Diversity shields most Ninth District contractors from defense cutbacks

David Fettig | Managing Editor

Published June 1, 1990  | June 1990 issue

During the 1980s, when America's defense spending increased at an average annual rate of 5.7 percent, the Upper Midwest and Great Lakes states did not fully participate in the boom. Indeed, from 1981-88, while the South and West received $1.29 worth of defense spending for every $1 paid in federal taxes, the Midwest and Northeast received 68 cents.

(Specifically, Montana received 35 cents worth of defense spending for every $1 it paid in federal taxes, North Dakota got back 52 cents, South Dakota 40, Minnesota 79, Wisconsin 41 and Michigan 39).

Although many in the Ninth District may bemoan such statistics, the region's non-reliance on defense dollars may be a saving grace for the '90s. For, as budget cuts are proposed and weapons plans are put on hold, it's those same southern and western defense contractors that are now bracing for tough times.

Upper Midwest companies, on the other hand, that haven't been relying on defense dollars, have necessarily diversified their businesses and will better be able to weather any cutbacks, according to the analysis of the Minnesota Department of Trade and Economic Development.

While some companies will suffer, effects will be localized

"The picture here is not as bleak as in other parts of the country," says J. Neil Thomas, economic analyst for the department. "There won't be a great impact."

That opinion probably wouldn't sit well with the 310 employees of Honeywell's defense divisions laid off since June 1989. Those divisions, part of which Honeywell hopes to spin off as a separate company, employ about 5,800 Minnesotans.

"It's clear that [the defense industry] is becoming an increasingly difficult environment, and we're aware of that," says Tim Morin, spokesman for Honeywell.

They're also aware of that in Texas, where General Dynamics Corp. and Texas Instruments Inc. recently announced plans to lay off nearly 2,000 workers due to anticipated cutbacks in military contracts.

But large layoffs like those in Texas are not expected for the Twin Cities or the Ninth District. And even if they did occur, their impact would have to be measured against the performance of the regional economy, according to James W. Morrison, vice president of policy for Business Executives for National Security, a non-partisan association of America businesses.

"The economic impact of reduced defense spending will vary considerably from one community to another, even in cases where the job and dollar reductions are similar," Morrison says.

States aided by diversity of contractors ...

Steven Malin of the Conference Board's Economic and Business Environment Program, agrees. Minnesota, the only Ninth District state with a significant amount of procurement production, is much more diversified than many other states that benefit from defense spending. With the state's high-tech, bio-tech, mining, lumber and agriculture industries, "That's not a state that's going to feel a lot of impact," he says.

Likewise, the state's diversification extends beyond the general economy into Minnesota's corporations. For example, according to Thomas, while Minnesota's top four defense contractors received about $1.9 billion worth of business from the Department of Defense (DoD) in 1988, that amounts to only 8 percent of the firms' total revenues for that year. For companies with smaller defense contracts, the percentage is even less. (3M Co., for example, had $53.5 million in DoD contracts for 1988, just one- half of 1 percent of its total revenue.)

So, even though the defense contracts seem large when taken at their face value, "They are not huge amounts when you take the entire picture," Thomas says.

... products and subcontractors

Local firms with defense contracts have another advantage over some of their counterparts across the country—many of Minnesota's defense-related products have applications for commercial industry. Much of the state's defense output is in the communication and electronic fields, industries that Thomas says are generally adaptable to commercial markets.

But large, prime contractors are not the only companies to be affected by slowdowns in procurement spending; subcontractors—which ultimately receive about half of all DoD procurement funds—also stand to face significant cutbacks. Thomas believes, however, that Minnesota subcontractors are already braced for any reductions. And again, he credits the state's diversity.

Also, since defense spending has been slowing since 1988, and since this region has not fully participated in the '80s build-up, many subcontractors have been developing their own commercial markets in recent years.

Morrison, of the Business Executives for National Security, agrees that defense subcontractors throughout the country have been diversifying in recent years, adding that some have been doing so because they have grown tired of the unpredictability of defense contracts.

Also, even though some defense subcontractors in Minnesota may be hurt by spending reductions, officials say the impact on the state's general economy will be small. The same holds true for other states, according to Thor Hertsgaard, professor of agricultural economics at North Dakota State University in Fargo. North Dakota receives such a small amount of procurement funding, Hertsgaard says, that any cutbacks will only be felt locally. (Half of North Dakota's procurement dollars are earmarked for Grand Forks and Ward counties—the two counties that contain Air Force bases. The same is similarly true for most of the Ninth District.)

In general, Thomas feels that while the Minnesota business community may raise a hue and cry when defense cutbacks are negotiated, they will probably not have that much to complain about. Also, he emphasizes that any cutbacks in procurement spending will not be immediately felt by the companies or the economy. Since contracts are made for long periods of time, all the defense orders from the late '80s and early '90s will continue to pay for years to come, smoothing the transition into the years of cutbacks.