Looking into the Defense Industry Glass Ball for 2013 ... and Beyond

This post was written by Lorraine Mullings Campos.

Last Thursday, Defense Secretary Leon Panetta outlined the Pentagon’s plan to change the priorities of the American military and implement budget cuts accordingly. This follows from last year’s Budget Control Act, which automatically cut $1.2 trillion of defense and non-defense spending when Congress did not pass legislation to reduce the budget. The Pentagon is now undertaking half a trillion dollars in cuts through its proposed budget. Although the budget is not final until February 13, Panetta’s remarks reveal two things: the pace of these cuts, and which industries will win and lose.

For FY2013, the pace is relatively slow—the Pentagon aims to cut $6 billion from its budget, down $531 billion to $525 billion. Over the long term, the Pentagon budget is expected to shrink by $487 billion over ten years, with $259 billion of cuts taking place in the next five years. However, commentators like former director of the Office of Management and Budget, Peter Orszag, note that the anticipated budget cuts are larger than what would likely be implemented.

If implemented, however, the Pentagon’s new priorities give some idea as to which industries will win and lose. On one hand, the proposed budget favors makers of unmanned aerial systems, along with cybersecurity, surveillance, and intelligence contractors. On the other hand, makers of certain weapons systems will likely feel some contraction. The proposed budget discards 108 to 144 fighter aircraft, reduces the number of littoral combat ships by two, and retires seven cruisers earlier than scheduled, affecting a number of well-established defense companies.

Although defense contractors have had an opportunity to prepare for the Pentagon’s budget cuts since August of 2011, this year’s reductions might give some indication of which companies and industries will successfully weather nine more years of increasingly aggressive cuts.