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Defense Contractors’ Profits Can Weather Military Budget Cuts

By Guest Contributor on August 13, 2012 at 11:00 am

"Defense Contractors’ Profits Can Weather Military Budget Cuts"

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By Lawrence J. Korb, Robert Ward, and Alex Rothman

With sequestration set to happen in early 2013 if Congress fails to make a deal on deficit reduction, the defense industry has mobilized in a major way to stop the cuts to the Pentagon budget. The main thrust of the offensive has been a huge public relations campaign aimed at convincing Americans that the cuts would devastate defense contractors and the broader economy, causing the loss of about a million jobs. To be fair, the cuts that would be made under sequestration are far from trivial. But, when viewed in their proper historical context, they start to look much less threatening –- and the largest contractors appear to be well positioned to weather them.

The last ten years have seen massive growth in defense industry profits. In 2002, the combined profits of the five largest U.S.-based defense contractors were $2.4 billion (adjusted for inflation); by 2011, that figure had increased by a whopping 450 percent to $13.4 billion (according to net Income TTM data from ycharts.com for five largest U.S.-based defense contractors). This success applied both to companies with large civilian sections of their businesses and to those almost wholly dependent on defense funding. In short, the largest defense contractors have prospered to a degree that would have looked very unlikely just eleven or twelve years ago.

Unsurprisingly, this growth in profits has been fueled in part by massive increases in the U.S. defense spending. In the decade since 9/11, the total Department of Defense budget (PDF) increased by about 55 percent in real terms, from $460 billion in FY 2002 to $715 billion in FY 2011. And the portions of the budget most relevant to military contractors -– the money allocated to procurement and to Research, Development, Testing, and Evaluation –- kept pace, growing 55 percent from $139 billion in 2002 to $216 billion in 2011.

The defense industry has continued to enjoy this prosperity during a recession that has had a devastating effect on both businesses and families across the country. For example, median household income, a broad indicator of economic prosperity, was hit hard by the recession, with more than a decade of growth being wiped out between late 2007 and 2011. Defense profits dipped slightly at the recession’s start, but unlike household income, they rapidly recovered, rising over 40% between 2008 and 2011 and nearly returning to their 2007 peak.


Sources: U.S. Census Bureau, DaveManuel.com, Sentier Research

In other words: after ten years of exponential growth in profits, defense contractors are much better positioned to weather prospective budget cuts than they claim to be. And they are certainly in a better position to deal with the cuts than the millions of hardworking American families who would be impacted by domestic sequestration and its cuts to health care, education, child care, food stamps, and other programs.

This does not mean that defense sequestration is a good policy: the automatic, over-broad, and sudden cuts that it mandates are not a smart way to reduce defense spending. But against this historical backdrop, apocalyptic claims like those of House Armed Services Committee Chairman Buck McKeon, who has argued that sequestration would “cripple our economy and our defenses in a single blow,” look painfully exaggerated. Defense contractors seem to be in a good position to withstand the coming cuts, whether they come through sequestration or a Congressional deficit-reduction deal like that recommended by the Simpson-Bowles Commission. The defense industry can and should absorb its fair share of the spending reductions that will be necessary for this nation to get its fiscal house in order.

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