DoD Buzz

Lexington's Thompson Forecasts Period of Prolonged Pain for Defense Industry

Uber-connected defense analyst Loren Thompson gave his outlook for the defense industry to a group of Raytheon executives the other day and after reading the text of his remarks I imagine some of those execs are considering a career change. The short version: Thompson says defense spending will drop significantly under Obama, weapons programs will be cut first and the industry faces a prolonged period of depressed demand similar to that of the 1990s - as in the “procurement holiday” 1990s.

Thompson is a very smart guy and knows the defense industry and Pentagon procurement backwards and forwards. It’s worth reading his remarks in full as he provides some good historical context for where things currently stand as far as defense spending, industry and the American economy. Thompson reminded the assembled executives that their industry was a Cold War creation. Before around 1950, the defense industry barely existed at all. The threat of communist aggression and ICBMs put the U.S. on a permanent war footing and military spending went from one or two percent of GDP to ten percent.

When that threat went away in the 1990s, the defense industry almost did as well: then SecDef Dick Cheney canceled a hundred programs in four years; procurement spending fell by two-thirds; and the industry consolidated from 20 major players to five or six. The attacks of 9-11 essentially saved an industry which was facing a second decade of depressed demand. The historical evidence is clear, Thompson says, “No threat, no defense industry – it’s almost that simple… The absence of any follow on attacks since 9-11 should be viewed as a harbinger of where this sector is headed.”

Thompson points out that Obama’s domestic stimulus program contains no mention of how military spending might spur economic activity; Obama intends to review weapons plans to eliminate unneeded programs; reform acquisition; strengthen oversight of contractors; put “people first” in military spending plans; and fundamentally alter the defense posture. Military pay and benefits are essentially mandatory entitlements, they’re not getting cut. But cut the DDG-1000 or FCS, and “the impact is barely felt at all outside a handful of congressional districts and companies.” Thompson laid out a range of options to what must have been a glum-faced crowd including lowering investor expectations, diversifying into other federal sectors, further industry consolidation, and a final option, “simply getting out.”

“There still is no peer competitor on the world stage to rival America, and the global war on terror has wasted a lot of money pursuing a very modest threat, so maybe the smartest thing to do is monetize your assets before competitors catch on that there isn't going to be much of a defense business for sometime to come.”

Show Full Article

Related Topics


Most Popular Military News