Federal budget cuts to squeeze some states harder than others
WASHINGTON — With the Pentagon set to whack its share of $85 billion in automatic federal budget cuts last month, it didn’t take long for Velma Searcy to feel the pain. The owner of a Palmdale maker of military aircraft parts saw two contracts quickly evaporate as defense firms pulled back.
Southern California’s aerospace industry is expected to be hit hard by the so-called sequester. Still, the state generally should be able to weather the cuts without major economic damage, experts said.
That’s because California’s economy has become more diverse over the past quarter-century, making it much less dependent on cash flowing from Washington, said Stephen Levy, director of the Center for Continuing Study of the California Economy in Palo Alto.
“We’re still a $2 trillion economy that’s going to sustain a $9 billion-or-so reduction in spending. That’s very, very small,” he said of the effect of the federal budget cuts in California. “It’s going to slow the recovery, but not turn the recovery into a recession.”
A study by the Pew Center on the States found that California ranked below the national average in various categories of federal dependence. For example, 4 percent of the state’s economic output in 2010 came from federal spending on contracts and salaries, compared with the nationwide average of 5.3 percent.
On the other hand, 19.7 percent of the 2010 economic output of Virginia, Maryland and Washington, D.C. — combined because of the large number of commuters — came from federal spending, partly reflecting government stimulus efforts during and after the Great Recession.
That percentage was the highest in the nation, followed by Hawaii, Alaska, New Mexico and Kentucky.
The nonpartisan Congressional Budget Office projected the cuts — the first of $1.2 trillion in cuts over the coming decade — would lower the nation’s economic output by about 0.5 percentage point this year and cause the loss of about 750,000 jobs.
The effect, however, won’t be uniform across the country.
“It varies regionally,” said Bart Van Ark, chief economist at the Conference Board. “The Northeast is not very dependent on federal employees. Neither is California.”
California’s economy is much different than it was 25 years ago when it was dotted with more military bases and the defense-dependent aerospace industry was a much more significant driver of the greater Los Angeles-area economy.
The biggest loss of aerospace jobs came in the recession of the early 1990s, which hit the state much harder and longer than it did in the rest of the nation.
In 1990, Levy estimated, California had about 250,000 civilians working on military bases and about 450,000 people in aerospace and private military-related jobs. Now, there are about 64,000 civilian military base employees in the state and about 162,000 private aerospace and defense workers.
“We’re not the defense monolith we were for many years,” Levy said.
Technology and Asian-based trade and tourism have become much larger components of the state’s economy, helping reduce its dependence on Washington.
About 2.8 percent of the state’s total economic output in 2010 came from federal military spending, below the 3.5 percent national average, according to the Pew study.
A good chunk of that spending is in the Antelope Valley. Large aerospace firms such as Lockheed Martin Corp. and Northrop Grumman Corp. have facilities in Palmdale, as do smaller subcontractors such as Searcy’s Aerowire Technical Services Inc.
“Everything revolves around aerospace around here,” Searcy said.
Last year, Aerowire doubled its workforce to 12 employees. Searcy said her staff was poised to double again this year — at least until the federal budget cuts hit. Two military-related contracts, totaling about $1.5 million, failed to materialize because of worries over the federal spending cuts. Now she’s looking at possible layoffs.
“I don’t see myself closing down, but (I do) see myself having to be really slim,” she said. “We were headed in a good direction, and now, unless someone comes through on my commercial side, it’s going to be tough for a while.”
Virginia, Maryland and Washington benefited for years from growth in federal spending and now are poised to be hurt worse than any other region.
In the Washington suburb of Tysons Corner, Va., for instance, Ed Jesson’s information technology services company, OBXtek Inc., may be forced to lay off as many as 15 employees from its 178-member workforce.
Because Jesson is a disabled Army veteran, the company he founded in 2009 qualified for special federal contracts. The company’s revenue grew to nearly $30 million last year from about $6 million four years ago, and it added 84 employees last year.
Now, as layoffs loom, he said he sees the dependence both he and the state have had on federal contracts as a “vulnerability.”
He won’t know for sure how much business his firm will lose until federal agencies announce their decisions. In the meantime, he’s holding back.
“We’re very judicious on the supplies we buy,” he said, “and we’re basically just not spending money on things we could use that aren’t an inherent need to our operations.”