Defense Industry’s Biggest Fear? It’s Not Budget Cuts, But a Government Shutdown

By Sandra I. Erwin

A presumption that Congress will not pass a budget for fiscal year 2011 within the next three weeks — and force the government to shut down March 4 when current funding authority expires— has defense industry on edge, with good reason, analysts said Feb. 16.
Uncertainty about the 2011 budget and the current climate of chaos and gridlock on Capitol Hill is racking the nerves of defense industry investors, said David J. Berteau, senior adviser and director of the defense industrial initiatives group at the Center for Strategic and Budgetary Assessments.
Defense stock prices have steadily risen since late 2010, and saw a dramatic rally after Defense Secretary Robert Gates unveiled his 2012 budget plans Jan. 6. Before that, Wall Street for some time had set stock values on the assumption that defense spending would go down. But Gates’ announcement that the 2012-2016 budget top line would be cut by $78 billion — a farsmaller reduction than the Bowles-Simpson deficit commission had sought — reassured investors. Gates made it clear that he was protecting procurement, research and development accounts. That was good news to the investment community, Berteau said during a panel discussion at CSIS.
But the current political standoff over funding priorities and the absence of an approved budget five months into fiscal year 2011 is throwing a wrench into Wall Street’s thinking about the defense industry’s cash flow in the near term, Berteau said.
The government is currently operating under a continuing resolution that allows agencies to keep functioning at the 2010 budget levels. The CR expires at midnight March 4.
The normal budget process has been paralyzed by the dynamics of a polarized Congress, where Republicans lawmakers are intent on meeting campaign promises to cut significant sums of government spending. President Obama has threatened to veto any bill that contains excessive cuts, including any major reductions to the defense budget.
For defense investors, the fear of a shutdown is real, said Berteau. The reason Wall Street likes defense suppliers is because of the steady cash flow provided by government contracts.In a shutdown scenario, agencies would not even accept, let alone pay, invoices from suppliers.
Stanley Collender, budget analyst and managing director of Qorvis Communications, said that the current climate of doubt is“making it tough for contractors.” In preparation for a possible shutdown, some firms already are laying off employees, he saidat a news conference last week.“There is better than a 50-50 chance that we’ll have a shutdown,” Collender said.
Indecision is the order of the day, he noted. “Industry will be in a continual ‘what do we do now?’ mode,”he said. “I wouldn’t be surprised if there are layoffs or furloughs.”
An industry lobbyist told National Defense that the real frustration for defense executives is not the prospect of reduced Pentagon spending but rather being clueless about what Congress will do next. “We know where the Defense Department is going,” the lobbyist said.But the unpredictability of Congress is a serious cause for concern.

Topics: Business Trends

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