Is the Sky Really Falling?

Stimson Spotlight

Is the Sky Really Falling?

Let's get this straight: the Defense Department and the defense industry survived the sequester. But you'd be forgiven for thinking otherwise, given a year of dire forecasts from the aerospace industry that 2013 would see the decline and fall of the economy -- and with it America's military capability.

The forecasting failure of the Aerospace Industries Association (AIA) notwithstanding, the industry has not given up. Facing a second round of the sequester this coming January, the halls of Congress and the media are once again ringing with forecasts of doom. AIA CEO Marion Blakey is back on the hustings, telling the Senate Defense Appropriations subcommittee that another round of sequester could cut $147 billion in defense acquisition over the next five years, calling into question "our industry's ability to deliver these capabilities in the future."

Here we go again; the industry never gives up, despite some lobbyists whining to National Public Radio that they are somehow incapable of defending their interests before the Congress and the public. And some members of Congress, especially those on the defense committees, remain ever susceptible to the pitch.

In reality, the defense industry is surviving the sequester mighty well, anticipating a downturn in the budget, making corporate moves that lock in profitability, and ensuring they remain in the game, whatever the level of the budget.  

Let's start with the basics: Is the defense industry hurting as a result of the budgetary sequester? Not really. Keep in mind that the decline in defense spending preceded the Budget Control Act by more than two years. Defense budgets started coming down after FY 2010, three years before the sequester of FY 2013. What the industry is dealing with is a long-term drawdown in the defense budget and America's military forces, something that happens after every war. In every drawdown since Korea, moreover, it is procurement -- buying things from the private sector -- that goes down most deeply and most quickly.

The big guys in the industry -- Lockheed Martin, Northrop Grumman, General Dynamics, Boeing, L-3, Raytheon -- have been coping for several years now with a decline in defense buying, and coping rather well, in fact. The last quarterly results are a testimonial to their hardy survival. Lockheed Martin's net earnings were up 16 percent from last year; they generated $115 billion in orders, raising their backlog to nearly $79 billion. Northrop Grumman also did well, reporting an 18 percent increase in earnings per share. And General Dynamics reported net earnings up $50 billion over the prior year. Sounds like defense continues to be not only good business, but profitable, as well.

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This column was originally published in Foreign Policy on Nov. 25, 2013

Photo Credit: Airman Magazine via Flickr