Industry's growth rate is starting to level. Certain pockets of high-tech weapons may buck the trend

The ink has dried on most major military contracts. Factories are humming. And the aerospace industry, by and large, is sitting pretty. But what lies ahead?

While the outlook for the nondefense sector of the aerospace industry could not be better, the same can't be said for defense sector, as the momentum in Washington for more defense dollars ebbs.

Since 1977, procurement spending has risen at an average annual rate of almost 20 percent. Now 3 percent growth is the most optimistic forecast. The Gramm-Rudman balanced-budget law -- constitutional or not -- has slowed, perhaps even halted, the rise in spending.

``We do not regard the defense industry as a growth industry,'' states Judith L. Comeau, an aerospace analyst at Goldman, Sachs & Co., in a recent report. ``Inventories of fighters, tanks, ships, and electronics have been upgraded; the upward cycle is over. We project a flat-to-declining procurement budget over the next five years.''

There are areas for potential growth. Wolfgang Demisch at First Boston Corporation dubs them ``the Five S's:'' surveillance, software, smart weapons, the Strategic Defense Initiative (SDI), and ``stealth'' technologies, designed to make aircraft more difficult to detect.

But overall, ``we're seeing a flattening of the growth rate'' in defense spending, says Paul H. Nisbet, aerospace analyst at Prudential-Bache Securities. ``It peaked temporarily in fiscal 1985. It came down in fiscal 1986 on a real- and nominal-dollar basis. Fiscal '87 will be about flat with this year. And past 1987, I see very nominal growth in defense spending.''

The current growth lull has yet to reach the factory floors. Lockheed, for example, is looking at a hefty 20-percent hike in earnings this year. General Dynamics has enough projects in hand to ensure strong earnings for the next three years. If the economy remains relatively robust, then pressure for actual reductions in defense spending will be modest, analysts say. And it's possible that international clashes, such as that with Libya, could alter the outlook for defense spending.

Even so, hard choices are not far away.

``All of General Dynamics' major programs peak this year. There's nothing new in the starting blocks,'' points out David L. Smith, a partner at Sanford C. Bernstein & Co. ``Lockheed will see a peak in earnings and revenue in '87 or '88 unless something supplants the C-5'' giant cargo plane.

And ultimately, most corporate boards must face the tough decision of where to go from here.

Mr. Smith cites three basic choices: Diversify into nondefense products, target a military niche and spend to hold it, or share the current wealth with shareholders and patiently look for the next opportunity.

In the past, the flop-rate for forays into nondefense products has been rather high. Still, a few companies are making acquisitions or plan to. For instance, General Dynamics bought ailing Cessna Aircraft last year. How profitable that move was remains to be seen -- the general-aviation market remains a poor one.

So far, more than half a dozen corporations have decided to use their heavy cash flows to buy back shares of their own stock.

``They're just pulling in their horns,'' Mr. Demisch says. ``The industry's response to the slowdown in growth is to reduce capitalization. I view that as an unfortunate development.''

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