Stress in military budget may strain defense firms
Election day may signal bad news ahead for Southern California’s biggest private employers -- aerospace giants Boeing Co. and Northrop Grumman Corp. -- no matter who wins today.
With a financial crisis pinching federal coffers and deep cuts in federal spending looming, multibillion-dollar weapons purchases could take a serious hit. Neither candidate has outlined Pentagon cuts for fear of losing votes, but industry officials and analysts believe an eight-year boom in military spending is about to end.
“No matter which party takes control of the White House in January, we will likely see defense spending fall off,” said Ronald Epstein, aerospace analyst for Merrill Lynch. “The current historically high budget for defense is not sustainable, especially as the federal budget will be straining from the recent financial bailout.”
Defense cuts could take several years to unfold, but they could hit Southern California particularly hard. Military spending has been a key economic driver, helping to offset job losses from the region’s housing downturn.
With military spending -- excluding supplemental outlays for the wars in Iraq and Afghanistan -- up 60% to more than $500 billion since 2001, hundreds of Southland companies, stretching from Santa Barbara to San Diego, have seen their fortunes rise.
Boeing and Northrop, two of the nation’s largest military contractors, together employ more than 58,000 in the Southland. In El Segundo, about 6,000 Raytheon Co. engineers design high-tech military electronics while about 4,000 engineers in Palmdale work in secrecy researching new aircraft for Lockheed Martin Corp.'s Skunk Works.
Smaller companies that make robotic spy planes such as AeroVironment Inc. in Simi Valley and General Atomics Aeronautical Systems in Rancho Bernardo have seen their payrolls more than triple.
But a top Pentagon official said Thursday that the military was anticipating “painful” cuts. “I think every one of the big programs will get some level of attention,” said John J. Young, the undersecretary of Defense for acquisitions.
The presidential candidates are facing an economy that is expected to contract at least through the first half of next year, leaving the new president with little wiggle room to fund all the programs the Pentagon wants.
Major projects such as the $200-billion F-35 fighter jet program or the $160-billion effort to modernize the Army are expected to be the biggest targets for cuts. The Army program, known as Future Combat Systems, calls for developing new land vehicles, aircraft and electronic equipment to make troops more agile. Boeing engineers in Huntington Beach have been spearheading the program for the Pentagon.
But the big-ticket programs are also likely to be hardest to slash because they have the broadest support in Congress and are expected to create higher-paying jobs for Americans. Parts for the F-35, which would be built for the Air Force, Navy and Marines as well as U.S. allies, come from firms based in more than 40 states.
The plane is assembled in Texas, with major components made in Connecticut and California. About 1,800 Northrop workers design and build the plane’s fuselage in El Segundo and Palmdale. All three states have influential representatives in Congress.
Last month, Lockheed showed off the F-35 to reporters at Edwards Air Force Base, which has become a major center for testing them. The test plane was able to shut down its engine and restart it several times in mid-flight, a milestone in the plane’s development, officials said.
“Big weapons programs generate so many jobs that they spawn potent political constituencies,” said Loren Thompson, a defense policy analyst for the Lexington Institute. He noted, for instance, that a “very large portion of Pentagon’s arsenal is manufactured by union workers in states that are up for grabs” in the election, such as Florida, Virginia, Colorado and Ohio.
In campaign issue papers, both Democratic Sen. Barack Obama and Republican Sen. John McCain say they support buying more unmanned planes and beefing up pay and benefits for U.S. troops, but they have been vague about most everything else.
Obama has said he supports “investing” in the C-17 military cargo plane, which is assembled in Long Beach, while McCain has raised questions about such programs receiving funds outside the normal budgeting process. In the last two years, purchase of additional C-17s has been funded through so-called congressional earmarks.
On his campaign website, McCain said he “feels strongly that our nation’s military spending, except in time of genuine emergency, must be funded by the regular appropriations process, not by ‘emergency’ supplementals that allow defense to be funded outside the normal budget cycle.
“It makes possible congressional pork-barrel spending that diverts scarce defense resources to parochial home-state interest,” the campaign website said.
McCain has criticized the Army’s Future Combat Systems, the C-17 and the F-22 fighter jet for cost overruns and for receiving earmarks. McCain has not said whether they would be targeted for cuts in his administration.
Although big cutbacks are looming, analysts said military spending wouldn’t drop right away because much of the Pentagon budget has already been set for the next two years. Depending on who becomes president, some programs could even get a boost.
“Nothing is going to change in the next couple of years,” said Jon B. Kutler, chief executive of Admiralty Partners, a Century City-based aerospace private equity firm. “These things don’t turn on a dime.”
Also, most military contractors in the region have enough backlog to sustain them for several years. Northrop Grumman, for instance, has a $70-billion backlog, more than double its annual revenue.
Some aerospace executives said spending on new weapons could rise -- albeit selectively -- amid what appears to be growing security threats from abroad. The nation’s top intelligence official warned recently that the next president faced increased instability and a heightened risk of terrorism.
Northrop’s chief executive, Ronald D. Sugar, said that although he didn’t have a “crystal ball,” the global financial turmoil wasn’t reducing conflict overseas. “The demand for national security is not going to diminish,” he said.
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The Pentagon’s biggest weapons programs could take a hit as a result of the economic downturn, growing federal deficit and spending on financial bailouts. Southern California companies have some role in almost all the major projects:
F-35 or Joint Strike Fighter
A new generation of fighter jets that would be built for the Air Force, Navy and Marines as well as U.S. allies. Estimated cost: $200 billion.
Future Combat Systems
The Army’s program to modernize vehicles, aircraft and electronics to make troops more agile. Total price tag: $160 billion.
Various weapons to defend the U.S. against ballistic missile attacks. Estimated cost: $150 billion.
Joint Light Tactical Vehicle
A replacement for the Army’s 170,000 aging Humvees, at a potential cost of $50 billion.
Source: Times research