The chattering class and the political voices are nattering on about the fiscal cliff. Meanwhile, the best canaries in the defense budget coal mine are the people keeping an eye on the long-term trends. With or without cliff diving, the defense budget is in a secular decline and they have known it for a while. And they know that this long-term decline will change the face of the industry.
The latest bit of evidence that the industry is working to get ahead of the game comes from a document called "2013 Defense Industry Perspective," provided yesterday by strategic consulting firm Booz and Company.
The six-page comment makes no mention of the fiscal cliff, but it does say "the defense sector is undergoing the kind of correction that happens once every 20 or 30 years." That is the right timeframe, and, as I have written before, procurement is always the first to go in a defense drawdown. In the defense drawdown of the 1980s and 90s, part of which I spent at OMB, DOD procurement spending fell 50 percent over ten years, while the overall budget was only going down 30 percent.
Booz and Co. point out that this process is already under way, and has been since Fiscal Year 2008. The budget for procurement and R&D has already fallen roughly 30 percent since that year and is projected to grow only minimally over the next five years. Moreover, if this drawdown is consistent with prior ones after Korea, Vietnam, and the end of the Cold War, a deeper reduction is likely. Falling off the fiscal cliff would reinforce that trend. (end of excerpt)
Click here for the report, on the Booz & Co. website.