Hundreds of Thousands of Jobs Could Be Lost in Defense Industry (LMT, BA, NOC, GD, RTN, BAESY)

More than $50 billion in defense spending is set to be chopped from the federal budget at the end of this year as part of the compromise deal reached last August that raised the US debt ceiling. US defense contractors are gearing up to force Congress to withdraw the mandatory spending cuts by threatening to fire hundreds of thousands of workers if a new agreement is not reached.

Defense firms Lockheed Martin Corp. (NYSE: LMT), Boeing Co. (NYSE: BA), Northrop Grumman Corp. (NYSE: NOC), General Dynamics Corp. (NYSE: GD), Raytheon Co. (NYSE: RTN), and London-based BAE Systems plc (OTC: BAESY) and their suppliers employ more than 1 million people and their facilities are scattered all across the country, making the threat consequential to a variety of politicians in many states. The Wall Street Journal reports that layoff notices would go out to employees before the November elections if Congress fails to reach agreement on a deficit-reduction plan before then.

The likelihood that an agreement will be reached before the election appears small because the available choices are tax cuts and spending cuts or tax increases and spending cuts. Congressional Republicans want to keep the current tax cuts and reduce deficits by cutting spending, while Democrats want to eliminate tax cuts on the highest-income earners and reduce spending. Each party will try to blame the other for the impasse. It will not be pretty.

Automatic spending cuts, called “sequestration” in federal budget speak, could also affect funding for the war in Afghanistan although the president may exempt military personnel costs. The requested off-budget total requested for the war is $88 billion in fiscal year 2013.

The sequestration process would hit the military contractors hard, which is why they want Congress to reach an agreement on a budget. That’s not to say that an agreement on deficit reduction would not have an impact on workers in the defense sectors. Jobs will almost certainly be lost no matter what. The issue is how many and how fast.

Paul Ausick