The Bush Effect on 3 Key Sectors

President-elect George W. Bush is unlikely to seek major new initiatives in defense spending, but instead focus on targeted increases to replace aging fighter planes, warships and weaponry, analysts said.

Although Bush talks tough on defense, his failure to obtain a decisive victory in the election and the evenly divided political power in Congress are likely to restrain any big ambition to strengthen U.S. military posture.

Instead of a boom in weapons spending--as some investors who have pushed defense stocks higher this year may be anticipating--the industry can expect only modest gains as the new administration struggles with military services clamoring to update their weapons.

Bush has talked about spending an additional $65 billion but only after ordering a sweeping review of military programs, which hasn’t been done in 10 years, securities analysts say. Among the issues would be whether the U.S. is buying too many jet fighters at the expense of less glitzy but sorely needed transport and refueling aircraft.

In any case, California--which receives 13% of the $295 billion in Pentagon spending and nearly 20% of its research dollars--will benefit from any budget increases. Although unlikely to get the kind of large scale ramp-up that came with the Reagan administration defense boom in the 1980s, Southern California might win awards that bring significant new production programs.

“I see a very pragmatic administration, spending dollars where the real threats are,” said Jon B. Kutler, president of Quarterdeck Investment Partners Inc., an aerospace investment banking firm. “For California, the industrial base is very defused now so I don’t expect the magnitude [of the impact] to be as great as it was in the 1980s.”

Still, a $65-billion spending increase would mean an additional $8.5 billion for California, which continues to have the nation’s largest defense industrial base.

The state could get an additional boost if Bush decides to buy more B-2 stealth bombers from Northrop Grumman Corp., as recommended by Vice President-elect Dick Cheney. Reopening the program, which produced its last plane this year, would be a boon to Palmdale, where the $2-billion bomber is assembled.

Northrop executives said restarting the production line would be “manageable” although some of the sophisticated tooling necessary to build the bomber has been destroyed and the subcontractors are now in other lines of work.

The B-2 program would be part of the sweeping review, which would also look at the feasibility of the three new fighter programs--the F-22, Boeing’s F/A-18E/F and the Joint Strike Fighter, a top Bush defense advisor said last month.

With the Air Force staunchly behind the F-22 and the Navy behind the F/A-18, the Joint Strike Fighter faces the most difficult challenge, analysts said. Boeing Co. and Lockheed Martin Co. have competing prototypes of the JSF, which would be produced for the Air Force, Navy and Marine Corps. Neither version of the JSF would be assembled in California.

Defense analysts said the U.S. is spending too much on the three programs when major portions of it U-2 reconnaissance, cargo and aerial refueling fleets need replacement.

As such, Bush may decide to divert funds from fighters and bombers to beef up the other programs, such as the C-17 transport, which is manufactured in Long Beach.

About 9,000 people work on the C-17 program. Sixty-eight of the planes have been built so far. The Air Force has 120 on order at a production rate of about 15 per year.

Bush’s military advisors believe the C-17 is key to having a mobile expeditionary force.

Analysts said Bush probably will make a national missile defense system a high priority. Most research and work on the program is done in California and it would be a boon to several large aerospace firms such as TRW and Raytheon Co.

Loren B. Thompson, a defense analyst at Arlington, Va.-based Lexington Institute said a divided Congress could actually prompt Bush to bolster defense spending.

“Spending on weapons can be a very effective way of rewarding your supporters and punishing your detractors,” Thompson said. “Giving them an airplane or giving them a tank is a relatively cheap way of garnering political support.”