Industry Market Trends
Small and Midsize Manufacturers to be Hit by Defense Spending Cuts
November 13, 2012
Upcoming cuts in federal military spending are poised to significantly reduce business activity among defense contractors and manufacturers that supply the defense industry. Moreover, unless the looming "fiscal cliff" issue is resolved in time, even deeper budget reductions will hamstring military funding for years to come. Small and medium-sized manufacturers are particularly at risk from the potential cuts. President Barack Obama's re-election means that reductions in military spending favored by the administration will continue to move forward, with an estimated $487 billion in cuts by 2023, according to National Defense Magazine. These reductions will be accomplished by ending the war in Afghanistan in 2014, shifting military resources to the Asia-Pacific region and increasing the focus on cyber warfare, drone warfare and special operations forces. The cost-cutting trend is already in place and affecting many manufacturers. But that's not the only concern. Unless Congress and the president take action, United States government spending will plunge off a "fiscal cliff" in less than two months. Under the Budget Control Act of 2011 (BCA) passed in August 2011, automatic federal spending cuts -- an "automatic sequester" -- of $1.2 trillion dollars over 10 years will go into effect Jan. 2, 2013, with half of the cuts coming from the military budget. The impact on the U.S. economy, including manufacturers, would be enormous, says the National Association of Manufacturers (NAM) in its report "Defense Spending Cuts: The Impact on Economic Activity and Jobs." For 2014, NAM projects that budget caps and across-the-board cuts in defense spending would result in:
- The loss of over 1 million jobs in the private sector, including 130,000 manufacturing jobs;
- A 1 percent drop in gross domestic product (GDP);
- A 0.7 percent increase in the national unemployment rate; and
- The loss of 3.4 percent of aerospace jobs, 3.3 percent of jobs in the ship and boat industry and 9.3 percent of jobs in the search and navigation industry.