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Local defense industry to dip in 2014

Pentagon cutbacks could trigger 7,000 job cuts in San Diego County over the next 12 months, driven by budget battles on Capitol Hill and the wind-down of the war in Afghanistan, according to a report released Thursday by the San Diego Military Advisory Council, or SDMAC.

Despite the expected downturn, military-related activities will continue to be the primary driver of the local economy, with direct and indirect spending supporting 22 percent of local jobs, the report said. But that's down from 25 percent in the current year.

"The region can be expected to see effects of the military’s downsizing and spending cutbacks going forward," warned the report, which was prepared in partnership with the Fermanian Business and Economic Institute at Point Loma Nazarene University.

Lynn Reaser, chief economist at the institute, said the impact could worsen if Congressional squabbling results in a temporary shutdown of the federal government, which she rates as a 50-50 possibility.

Although the effect on most federal workers would probably be short-lived, "non-essential" employees might be furloughed, which would be a drag on spending throughout the region, she said.

"Various contractors and firms reliant on federal dollars would also be adversely affected," she added.

To cushion against the decline, the report suggests, local firms should hone their cutting-edge technologies "as competition for a piece of a smaller procurement budget pie intensifies." And they should look for commercial and consumer uses for their products, as Qualcomm Inc. (Nasdaq: QCOM) founder Irwin Jacobs did during the post-Cold War cutbacks in the early 1990s.

Military spending in San Diego County stagnated over the past year, largely due to the federal budget sequester that took effect in March. Contracts were scaled back, repairs and maintenance were postponed, training operations were disrupted and civilian personnel were placed on furlough.

"Overall, San Diego’s defense complex weathered the storm relatively well, but certain segments were significantly and negatively affected," the report said.

But the situation is projected to worsen next year.

The report predicted direct and indirect military spending in San Diego County will slide from an estimated $32.2 billion in fiscal 2013 to $31.9 billion next year, a 1 percent drop that will feel more like 3 percent after factoring in the effects of inflation.

As a result, the number of local jobs supported by military spending is projected to slide from 302,000 this year to 295,000 in 2014.

Construction companies might face the sharpest cutbacks. Building projects that were launched as federal stimulus projects during the depths of the recession are now winding down, with no major undertakings on the horizon. The largest project, a $465 million hospital in Camp Pendleton, is slated to be finished by mid-December, six months ahead of schedule.

On the other hand, San Diego is projected to weather the cutbacks better than other regions throughout the country, since it is benefiting from a shift of Navy forces to the Pacific Rim as well as a continuing emphasis by the Pentagon on high-tech research, development and production.

"Military and defense-linked activities will continue to represent a major force in San Diego’s economy for many years into the future," the report concludes. "That support, however, should not be taken for granted."

Related videos:

Jerry Sanders on SD military's economic impact

Dr. Lynn Reaser: 'Military most important economic driver'

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