Defense Cuts and the Small Business Impact
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There is growing sentiment among economists and experts that mandating $600 billion in defense spending cuts beginning in January will contribute to a U.S. recession. We've written about the broad economic impact of sequestration here, here, and here.
The impact of sequestration on small- and mid-size firms is perhaps underappreciated. Aerospace Industries Association President Marion Blakey estimates that 70 cents on the dollar of defense investments flow down the supply chain to small and medium-sized firms. The American Enterprise Institute's Mackenzie Eaglen investigates further:
These small companies are ones like JWF Industries in western Pennsylvania, which makes parts for Army vehicles as a subcontractor. Some 450 “families” work at JWF Industries, run by John Polacek. He said that guys like him and those he employs will get hit first and hardest by the automatic defense budget cuts set to take place early next year.
It’s the first-tier subcontractors like us that are going to feel the impact, and these guys [JWF employees] may not be here come January because of that,” Polacek told CNN. “The impact to this town is a lot more brutal than it will be down in the Beltway of Washington, D.C., because there are fewer jobs available here for these people to go get.
Small businesses like JWF industries provide parts and services that, in some cases, are very hard to replace, as Huntington Ingalls CEO Mike Petters tells Eaglen:
Petters explained that up to 60 percent of the firms who supply his yards are “sole source” — companies that may be the only possible provider for critical components. If sequestration breaks these links, his whole supply chain could crumble.
And the pain of sequestration isn't confined to just small- and mid-size aeroespace and defense firms:
They will also hurt small neighborhoods and local economies that interact with the defense economy. Deanna Smith runs Deanna’s Tobacco & Cigar Shop in Taunton, Mass. She benefits from the plant nearby because those employees often stop by her store after work. They are her “steady customers.” Faced with changing budget priorities this year, however, the General Dynamics facility is facing possible layoffs. If General Dynamics begins downsizing, Smith told the Boston Globe, she and other store owners in Taunton “will surely feel the loss.” Smith said these budget cuts hurt “everyone, because now those guys won’t stop in to a local sub shop to get something small on the way home, or they won’t come by here. It adds up.”
Many small businesses are struggling to keep their doors open in this sluggish economy, and sequestration might just slam them shut.