Defense Industry Aims a Weapon of Mass Job Destruction at Washington

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Lockheed MartinWhen 14-year-old San Diego native Snigdha Nandipati won the Scripps National Spelling Bee last month, it was a French-derived word meaning ambush or trap -- guetapens -- that won her the prize. But it's another obscure word that may symbolize the budgetary ambush that could swing the 2012 election: sequestration.

Snigdha could probably spell that one without breaking a sweat, but for those of us unfamiliar with the term, here's the new, revised, 2012 definition of sequestration: the deal that Congress made with itself when it failed to agree on spending cuts earlier this year. Rather than make targeted incisions in the national budget with a scalpel, Congress opted to swing a meat cleaver, and cut both defense and entitlement spending across the board.

Needless to say, America's defense contracting firms were not thrilled with the news. And now, they've decided to do something about it.

Fix the Budget ... or Else


Earlier this month, news began filtering out of the Beltway about a doomsday plan that the contractors were mulling. Unless Congress sat down and agreed on a rational budget plan for 2013, the contractors would proceed under the assumption that sequestration would happen, and defense spending would be cut by some $500 billion over the next decade.

"Fine," said the contractors. (Paraphrasing, of course.) "You don't have to buy our tanks, battleships and warplanes if you don't want to. But if you're not buying them, and we're not building them, then this means we've got a whole lot more workers on the payroll here than we need. And so we're going to start laying them off... in September."

As in, just a few weeks before voters head to the polls in November to re-elect their members of Congress -- or not.

30 Threats Hath September

There's no great mystery behind the timing. As Lockheed Martin (LMT) Chairman Robert Stevens bluntly explained: "It is quite possible that we will need to notify employees in the September and October time frame that they may or may not have a job in January, depending upon whether sequestration does or doesn't take effect." So the threat here is clear: Either Congress must find something else to cut, or right before Election Day, newspaper headlines are going to be filled with news of massive layoff announcements out of Lockheed, General Dynamics (GD), Boeing (BA), Raytheon (RTN), and Northrop Grumman (NOC).

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It's hard to overstate how big an effect this could have on employment numbers -- and the election. Combined, these five big defense contractors employ some 527,000 people. With control over so many jobs, it wouldn't take much -- just a layoff of about 14% of the workforce -- to completely obliterate all 69,000 of the jobs America gained in May 2012. Indeed, the situation's even worse than that. As The Wall Street Journal recently pointed out, the five big defense companies are just the tip of the defense industry iceberg. Widen the lens to include the smaller defense shops and suppliers who feed into the industry, and "defense manufacturers and their suppliers employ around 1 million workers combined."

If September's or October's job figures look as bad as what we saw in May, then the defense contractors have the power to single-handedly transform anemic employment growth in America into full-fledged employment decline... at the precise moment when Americans are deciding whom they'll pick for president.

What? Obama? How'd He Get Into This Story?


Not by accident, rest assured. You see, here's the real point of the story: Lockheed, et al may be training their guns at Congress with this threat. Their sole intention in making it may be -- as they claim -- to push Congress to "do something" to fix the budget mess. But members of Congress aren't the only folks going up for re-election in November.

This may come as a surprise to you -- we certainly haven't heard much about it so far this year -- but President Barack Obama is going to be on the ballot, too. So there's a distinct possibility that in the process of trying to embarrass Congress into doing its job, the defense companies may accidentally swing the tide of the election against the incumbent president, and in favor of his rival.

Defense Industry Aims a Weapon of Mass Job Destruction at Washington

By 24/7 Wall St.


5) Lincoln, Neb


Violent crime per 1,000 people: 4.84 (32nd lowest)
Poverty rate: 17.3% (28th lowest)
Adult population graduated from high school: 92.9% (6th highest)
Credit rating: Aaa (stable outlook)
Population: 259,041

Lincoln, Neb., is one of only two state capitals to make our best-run cities list. It also has a much lower median household income compared to the very high incomes of most of the best-run cities on our list. Lincoln’s income is just $47,526, ranking only 35th among the 100 largest cities in the country. Despite the less affluent tax base, however, Lincoln’s economy is healthy. The city had an average unemployment rate of just 3.73% over the past 12 months, the lowest among the 100 cities considered, as well as the fourth-lowest vacancy rate. Mayor Chris Beutler explained to 24/7 Wall St., “Over the past five years, we’ve incorporated citizen input into a multifaceted outcome-based budget process where we ask residents what their priorities are and what they want their city to be. It’s been very well received and has helped build a culture of citizen ownership and involvement that has guided our decision making and solidified citizen support.” Moody’s has awarded an Aaa rating to the city’s debt, explaining: “The city’s financial position will remain sound given management’s conservative budgeting practices, ample revenue-raising flexibility and alternate liquidity provided in the Special Revenue fund.”

4) Fremont, Calif.


Violent crime per 1,000 people: 2.37 (11th lowest)
Poverty rate: 6.6% (the lowest)
Adult population graduated from high school: 90.2% (15th highest)
Credit rating: not rated
Population: 214,613

For a large city to have weathered the worst of the recession is impressive. To do it in the particularly hard-hit state of California is especially notable. Like most of the state, homevalues dropped nearly 15% between 2007 and 2010. Nevertheless, the city has a vacancy rate of just 5.6%, good enough to make the top five among large cities. Fremont also has a poverty rate of just 6.6%, the lowest in the country, and a violent crime rate of just 2.37 per 1,000 people.

3) Madison, Wis.

Violent crime per 1,000 people: 3.92 (21st lowest)
Poverty rate: 18.7% (40th lowest)
Adult population graduated from high school: 95.1% (3rd highest)
Credit rating: Aaa (stable outlook)
Population: 233,777

Madison, the other capital city on our list, was incorporated in the mid 1800s, and exists today as one of the most well-run cities in the Midwest. Madison is not a particularly wealthy city, with a median household income of just over $50,000. Nevertheless, the capital has a perfect Aaa (stable) credit rating, as well as extremely low unemployment and home vacancy rates. According to Madison city administrative analyst Tim Fruit, “Over the past few years, we have really made a significant effort toward more carefully planning our six-year capital improvement program. In the past, the out years were not well scrutinized. Now, we try to analyze and balance the out years much more carefully.”

2) Irvine, Calif.


Violent crime per 1,000 people: 0.55 (5th lowest)
Poverty rate: 12.3% (9th lowest)
Adult population graduated from high school: 95.7% (2nd highest)
Credit rating: not rated
Population: 212,982

Irvine has a violent crime rate of just 0.55 per 1,000 people, the fifth lowest among the major cities on our list. The city is also among the best 10 for home vacancy, unemployment, median income and high school graduation rates. In 2008, CNN Money rated it the fourth-best place to live in the U.S. According to Craig Reem, director of public affairs and communications, “We are seeing a gradual improvement in our local economy that allows us to move from recession ready, to recovery ready. The City Council plans conservatively: This past fiscal year (2010-2011), we outperformed our budget expectations by nearly $14 million.”

1) Virginia Beach, Va.


Violent crime per 1,000 people: 1.88 (8th lowest)
Poverty rate: 7.5% (3rd lowest)
Adult population graduated from high school: 93.1% (5th highest)
Credit rating: Aaa (negative outlook)
Population: 439,172

Virginia Beach is, by our measurement, the best-run city in the U.S. Located on the eastern shore of Virginia, the city is one of the most prosperous in the country. Out of the 100 largest cities, it has among the 10 lowest violent crime, unemployment, and poverty rates, as well as among the 10 best for median income, high school graduation and health insurance coverage. Moody’s listed Virginia Beach’s three main strengths as a “large and diverse tax base stabilized by the presence of military bases,” the city’s “strong and carefully managed financial position,” and “comprehensive financial policies and conservative budgeting approach.” The city’s credit rating is a perfect Aaa.

5) Cleveland, Ohio


Violent crime per 1,000 people: 12.97 (8th highest)
Poverty rate: 34.0% (3rd highest)
Adult population graduated from high school: 77.7% (19th lowest)
Credit rating: A1 (stable outlook)
Population: 396,240

Cleveland has grown exceptionally poor since its days as a major manufacturing center. Census data from 2010 show that one out of every three Cleveland residents lives in poverty, placing the city among the poorest large American cities. Cleveland also has the second-lowest median household income, at just $25,977, as well as a particularly high rate of violent crime. In addition, Cleveland is the county seat of Cuyahoga County, which is in the midst of a tremendous corruption scandal, centered around County Commissioner Jimmy Dimora.

4) San Bernardino, Calif.


Violent crime per 1,000 people: 8.15 (31st highest)
Poverty rate: 34.6% (2nd highest)
Adult population graduated from high school: 64.1% (2nd lowest)
Credit rating: not rated
Population: 210,670

San Bernardino is the third city from California to make our top worst-run cities list. Its economy has arguably been hit harder by the subprime mortgage crisis than any other major U.S. city. Between 2007 and 2010, median home value dropped 55%, from $327,000 to just $147,200. Along with the massive loss in home values, unemployment rates have skyrocketed to the third-highest in the country among the largest cities. The city also has a poverty rate of nearly 35%. Just 64.1% of adults have a high school diploma.

3) Newark, N.J.


Violent crime per 1,000 people: 10.29 (21st highest)
Poverty rate: 30.2% (10th highest)
Adult population graduated from high school: 69.2% (6th lowest)
Credit rating: A3 (negative outlook)
Population: 277,232

Newark has a very high rate of poverty, reaching 30.2% in 2010. Its median household income is $32,043 — the ninth lowest among the 100 largest cities. Less than 70% of the adult population has a high school diploma or more — the sixth lowest rate. Meanwhile, Newark’s violent crime rate has been increasing. In late November 2010, the city laid off nearly15% of its police force. By May 2011, the annual murder rate had increased a stunning 65%. Robberies, burglaries and thefts increased as well.

2) Detroit, Mich.


Violent crime per 1,000 people: 18.87 (the highest)
Poverty rate: 37.6% (the highest)
Adult population graduated from high school: 77.4% (18th lowest)
Credit rating: Ba3 (on review)
Population: 711,910

Despite being more notorious for its troubles than any other major U.S. city, Detroit managed to avoid the title of worst-run city in the country. The city has been in a tough spot for decades, but continued problems with corruption and poor management have not helped matters. Detroit already sports the worst credit rating awarded by Moody’s and is the only one of the 100 largest cities in the U.S. to have a rating below investment grade. Worse still, the rating agency is currently reviewing the Ba3 rating — which already had a negative outlook — after the state of Michigan announced it was evaluating whether the city’s troubles constituted an economic crisis. Of the 100 largest cities, Detroit has the highest home vacancy rate, the highest unemployment rate, the highest poverty rate, the worst violent crime rate and the lowest median household income.

1) Miami, Fla.


Violent crime per 1,000 people: 11.08 (13th highest)
Poverty rate: 32.4% (5th highest)
Adult population graduated from high school: 68.2% (4th lowest)
Credit rating: A2 (stable outlook)
Population: 400,892

According to a 2011 UBS study, Miami is the richest city in the country and the fourth richest city in the world by domestic purchasing power. However, a 2011study by the Census Bureau found the Miami metropolitan area also had the second-highest income inequality rate in the nation — probably due to the incredibly high percentage of households living below the poverty line. Despite the city’s wealth, Miami’s median household income of $27,291 is the third smallest among the 100 biggest cities. Its poverty rate of 32.4% is the fifth highest. The city faces a handful of other problems. Only 68.2% of adults have a high school diploma or more — the fourth lowest rate. Also, 22.5% of housing units are vacant, which is the fifth highest percentage. A 2011 Brookings Institute report put Miami among the 20 weakest-performing metropolitan statistical areas in the country with regards to recovering from the recession, due in large part to the crash of its housing market.


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Moral of the story: Unless the president wants to get caught in a "guetapens" not of his own making, he'd better convince Congress to pass a real budget -- and to borrow another phrase from the French, he'd better make it happen tout de suite.


Motley Fool contributor
Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of General Dynamics, Lockheed Martin, Northrop Grumman, and Raytheon.


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