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Deficit Deal Is ‘Game Changer’ For Industry: Wall Street

Posted by Carlo Munoz on

Washington: Things are only going to get worse for the Defense Department and industry, as the White House increasingly looks to military spending as a way to cut the nation’s debt.

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Last week’s deficit reduction deal, which included $350 billion in national security cuts, was a “game changer” for both DoD and the defense firms that support it, a new financial forecast issued by Wall Street analytics firm Moody’s says.

Growing concern over the U.S. economy, combined with the large bills racked up by DoD to support the wars in Iraq and Afghanistan, the department’s ability to stave off budget cuts could not be kept up, according to the report.

A point made clear in the White House’s debt reduction plan.

Since defense spending makes up more than half of the entire government budget, “its debt situation is likely to have a lasting effect on the defense industry overall,” since DoD will likely look cut procurement, rather than people, to hit the administration’s goal.

On the programs listed in the report as likely to be reduced or terminated, there are really no surprises. The vertical-lift variant of the F-35 Joint Strike Fighter tops the list, while the Navy’s Littoral Combat Ship, new Ford-class carrier program and Virginia-class submarine replacement rounded out Moody’s hit list.

“Military programs of [that] size, particularly those that are behind schedule and/or over budget, look to be most vulnerable – if not to outright cancellations, then almost certainly to quantity reductions and other curtailment initiatives to rein in spending at material levels,” the report states.

The reduction or cancellation of those programs will hurt the smaller, subcontractor companies most, Moody’s says.

“As the larger companies begin to see cutbacks, the impact can be expected to ripple through the supply chain to these smaller sub-contractors,” according to the report. Many of these smaller companies…have less financial wherewithal to endure such potentially material revenue reductions.”

But its not all doom and gloom coming from Wall Street.

DoD’s booming investments in cyberwarfare technology and unmanned intelligence, surveillance and reconnaissance platforms could prove to be industry’s saving grace.

“Contractors positioned in unmanned aviation [and]cyber security…will broadly be better off as these areas represent high priorities for future spending and, therefore, some of the few growth opportunities that are likely to remain.”

Despite that silver lining, things look bleak for the defense industry.

“The appetite for government spending cuts is unlikely to abate from here, especially as long as the U.S. remains on its current fiscal trajectory,” Moody’s says.

What do you think?