Research Finds $17 Billion in Business Lost Due to Defense Cuts

Reveals Top Ten Most Impacted Metros in the Nation

Nearly three years of continuous budget wrangling in Congress has left the fragile U.S. economic recovery limping along, in many respects, instead of galloping. Sequestration and the Budget Control Act have put the squeeze on both defense and non-defense spending. In this environment, Chmura has spent a great deal of time helping state lawmakers, city officials, and other civic stakeholders understand the economic impact of these defense cuts at the community level. What does it mean to your community if a specific defense contract gets cut back or cancelled altogether? To answer these questions, Chmura mapped the supply chain of defense contractors in the nation and analyzed defense spending contract data over the past thirteen years.

First, defense spending is by design a bit opaque as credible and specific national security considerations oftentimes keep U.S. policy makers from telegraphing openly the true nature or extent of specific programs. Second, many defense contracts are multiyear projects, but public documents, such as contract award notices, make it difficult to see how payments to contractors are set to be dispersed or spent in detail. Third, many government contractors, who competitively bid and win large contracts, subcontract many aspects of the work to other firms. Thus, a single contract can impact several disparate communities at different times with different intensities over the life of the contract. Chmura has dealt with these issues by analyzing typical contract payouts and by adjusting these figures to more accurately model the flow of funds to contractors and subcontractors.

To begin answering questions regarding the previous and looming defense cuts, one must first determine how much of the budget is being cut by region. The defense industry is big, and as President Eisenhower famously noted in 1961, the military industrial complex has political momentum all its own that can alter spending based upon the peculiarities of power and influence. The Department of Defense’s spending has declined substantially from its peak in 2010. By 2012, defense spending was already cut by close to 6% (without adjusting for inflation). While these cuts are large and further cuts are expected in 2013 and 2014, they are not unprecedented. In a recent study, the Center for Strategic and International Studies examined real (adjusted for inflation) defense spending cuts since World War II and found that in the aftermath of the Korean and Vietnam wars, and at the end of the Cold War, defense spending cuts were more severe in each case than in the current environment. (For more see the full CSIS report here: http://csis.org/publication/defense-budgets-double-whammy-drawing-down-while-hollowing-out-within)

While the cuts in defense spending are real, they vary greatly across the military by branch and function. For instance, from 2013 to 2014, Army procurement is being cut 3% and Marine procurement will be down 14% while Navy procurement spending is set to rise to $39 billion—a 13% increase from the year before—and Air Force procurement spending is set to increase by 1%. Moreover, the Army’s and the Navy’s Operation and Maintenance budgets will both be cut by 4%, while the Marine’s Operation and Maintenance budget is set to expand by 4% and the Air Force’s by 5%. A public advocacy infographic shop, Timeplots, assembled an impressive infographic depicting the size and scale of the changes in government spending from 2013 through 2014, including defense spending by spending category. See the full infographic here: http://visual.ly/death-and-taxes-2014-us-federal-budget

In order to help make sense of the community impact of the recent pending defense cuts, Chmura created the following analysis to see which metropolitan statistical areas (MSAs) have been most impacted by the recent defense spending cuts. At the aggregate level, some of the largest MSAs have seen the most dramatic cuts in the period from fiscal year 2010 to fiscal year 2012. However, after adjusting for the size of the MSA, several much smaller areas stand out for the level of cuts they have experienced over this period. Similarly, by aggregate dollar figure, a few of the largest MSAs have gained the largest increases in government contracts over this period, but after adjusting for the size of the labor market in these metro areas, several much smaller U.S. metros stand out in terms of the contractual gains.

The labor market impact of these spending cuts can vary widely depending on the type and nature of the defense spending. Every industry in the area will have a different economic impact based on the size of its local supply chain and the spending spillover from its directly employed workers. However, it stands to reason that these spending cuts, as steep as they are, can be a driving force to upset labor markets in many of the nation’s MSAs, both big and small. To learn more about Chmura’s expertise and research regarding defense spending and supply chain mapping, contact us here.