The Defense Shift Hits Main Street

Ever have a tooth filled, and then suddenly, a month or two later, you get a raging ache in the same spot? That, simply put, is what defense cutbacks are doing to the economy.

Until now, thoughts of declining defense spending and arms cutbacks generally have been tempered by visions of peace dividends and a gentle post-cold- war letdown. Even announcements of pending layoffs and plant closings were items that could be worried about later: Much of the bloodletting was scheduled for what seemed the distant future.

Suddenly, the future is now, and the harsh reality is hitting many local communities--and a weak economy--like a painful throb in a molar. First-quarter growth was only a meager 1.8%, thanks in part to a big drop in defense spending. Defense purchases of goods and services, adjusted for inflation, are projected to fall by 10% this year. That's more than the cumulative cuts for the previous four years put together. And the pace of actual defense industry layoffs--as opposed to just announcements--has accelerated by 35% in recent months (chart). "What we're seeing is the bow wave beginning to hit," says Richard Bitzinger, an analyst at the Defense Budget Project in Washington. "We're finally coming to the end of the 1980s buildup."

DEEP SLIDE. Unfortunately, the latest surge in defense cuts is hammering an already vulnerable economy. So far this year, Corporate America has announced layoffs of more than 200,000, with many more to come from stumbling behemoths such as IBM. An almost four-point decline in the April purchasing managers' index, meanwhile, suggests that manufacturing is slumping, at least temporarily. Overseas demand for U.S. exports is faltering as Germany slides deeper into recession and France follows. And consumers and businesses are worried about the prospect of huge tax increases to pay for the Clinton Administration's economic and health plans.

That's not to say that the U.S. is on the verge of another recession. Most economists expect growth to regain momentum in coming months. Auto sales are strengthening, for instance, and the housing market is sure to revive after its blizzard-induced coma in March.

But the defense industry's downsizing still looms large. All told, this year's drop in defense spending could depress 1993's economic growth by a full percentage point. "It's like pneumonia to a patient who is weak already," says Richard Belous, chief economist for the National Planning Assn.

Indeed, defense job losses are rocking almost every region of the country. In the Dallas-Fort Worth area, the two largest defense subcontractors have announced big layoffs in recent months. In February, Texas Instruments Inc. said it would cut nearly 900 workers. On top of that, Vought Aircraft Co., formerly LTV Aerospace, which makes major portions of the B-2 stealth bomber in Dallas, has said it will cut 1,500 jobs this year, after axing an equal number last year.

Why are the cuts coming so fast and furious now? Many contractors are finding that the peace dividend just isn't working out. For one, Lukens Inc., a specialty steel producer based in Coatsville, Pa., lost money during the first quarter on corrosion-protection products, reflecting weak construction activity. And demand for Lukens' military alloy plate, which goes into tanks and submarines, has shriveled--pushing the company into less profitable civilian markets.

Small subcontractors don't often make headlines, but they're adding to the pain. Just ask John E. Gregory, president and CEO at J.T. Slocomb Co., a South Glastonbury (Conn.) subcontractor to Pratt & Whitney Co. and other aerospace companies. In the past 18 months, declining orders have forced him to cut his work force in half, to 200, and to close plants in Waterbury, Conn., and Wildwood, Fla. "What we are doing is reducing our staff to keep a smaller amount of people working [full-time]," Gregory says.

Depressed labor markets are magnifying the impact of the cutbacks. Laid-off defense workers are finding "No Hiring" notices up in all sorts of specialties where they might have been hired a year or two ago. Such previously strong alternatives as commercial aerospace and high technology are now cutting back, too. Northrop Corp. recently announced 2,400 layoffs after Boeing Co. scaled back production of the civilian 747 jets. And employment in the U.S. semiconductor and computer industries is down by 30,000 over the past year. The typical result: A study of workers laid off from McDonnell Douglas Corp.'s St. Louis operations showed that up to a year after losing their jobs, 44% had not found any work.

The white-collar set isn't faring much better. Fully half of all technical and professional employees--largely engineers and scientists--working in Southern California's defense and aerospace industry have lost their jobs, according to an upcoming study from Rand Corp. A year after being laid off, most of those highly skilled workers have not found other work. "Southern California is a lot worse than people realize," says James N. Dertouzos, a Rand economist.

MORE TO COME. When arms workers do land new jobs, they usually find their incomes downsized. For instance, hiring at the booming Foxwoods Casino in Ledyard, Conn., run by the Mashantucket Pequot Indians, has helped cushion the defense job cuts at the General Dynamics Corp.'s Electric Boat shipyards in nearby Groton. But the casino pays 25% to 40% less than the $13 or so hourly that the shipyard paid.

There's more bad news coming: The third round of military base closings in five years is on its way. In mid-March, Defense Secretary Les Aspin proposed closing 31 major military installations by the year 2000, plus cuts at dozens of smaller bases. The toll on communities such as Charleston, S.C., longtime home to a large naval port, could be stark. In early May, state and local officials in South Carolina told Congress that plans for plant closings could cost more than 36,000 jobs and take a $1.1 billion slice out of the local annual payroll.

Worst of all: It ain't over yet. The Clinton Administration wants to slice $127 billion worth of defense spending out of the budget over the next five years, but it hasn't figured out what programs or people will be cut. Add it all together and one thing is clear: Americans keep waiting for the boom after the bust. What many are getting, instead, is the dull ache of layoffs and cutbacks.

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