As the $2-trillion Reagan defense buildup fades into memory, weapons producers have been bracing in recent months for potentially devastating Pentagon budget cutbacks in fiscal 1989.
But a close examination of the federal budget released last week suggests that at least for the next year the aerospace industry will remain on strong footing. A half-dozen major programs that account for billions of dollars worth of industrial activity in Southern California emerged from budget cutting virtually unscathed.
The Pentagon has proposed spending $94.6 billion on the procurement of arms and related equipment in fiscal 1989, a 4.3% reduction from the current year's program after adjusting for inflation. In the related area of research and development, the 1989 budget calls for spending $38.2 billion, a 0.3% increase after adjusting for inflation.
These small reductions are more than offset by the robust market that has developed for commercial aircraft produced on the West Coast. In addition, the budget for the National Aeronautics and Space Administration provides for stepped-up activity by major contractors.
"The budget was reasonably friendly to procurement," said David Wyss, chief financial economist at Data Resources, an economic forecasting firm based in Lexington, Mass. "The aerospace impact does not look terrible. The Pentagon decided to opt for airplanes rather than ships. The Air Force won and the Navy lost."
And yet, some aerospace executives still question whether Defense Secretary Frank C. Carlucci has cut back weapons programs too severely in favor of preserving troop strength and operations.
"Carlucci should be opting more to be sure that ammunition is there when he needs it," said Ralph Hawes, General Dynamics' executive vice president for missiles and electronics. "It is all well and fine to have well-trained troops, but it isn't going to do any good if they don't have ammunition."
Indeed, the mood in industry is not confident because the 1989 budget proposal, which contained $33 billion in overall defense spending reductions, was just one in a long series of continuing cutbacks that could ultimately cause profound shrinkage in future years.
In a speech last month, Pentagon Comptroller Robert Helm said: "We're probably looking at five or more years of real decline."
The official Pentagon projection, however, calls for annual budget increases of 2% after adjusting for inflation. That would boost Pentagon budgets to $360.3 billion by 1993 from $290.8 billion in 1989.
Such long-term funding growth is necessitated by huge weapons programs that are scheduled to go from a low-cost research phase to a high-cost production phase. Critics charge that the Reagan Administration has "front loaded" the budget with such forced growth.
Ultimately, if that budget growth fails to occur, major programs will either have to be cut or significant reductions made in armed forces personnel.
While Southern California firms are not expecting a big downturn, modest layoffs will become more common over the next year and for the foreseeable future. TRW, Lockheed, Rockwell International and Hughes Aircraft have all had some layoffs in the past year. Although some of those layoffs resulted from the normal maturation of large programs, others were prompted by unexpected cutbacks on programs and by belt tightening in anticipation of lean budgets.
For the time being, however, the worst fears of aerospace executives have been allayed. Even with the moderate cutbacks, procurement spending has more than tripled in the past decade.
More Air Force Spending
Aircraft and missile producers emerged as the clear winners in the budget battle, while shipbuilders, concentrated on the East and Gulf coasts, took major hits.
In the significant category of aircraft procurement, the Air Force will increase its spending to $16.6 billion in 1989 from $12.9 billion in 1988, a 29% surge that will fund such programs as the McDonnell Douglas C-17 cargo jet, the Northrop/Lockheed Advanced Tactical Fighter and several classified programs.
"The Air Force has stuck with the plan for the C-17 in spite of the budget cuts," said Robert H. Kinder, McDonnell Douglas vice president for program development in Long Beach. "That's good. At this point, we are guardedly optimistic."
The 1989 budget provides $2.1 billion in funding for the C-17 and $517 million for the firm's T-45 trainer jet for the Navy. "From our point of view at Douglas, we see a better future than we have in a long time," Kinder added.
Meanwhile, General Dynamics, headquartered in St. Louis, will experience a moderate increase in activity at its two divisions in Pomona and Rancho Cucamonga, Hawes said.
General Dynamics will be increasing production of its highly successful Stinger missile, recently credited with major Soviet aircraft losses in Afghanistan. Hawes said production of a new version of the missile is increasing to 600 from 200 missiles a month.
