Aerospace And Defense Sector Plagued By Uncertainty
By Paul Kruczkowski, Editor
The specter of sequestration looms large over the aerospace and defense market and impedes the industry’s ability to plan for the future. Sequestration is the poison pill in the 2011 Budget Control Act that mandates an automatic $54.7 billion annual cut in defense spending every year from 2013 through 2021, unless Congress intervenes.
The 2011 Budget Control Act immediately increased the national debt limit by $900 billion and it reduced government spending by $917 billion over 10 years, $492 billion of which was cut from the Pentagon’s budget. This translated to a FY2013 Department of Defense (DOD) budget of $614 billion, down from $645.6 billion in FY2012 (-4.9%), and procurement of $108.5 billion, down from $120.6 billion in FY2012 (-10%). The second component of the act required the Joint Select Committee on Deficit Reduction, also known as the “super committee,” to find $1.5 trillion of additional cuts, and this is where sequestration was conceived.
Sequestration was originally intended as an incentive for the super committee to succeed in its duties. Since sequestration was so punitive to both defense and social programs, there was no conceivable way that a bipartisan committee would fail to find a compromise. However, the super committee did not succeed in recommending additional cuts, congress later increased the debt ceiling by an additional $1.2 trillion, and sequestration was triggered. Both defense and nondefense spending will be cut by $54.7 billion on January 2, 2013, unless Congress acts to alter sequestration.
Congressional intervention in an election year is a tall order, but Congress is trying to understand the potential impact of sequestration to determine its course of action. In June, the Senate passed an amendment to the 2012 Farm Bill that would compel the Office of Management and Budget and the DOD to provide a report by August 15, 2012, on how they would implement these additional cuts in defense and nondefense spending. In addition, a group of senators has sent a letter to executives at 15 major aerospace and defense contractors, asking five questions about the impact of the Budget Control Act on their company, its employees, partners, and suppliers, as well as its contracts with the DOD. Some companies like Lockheed Martin have been outspoken on the possible impact on employee’s jobs, while others are remaining silent until more is known.
A recent study by the National Association of Manufactures predicts that over 1 million private sector jobs, including 130,000 manufacturing jobs, will be lost by 2014 as a result of the Budget Control Act’s spending caps and the sequestration provision. This would increase U.S. unemployment by 0.7 % and decrease GDP by almost 1%. It is unclear if these projections are accurate, but if they are it paints a grim picture for an industry that is already fighting budget cuts, program delays, and a sluggish economy. If the additional automatic cuts are enacted, the DOD budget will shrink to approximately $559 billion and the level of procurement would be determined by how the cuts are implemented.
As the countdown to sequestration continues, Congress will have the unenviable task of implementing budget cuts without adversely impacting the DOD’s ability to execute its new security strategies, eroding the aerospace and defense industrial base, or severely weakening the economy — especially state and local economies that are home to these industries and military bases. In August, Congress will receive the reports on how the cuts will be implemented, and they will also witness plenty of industry reaction to this news and, more importantly, responses to the senators’ letters. The $55 billion question is: Will this information influence Congress to act before January 2, 2012? And if so, what will they do? Will the cut remain but allow targeted cuts instead of across-the-board cuts, or will they change the split between defense and nondefense spending cuts, or will the size of the cuts be reduced or increased? These are all valid possibilities, but if passing the problem onto the next Congress to solve becomes an option, I predict that is what will happen this election year.
What do you think will happen? Does Congress have the will to act in an election year, if everything points to catastrophe? Please submit your comments below.