You have a lot of people, especially in the defense supply chain, who are quite worried about how budget cuts might affect them,” Moutray said. Smaller suppliers “are going to be most affected” by automatic budget cuts, he said.

Seal Science Inc. of Irvine, California, is one such company. Greg Bloom, executive vice president and general manager, said he gets phone calls “daily from program managers” at large defense contractors about their orders from the government “coming to a stop.”

Immediate Reduction

Seal Science supplies precision-engineered seals for advanced weapons, aircraft, ships and satellites and depends on the U.S. government for 80 percent of its revenue, he said. Budget cuts caused by the fiscal cliff or further contraction in defense spending may mean “we could see a 10 percent reduction in our workforce immediately,” said Bloom, who currently employs about 200 people.

Some defense suppliers that also sell to commercial airplane makers such as Boeing expect to survive the changes without firing their employees. Ferco Aerospace Group, a family- owned company in Franklin, Ohio, that makes sheet metal components for airplane engines, is less dependent on military sales, said Joseph Murphy, chairman.

Commercial business, which makes up about 75 percent of the company’s revenue, is growing while sales of engine components for the Pentagon’s F-35 Joint Strike Fighter program may weaken, he said.

“We are selling parts faster than they can book orders,” for engines that power Boeing’s 787 Dreamliner and 777 airplanes, Murphy said in an interview.

Small Suppliers

Still, small suppliers who specialize in parts and components, such as closely held Alken in New York, are trying to be “as lean as possible to be able to compete” with domestic and foreign competitors, said Lutz, who said he fears for his job.

Lutz said he may be able to find another position if he’s fired because of his three decades of experience as a machinist. The new job may not pay as well as his current one and benefits, such as for health care, could be worse, he said.

Since his wife, who was a data-entry operator for 15 years, lost her job, she’s been going through unemployment services to find a new position without success, Lutz said. “It has been pretty hard.”

To contact the reporters on this story: Gopal Ratnam in Washington at gratnam1@bloomberg.net; Elizabeth Dexheimer in New York at edexheimer@bloomberg.net

To contact the editors responsible for this story: John Walcott at jwalcott9@bloomberg.net; Chris Wellisz at cwellisz@bloomberg.net


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