Defense Contractors, Defense Communities: Get Ready To Tighten Your Belts

by Bill Conerly, Forbes
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Reduced defense spending is coming to a community near you, whether you like it or fear it. Defense spending reductions projected for 2015 frighten my fellow Forbes.com contributor Loren Thompson, who writes “Weapons Cuts In 2015 Budget Leave Soldiers, Marines At Risk.” I, however, am writing as an economic forecaster, not a defense expert.

First, let’s review the data. Defense spending (not adjusted for inflation) hit a peak in late 2011. Since then it has dropped 11 percent. The United States is clearly winding down our operations in Iraq and Afghanistan.

Gallup reports that more Americans think we are spending too much on defense (35 percent) than too little (26 percent). That’s not a solid majority for cutting spending, but neither is it much of a mandate to grow the Pentagon’s budget. Another Gallup poll of priorities for the President and Congress put terrorism as the fifth most important concern, and “military and national defense” as seventh. Defense spending will clearly take a back seat to the economy, education, Social Security and Medicare.

Propping up popular support for defense spending is the notion, common among many, that our wars in the Middle East were a fight against terrorism. There are plenty of skeptics on this concept, but I think that many Americans believe that our Iraq invasion was a response to 9/11.

Republicans have, since the late 1950s, generally favored military efforts overseas. However, the growing libertarian wing has serious doubts about foreign military operations. Democrats have split for years. There are anti-war Democrats, with a history dating back to the nuclear disarmament movement even before the Vietnam War. Other Dems, however, seem fearful of being “soft on Communism” (back in the 1960s) or “soft on Terrorism” (since 9/11).

I forecast continued mild declines in defense spending. These will not be such severe cuts that we dramatically change our military, but they will continue, year after year, nibbling at total spending.

Businesses in defense industries should look for alternative revenue streams, as well as how they will downsize if this forecast comes to pass.

Communities with major defense contractors or military bases should also be wary. We could very well have another round of base closures in the coming years. There seems to be plenty of whistling in the dark among communities dependent on defense spending. The chamber of commerce talks about how vital to America the local activity is. The Congressional delegation for the region swears that they will protect the base or contractor. In this environment, the business owner may be lulled into believing that the local economy is not at risk. However, looking forward five to ten years, I believe that the cities that are defense-dependent are at the greatest risk of slow economic growth.

Across-the-board cuts are unlikely, throwing a roulette-like gamble on communities. If the cut is ten percent of total spending, many cities could handle that. But more likely, seven cities will be untouched, two will have bases or plants gutted, and the tenth will benefit from consolidation. Those numbers are just wild guesses, but the underlying truth is that those who are hit will be hit hard. More than ever, businesses, families and communities need to do contingency planning for defense cuts.