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Sequester, the supply chain and national security

Jun 26, 2012
Carter Wood

The realization seems to be breaking through, at least into the media, that sequestration under the Budget Control Act could have calamitous economic consequences.

Interesting, too, is the frequency with which "supply chain" enters into the coverage. Correctly so. It's not just major defense contractors that would be affected; all their suppliers would be hit as well.

Kevin G. Hall, McClatchy newspapers, "Coming ‘fiscal cliff’ in Congress affects hiring, even firing"

With scant prospects for compromise as of now, American companies aren’t waiting to see how it all plays out. Big U.S. corporations, ranging from aerospace firms to defense contractors, say they’re taking action now.

“The cold-eyed view is there is paralysis and it is likely to be a last-minute thing,” said Jim McNerney, CEO of Boeing Co. and chairman of the Business Roundtable, the lobby for big corporations.

The National Association of Manufacturers last week released a report on the threatening sequestration, "Defense Spending Cuts: The Impact on Economic Growth and Jobs." From the news release:

The report’s findings paint a stark picture of the potential harm the BCA budget caps and across-the-board cuts under sequestration will have—a loss of 1,010,000 private sector jobs, including 130,000 manufacturing jobs, by 2014. This job loss will increase the unemployment rate by 0.7 percent and decrease GDP by almost 1 percent by 2014. The report shows that the long-lasting effects of these cuts will be felt by not just by the defense equipment supply chain, but also the everyday Americans who are protected by these products.

The Los Angeles Times, like other outlets, localizes the potential impact. From "U.S. military contractors prepare for possible budget cuts":

Although there is much speculation about whether Congress would let those automatic cuts actually occur in January, military contractors are ringing alarms now. Pentagon boosters in Congress, including Rep. Howard "Buck" McKeon (R-Santa Clarita), chairman of the House Armed Services Committee, are also issuing stark warnings.

In an interview, McKeon said that many of the nearly 113,000 aerospace jobs — and thousands from supply shops — in California could be hurt. "Congress is playing political chicken with people's jobs," he said. "The clock is ticking."

More on sequestration from The Boston Globe, "Defense cuts due to hit Mass. economy hard":

The Bay State’s economy has benefited from a decade-long surge in defense spending, but that sector’s labor force is threatened by massive military budget cuts that are set for next year, the author of a new study warned Monday.

“It could be up to 30,000 jobs at risk,” said Marty Romitti, director of economic and public policy research at the University of Massachusetts’ UMass Donahue Institute, which prepared the report for the Defense Technology Initiative.

Washington Technology, "Sequestration fears making for long, hot summer, citing Warren Suss of Suss Consulting:

Companies can’t keep engineers and IT specialists on their payroll “sitting and waiting until this situation gets resolved,” he added.

“So, in many ways, industry is thinking about the unthinkable and coming up with ways of cutting back on costs if their revenues drop in a dramatic way due to sequestration,” Suss said.

In fact, Lockheed Martin Chairman and CEO Robert Stevens has broached that thought.

Speaking at a Lockheed Martin media event June 19, Stevens said, “Our position is to not have sequestration occur in its current form. I think it’s an improper way to try to get real traction in reducing spending in an efficient and effective way.”

But if sequestration does occur, he said, it could cause significant disruptions in Lockheed Martin’s supply chain because the company would have to modify its contracts and streamline operations – shorthand perhaps for employee layoffs.

And, National Journal reports, "Insiders Say Defense Sequester Likely to Take Effect":

With no sign of compromise on Capitol Hill for a deal on the budget deficit and debt, National Journal's National Security Insiders are hedging on whether the across-the-board defense cuts that Pentagon officials have warned would be devastating to the military's capabilities will actually happen.

Amid talk that members might punt a budget deal into next year, 49 percent of Insiders said the so-called sequester mandating $600 billion in cuts over the next decade is "somewhat likely" to take effect.

"Washington will work hard to avoid a sequester that no one wants. If the financial crisis deepens and spreads, however, there may be little politicians can do to stop it," one Insider said.

One appreciates that National Journal leads with the national security angle. Along with the important question of how sequestration affects the economy, there's the ultimate question: Will sequestration make the United States less secure?

n many ways, industry is thinking about the unthinkable and coming up with ways of cutting back on costs if their revenues drop in a dramatic way due to sequestration,” Suss said.

In fact, Lockheed Martin Chairman and CEO Robert Stevens has broached that thought.

Speaking at a Lockheed Martin media event June 19, Stevens said, “Our position is to not have sequestration occur in its current form. I think it’s an improper way to try to get real traction in reducing spending in an efficient and effective way.”

Source: Washington Technology (http://s.tt/1fXvf)

n many ways, industry is thinking about the unthinkable and coming up with ways of cutting back on costs if their revenues drop in a dramatic way due to sequestration,” Suss said.

In fact, Lockheed Martin Chairman and CEO Robert Stevens has broached that thought.

Speaking at a Lockheed Martin media event June 19, Stevens said, “Our position is to not have sequestration occur in its current form. I think it’s an improper way to try to get real traction in reducing spending in an efficient and effective way.”

Source: Washington Technology (http://s.tt/1fXvf)

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Business Roundtable

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