From flow to dribble: Local economies brace for defense cuts

With a slice here and a chop there, the folks in uniform who wield the Pentagon's budget axes have cut out large numbers of prospective jobs - and the dollars that defense spending invariably brings to a local community. In Long Island, N.Y., where the Grumman Corporation employs many workers, that may mean leaner times because of the axing of the proposed new version of the A-6F attack aircraft.

In Nevada, the local economy could be hurt because of the decision by the United States Air Force to deactivate the 474th Tactical Fighter Wing at Nellis Air Force Base. And throughout the US, defense and economic analysts say, a possible slowing in the rate of defense spending will mean slower growth for communities that depend on Pentagon largess.

So far, the defense pipeline continues to churn out dollars. The Pentagon has $260 billion in appropriated funds. But the expected dip in future spending could mean slower growth in many localities, says Robert E. Hopkins, an analyst with Salomon Brothers. According to a report prepared by Mr. Hopkins, ``future reductions in defense spending will, by necessity, be unequally distributed among the states, resulting in a cooling in economic growth rates in many of the rapidly expanding states.''

The Reagan administration has proposed defense spending authority of $299.5 billion for fiscal year 1989 beginning Oct. 1. This is up slightly from the $291 billion for the current fiscal year. But considering that not long ago the administration was talking about an increase in the $30 billion range, that's mixed news for the hundreds of communities around the US dependent on military spending.

The rate of increase in defense spending authority, which includes spending in future years, has been declining since 1986, according to one Pentagon analyst. But actual spending, that is, dollars going into the defense pipeline on a current basis, has not been slowing, he notes.

Still, the latest defense budget represents `` the first year of actual spending reductions, in real terms, since 1976,'' says Alexis Cain, senior budget analyst for the Defense Budget Project.

``After all the growth in defense spending that has gone on for the past decade, any decline at all must be considered significant,'' Mr. Cain says.

Defense spending ``has been a major determinant'' in regional economic growth over the past decade, Hopkins says. Purchases of defense goods and services grew at an inflation-adjusted 6.2 percent annual rate from 1979 to 1986, according to the Salomon report. That's well above the 2.2 percent growth rate of the gross national product.

Pentagon spending, Hopkins adds, has been concentrated in a few major states, such as New York, California, Connecticut, and Massachusetts. That has meant that ``the strongest growth during the 1980s has been in regions that have received major federal defense spending.''

So any cuts in defense spending could well mean slower economic growth for those same states and regions. The most important spending cuts would involve money intended for ``major weapons systems, not spending for military bases or payroll,'' Hopkins says. In fact, he notes in the study, with the exception of three states - Virginia, Alaska, and Hawaii - ``there appears to be almost no correlation between military payroll and state economic growth.''

But when it comes to major weapons programs, which could be either scuttled (like the proposed new A-6 program for Grumman), or sharply reduced, the impact on a local community is far more pronounced. In such cases, Hopkins argues, industries directly affected by a reduction in defense dollars include real estate; high technology, including computers and electronics; and smaller retail outlets that cater to military personnel, or are located near defense plants.

``Our forecasts are already indicating some slowdowns in economic activity because of the slowing in defense spending,'' says Donald W. Walls, vice-president and chief regional economist for Data Resources Inc., a Lexington, Mass., consulting firm. But most of the slowing will take place in the early 1990s, given the lag between congressional appropriations for defense and actual spending, Mr. Walls says.

The most affected communities, he says, would be in areas involving transportation equipment, shipbuilding, purchasing of aircraft and missiles, and other defense-related products. The less hard-hit areas would be where military-related research and development is underway, including the New England area. Research and development, Walls says, tends to be one of the more steady parts of the Pentagon budget.

In the case of real estate, which is directly affected by military spending in a community, a slowdown may already be occurring, Hopkins says. For example, he points to office employment and to jobs in such white-collar service positions as financial services. ``Last year 50,000 new jobs were added almost every month '' in office employment, he says. ``In December, new job growth fell to 20,000. In January, job growth stood at 10,000.''

Job growth is still there, he says, but ``it is definitely increasing at a much slower pace than in the past.''

Hopkins believes the real estate industry should be particularly wary about the possible impact of reduced, even marginally, defense spending on a local community. Industry officials should analyze defense spending ``in terms of the effect on their own region'' he says, not on what has happened in the past.