Defense Spending: A Leading or Lagging Indicator?

The Wall Street Journal has reported defense spending is down. Though not exactly news, it is interesting the venerable financial daily is looking at the defense sector like many have the housing market, the auto industry and consumer spending.

Despite gains reported by General Dynamics of 14 percent and Northrop Grumman of just 1.4 percent, these companies noted these increases were more reflective of belt-tightening than increased revenue for the third quarter. At the same time, GD reported a decrease of 12 percent in revenue, and NG continues to see its shipbuilding sector take on water.

Increases in a flat market are being seen across the industry. Lockheed Martin recently told investors though they could report a monetary gain, the company had made significant workforce reductions and will have to continue to size its workforce throughout this uncertain period.

Decreased revenue is being felt globally, making programs like two major U.S. defense a defense jackpot—the littoral combat ship and the joint strike fighter. The contracts are as much about the behemoth prime contractors as they are the hundreds of subs that live and die on a congressional or defense department whim.

The Pentagon announced its decision to cut spending early in part to give companies time to look for other business sources. GD has found success with its Gulfstream business jet for example. Lockheed Martin is looking at opportunities in solar energy.

Cuts are not limited to the United States or the federal government. Great Britain announced an 8-percent defense reduction. At the same time state and local government contracts are harder to come by.

Companies still expect low-level gains over the next decade due to further diversification and downsizing.

Is this much ado about nothing or are these captains of industry in trouble? How does this bode for the lowly subcontractors and those employed at any stage of this food chain?

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