It was always clear that Pentagon belt-tightening was going to take a bite out of St. Louis’ defense industry. Now it’s starting to grow clearer just how deep.
A recent report by an economic consulting firm found that St. Louis-area defense suppliers lost nearly $1.5 billion in contracts from 2010 to 2012 — more than all but three other metro areas. And that was before the cocktail of spending cuts known as sequestration that took effect in March and is set to knock $52 billion out of next year’s defense budget.
“We’ve talked to defense companies who were already leaving positions open in 2012 in anticipation of the sequester,” said Chris Chmura, president of Chmura Economics in Richmond, Va. “It’s only going to get tighter.”
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To be sure, the defense business has been through cuts before.
This round — so far anyway — has been quieter, nothing like the post-Cold War days when McDonnell Douglas was laying off assembly line workers by the thousands.
Many local suppliers today have diversified into commercial aircraft parts too, and the big guys have gotten by with nips and tucks, at least for now.
“My sense right now is that a lot of people are monitoring the situation, trying to understand it,” said Doug Rasmussen, senior vice president at the St. Louis County Economic Council. “We’re all trying to get in front of it. But it’s not clear what it is yet.”
Employment at Boeing, the big dog of St. Louis’ defense business, has been basically flat over the last two years at roughly 15,000. In May, the company said it plans to move 600 IT jobs here over the next few years. Still the company has been squeezing out costs where it can.
A spokeswoman for Boeing’s Hazelwood-based Defense, Space and Security division, which had $32.6 billion in revenue last year, said the unit has wrung about $2 billion in savings from its budget since 2010 by consolidating facilities, shifting workers and other cost-cutting measures.
“We are not hunkering down,” the company said in a statement. “We will continue to execute on our core programs and aggressively pursue business in international markets and growth areas.”
But smaller shops may have less wiggle room.
A survey earlier this year by trade group Aerospace Industries Association found that 88 percent of small and midsize suppliers have had “negative impacts” from budget cuts, and nearly half had been forced to lay people off.
“The small companies don’t have the same access to capital. They don’t have the strong internal financials,” AIA president Marion Blakey told the Reuters Aerospace and Defense Summit last week. “We’ve had a couple say that they are going out of business.”
That has happened here in St. Louis.
Late last year, small defense manufacturer Labarge Products Inc. laid off its last 30 employees and closed its doors in south St. Louis after federal contracts dried up. Clayton-based parts-maker Sabreliner blamed lower defense spending for a series of layoffs earlier this year that cost more than 230 jobs at plants in Perryville and Ste. Genevieve.
Those kinds of cuts have a broad impact, Chmura said. “People’s income goes down. They don’t spend as much at restaurants. They don’t go to the movies,” she said. “That ripples out through the rest of the economy.”
Absent an unlikely rebound in Pentagon spending, one way to ease this may lay abroad. Boeing in particular has put an emphasis on winning international contracts, supplying planes to U.S. allies from India to the United Kingdom. The next job could be for South Korea, which is set within the next few weeks to pick a new fighter jet to replace its aging fleet of F-4s and F-5s.
Boeing is offering its F-15, and was said to be the only planemaker to come in under South Korea’s budget proposal. That had Boeing Defense CEO Dennis Muilenburg feeling optimistic about his company’s chances, though he stressed no deal is done.
“We’re confident in the bid that we’ve provided,” he told the Reuters summit. “It’s an affordable bid and also a very capable bid.”
If Boeing prevails, it’ll be a lucrative bid, too. The $7.4 billion contract for 60 planes could keep assembly lines running in St. Louis through the end of the decade, with lots of business trickling down to suppliers, too.
But with nearly $1.5 billion less in federal contracts here just over the last two years, even big foreign orders won’t be enough to make up for the cuts by St. Louis defense firms’ biggest customer: the Pentagon. That means more belt-tightening may be on the way.
