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Defense Sequester: Not Such a Big Deal

Wednesday July 24th, 2013   •   Posted by Craig Eyermann at 6:33am PDT   •  

Lockheed_Martin_F-22A_Raptor_JSOHDo you remember how U.S. politicians claimed that the federal government’s budget sequester would be extremely destructive to the U.S. economy?

Well, perhaps not so much, especially considering how they work in real life. But there was one area of federal budget cutting that was expected to have a real world impact: defense spending.

Why that was the case is because 50% of the federal budget sequester’s spending cuts were aimed at defense, which President Obama believed would force his opposition in the U.S. Congress to agree to larger income tax hikes. Here, the expectation that the spending cuts would impose pain on U.S. defense contractors, which in turn would impose a drag on the U.S. economy.

So how has that worked out in practice? The Washington Post reports:

Big defense contractors are weathering the federal budget sequester far more easily than they projected, in part because they have gradually eliminated jobs over the past few years in anticipation of spending cuts.

Bethesda-based Lockheed Mar­tin, the world’s largest defense contractor, reported Tuesday that its profit rose 10 percent, to $859 million, during the second quarter even as revenue dipped slightly. Northrop Grumman and General Dynamics, two other large contractors, are scheduled to report results Wednesday.

Here’s how the numbers are actually playing out between expectations and reality for Lockheed Martin:

Lockheed Martin had predicted that sequestration would wipe out $825 million in revenue this year, but it no longer expects such a big hit. In fact, the company said, profit will be higher than initially projected.

“We’re seeing less impact .?.?. than we had expected to see through the first half of the year,” Bruce Tanner, Lockheed’s chief financial officer, said in a conference call with reporters Tuesday. “It’s somewhat hard for us to imagine that the full [anticipated] impact will be realized.”

If it helps understand why the federal budget sequester’s defense spending cuts are having a much-less-than-expected effect, it’s because the only thing that has really been reduced is the increase in the level of planned spending. In reality, defense spending will steadily increase throughout the ten year period covered by the federal budget sequester.

And as the nation’s largest defense contractors have shown, if you expect that spending will be reduced below previously planned levels in the future, you can take steps that protect your company’s bottom line.

Featured Image:
U.S. Air Force (via Senator Mark R. Warner)

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July 2013