Industry Fortune Tellers See a Mix of Boom and Bust

Article excerpt

FOR THE DEFENSE INDUSTRY, depending on whom you talk to, these are the best of times, and the worst of times.

Soaring profits, thriving military spending and a healthy aerospace global market offer undeniable evidence that the nation's security industrial complex so far seems sat: from the evils of cyclical downturns.

But it also can be argued that these ebullient forecasts ignore irrefutable signs that defense is headed down the same path that has led to the demise of major manufacturing sectors in the United States, such as commercial shipbuilding, consumer electronics and automobiles.

In other words, the industry should enjoy the spoils of war while it can, because they will not last.

Loren B. Thompson, a defense analyst at the Lexington Institute, says it is impossible to ignore the ominous trends that portend trouble for the industry. One is the Bush administration's disinterest in the subject. The president, himself, turned "industrial" into a dirty word by complaining in a 2000 speech the military was organized for "industrial age" operations rather than for the information age. Ever since, he says, "Policy makers under the spell of transformation have turned industrial into a retrograde and irrelevant word."

"Transformation" has become a pervasive catchword that conveniently captures the mood of the administration, but neglects to take into account the economic foundation of defense industry. "Based on what we've seen under Rumsfeld's watch, if he had his way, every major production line would be closed in the next decade," Thompson says. "They don't seem to care."

Defense contractors clearly have benefited from.... increased spending in Iraq, but it is not certain what will happen beyond this conflict. Pentagon officials often express their distaste for protectionist policies and their preference to rely on the free market to shape the industry. The problem with that reasoning, says Thompson, is that the nation's manufacturing capacity is withering away. "Manufacturing share of the U.S. economy has gone from 22 percent in 1976 to 11 percent today." By the end of the decade, the U.S. trade deficit will be a trillion dollars. Under the Bush administration, 43,000 manufacturing jobs have been lost every month. The "de-industrialization" of the United States, combined with the administration's indifference to the issue, should be cause for worries about how the nation would mobilize for a prolonged conflict, says Thompson.

A case in point: It took two years for the Defense Department to ramp up the production of truck and body armor to supply troops in Iraq.

The industry's best chance for continued stimulus is, unfortunately, a protracted war on terrorism. "Despite of all the talk of a long war, we don't know how long the threat will last," Thompson says. "Who knows if we can maintain the political will for military modernization? …