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Business & Tech

Rough Waters Ahead for I-15 Corridor's Defense Contractors?

Northrop's announced reduction through volunteer attrition could portend reduced contracts for critical sector of the economy.

Northrop Grumman said Aug. 25 it is reducing its workforce by 500 workers.

Is the decision a warning shot fired across the bow of San Diego’s economy about more job losses ahead?

The LA-based defense contractor, which employs 2,200 in Rancho Bernardo out of 18,000 in California, is cutting 500 workers, by attrition if it can, adding to the 500 workers already let go in 2010.

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If enough volunteers don’t step forward, a spokesman said the cuts would be done through forced layoffs. He expects the cuts to be completed by Dec. 31.

The cuts will come from the company’s Aerospace Systems unit, which designs the Global Hawk unmanned drones flown by the Air Force.

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Northrup also makes an unmanned helicopter deployed in the fighting in Afghanistan.

The layoffs are not surprising in view of the fact that the Pentagon faces cutbacks as President Obama and Congress wrestle to reduce budget deficits to keep a lid on the national debt, and as the U.S. military withdraws from the Middle East. 

Congress recently appointed a special committee that could start cutting spending later this year. The committee, or “Super Congress,” consisting of 12 representatives and senators—six from each party—will have the authority to fast-track cuts that are unpopular with voters.

Kelly Cunningham, economist for the San Diego Institute for Policy Research, said the future health of defense contracting “is a big concern” for San Diegans.

Other defense contractors with major operations in the area include General Atomics’ Aeronautical Systems unit located in Poway and General Dynamics Nassco and SAIC Co. located in San Diego.

 “There are going to be some cutbacks, and we’re going to have to absorb them,” he said, noting that San Diego has suffered some severe cutbacks in defense spending in previous decades, including the early 1990s.

He noted that aerospace, the target of Northrop’s most recent attrition effort, “has been struggling in recent years.”

That’s not good for the region, because the military and defense contracting sectors account for 20 percent of the San Diego economy, and with “multipliers,” the impact accounts for 30 percent of overall activity.

Cunningham said money flowing from the Pentagon has helped the region avoid the worst of the economic downturn.

The jobless rate, for example, in San Diego is 10.5 percent, as compared to 12.4 percent statewide.

“(Defense contracting) softened the blow of the recession,” said Cunningham. “It would have been much worse here in San Diego but the fact that military expenditures actually increased over the past decade.”

For example, he noted that the military payroll almost doubled, along with an increase in the amount of work for defense contractors like Northrop Grumman.

“It hasn’t saved us completely, but it’s helped prop us up,” he said. “It’s been the real stimulus for the San Diego area.”

He said that each cutback would impact workers and the communities in which they live, as well as local businesses. The “ripple effect of spending” would be felt as incomes are cut back, Cunningham said.

“We’ve been through this before, the boom and the bust, but I don’t think this will be as bad as we saw in the early 1990s. But it certainly will impact us,” he said.

A military-impact study commissioned earlier this year by the San Diego Military Advisory Council said that spending for defense contracting in San Diego will total $21 billion this fiscal year, based on past spending trends. The membership group said military and defense spending accounted for 355,000 workers, or 25 percent of all regional employment.

Larry Blumberg, SD MAC’s executive director, said San Diego could survive the $400 billion in annual cuts over the next decade as outlined by outgoing Defense Secretary William Gates in the spring, but said the region would suffer if an additional $350 billion to $400 billion in cuts are imposed by the Super Congress.

 “The kicker is that if the ‘Gang of 12’ as we refer to them ... if they don’t come up with a remedial plan to provide for the additional cuts that the legislation provided, then it becomes an issue, especially if $1.2 trillion in cuts are made,” he said.

“If the Congress does $400 billion in defense cuts smartly and logically, it would have minimal effect in the San Diego region,” Blumberg said. “But if the other thing happens, a doubling of the cuts, who the hell knows what the impact will be?”  

Debra Rosen, president and chief executive officer for the San Diego North Chamber of Commerce, which represents businesses along the I-15 corridor, said she was “saddened” to hear about the employee reductions.

She declined to talk specifically about the cuts announced Aug. 25 from the company.

The chamber’s board includes a local executive from Northrop, Steven Anderson from the company’s HR department.

“Anytime you have a job loss, it’s a challenge. It’s not good for our economy,” she said. “You never want to see that happen.”

The chamber has been on push for its members to spend locally to preserve jobs.

“When I see companies going outside our region to make purchases from vendors in other states or countries I always liken it to how many jobs that could have been saved,” she said. “You never want to lose jobs—ever. We need to do the best job that we can to keep the jobs in the region.”

Meanwhile, the share price for publicly held Northrop has been hovering around its 52-week low of $49.20.

Its 52-week high is $72.50, an indication that Wall Street feels the company faces reduced business prospects ahead.

Analysts also have a “hold” rating on the stock, another indicator that future sales and profits are uncertain.

A bit of good news is that industry researcher the Teal Group, located in suburban Washington, D.C., is predicting that spending for GA’s Predator unmanned drone, as well as Northrop’s Global Hawk and related programs, will increase to $13 billion in a few years from $6 billion in 2011, despite ongoing reductions in military spending.

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