How 'fiscal cliff' is already hitting defense industry

Although lawmakers have been moderating dire predictions, some small businesses are talking about layoffs if no deal on the fiscal cliff is reached. And some have already lost contracts.

Rodney Hudson’s 13-person business, QuickSilver Analytics, builds sampling kits for weapons of mass destruction, used by Air Force bases, the Coast Guard, and Special Operations Forces.

Even though the test kits are widely popular and his Abingdon, Md., company’s sales average $2 million to $3 million annually, Mr. Hudson is predicting a 15 percent slowdown in orders next year.

That’s due almost entirely, he says, to the threat of looming cuts known as sequestration, which would contract the US defense budget by $500 billion over the next decade if Congress doesn’t come to a “fiscal cliff” deal.

“I have no idea how it’s going to go, but it doesn’t look good. You can’t plan,” warns Hudson, who adds that he is already considering the possibility of laying off some staff. 

“We want to be loyal to people as long as we possibly can, but if it looks bad, the bottom line is that we’re going to have to let folks go or close the doors.”

Sequestration has for months prompted dire predictions of job and income loss among small businesses nationwide. Defense Secretary Leon Panetta, for one, has alternately called the cuts a “meat ax,” a “goofy meat ax,” and “fiscal castration.”

But lately, lawmakers have begun moderating their predictions in an effort to reassure the defense industry in particular.

“If you go off the fiscal cliff, you don’t actually hit bottom,” says Rep. Chris Van Hollen (D) of Maryland, the ranking member on the House Budget Committee. “There are a number of parachutes on the way.”

House Speaker John Boehner has signaled that he might be willing to push back any fight over the federal debt limit for one year.

For their part, some defense contractor executives are now making it a point to stress that sequestration, if a fiscal cliff deal isn’t reached by Jan. 1, would be less of a “guillotine” than a “speed bump.”

That’s long been the view of military analysts. “The fiscal cliff metaphor just isn’t accurate,” says Todd Harrison, senior fellow in the Defense Budget Studies program at the Center for Strategic and Budgetary Assessments in Washington. “It’s more of a slope – but it is a slippery slope.”

Moreover, sequestration does not apply to cases in which defense companies are working now on vehicles and weapons contracts that have already been obligated. “That’s an important point, because if you’re a defense contractor, whatever you’re working on now is something that has already been obligated, and that will continue until the money runs out,” Mr. Harrison says. “There won’t be any immediate impact on Jan. 2.”

Small companies that are already talking about layoffs are “self-sequestering,” he adds. For most companies, it would be “two or three, or even four or five years” before they would feel the impact of sequester.”

Still, in places like Fayetteville, N.C., home to Fort Bragg, the city is already feeling the impact of sequestration, says Joy Thrash, executive director of the North Carolina Defense Business Association, a professional trade association for the defense industry. She recently received an e-mail from the head of a small company who has already lost three major contracts because of the sequestration threat.

Some larger companies in the region are combing through their budgets. “They’re taking a look at their research and technology to see if they need to cut back on that,” says Ms. Thrash, who adds that she fears this could create consequences for the Pentagon.

“The problem is that it may hurt the military, because what if they cut research on a product that troops may need?” she asks.

Really, she adds, the problem is the uncertainty. “I don’t know anybody at this point who’s not touched by the threat of sequestration,” Thrash says. “It’s not that they’re saying don’t cut the defense budget: They understand that there has to be give and take. What they’re saying is, ‘Just get it figured out.’ ”