EconSouth (Second Quarter 2003)


Cover Story

Across the Southeast, military contractors are producing everything from virtual reality training modules to boots and breakfast cereal as part of the nation’s $243.7 billion 2002 defense spending bill.

Pockets of new jobs and higher salaries for the region’s military personnel are good news for the Southeast, especially in states that have experienced high employment losses during the past few years. However, this timely stimulus will not be sufficient by itself to spark an overall economic rebound in the region.

Businesses in Mississippi and Louisiana are on tap to add crucial new jobs as a result of $1.8 billion worth of ship contracts won by Northrop Grumman. The boost to employment will be significant compensation for shrinking work opportunities that have plagued both states.

Picture of Airplanes

Defense spending on aerospace production and research, concentrated in Georgia, Florida and Alabama, accounts for $8.7 billion of the $20 billion in military contracts awarded to the region as a whole. Rather than creating new jobs, however, these contracts will mostly serve to retain jobs.

Technology and communications expenditures could breathe new life into the struggling high-tech industry, which is especially important in Florida. Information technology, biomedical technology, modeling, simulation and training industries, and plastics industries have “attained critical mass” there, according to Business Florida, along with the aviation, aeronautics and defense industries. Aviation and aerospace industries alone generate more than $15 billion in annual sales in Florida. According to one research study cited in the Real Estate Journal (published by the Wall Street Journal), technology-related jobs account for $16.8 billion in wages annually, far outstripping the impact of tourism, which provides $9.6 billion each year.

In Tennessee, a state hard hit by the waning domestic apparel industry, an infusion of more than $1 billion in defense contracts to 2,000 companies will be a significant help. Apparel employment there has halved since 2000.

Contractors across the region will benefit from construction stimulus. In 2001 the Southeast received $1.7 billion of the $10.5 billion allocated for military construction in the nation as a whole. Analysts expect spending on military construction to increase slightly each year through 2005, helping to offset regional downturns in commercial construction that threaten to continue throughout 2003.

In addition, a 4.4 percent pay increase for armed services personnel will add to discretionary income and boost retail spending.

Defense spending remains important in the Southeast
The Southeast, which claimed about 16 percent of the nation’s direct expenditures for defense in 2002, has historically relied on military spending as an economic spur. In 1996 the Southeast was the third-largest regional recipient of defense contracts, behind only the Western and Mid-Atlantic states.

Cuts in defense spending in the late ’80s and early ’90s compelled manufacturers to turn military capacity toward civilian production. For example, global positioning systems have been widely adapted for civilian use in navigation and agricultural equipment, some shipyards building naval vessels turned to producing pleasure boats, and some airplane manufacturers producing military planes switched to making corporate jets. While the orientation of traditionally defense-oriented industries shifted, the clusters of technological expertise and skilled labor remain intact and have drawn defense contractors back to the region. Georgia in particular has benefited, moving from eighth nationally in the amount of defense contract dollars received in 1996 to fifth in 2001. Florida moved from fifth to fourth in 2001.

Although Louisiana, Mississippi, Alabama and Tennessee receive considerably fewer defense dollars than Florida and Georgia, military spending is nonetheless an important factor in these states’ economies.

Aviation struggles despite defense demand
The Lockheed Martin plant in Marietta, Ga., one of the region’s largest benefactors of defense spending, landed a $4 billion contract to produce 40 C-130J aircraft for the Air Force and 20 KC-130J aircraft for the Marines. However, the six-year contract will not produce any new jobs at the plant; rather, it will ensure that the plant’s 7,000 employees retain their jobs, according to a Lockheed spokesperson.

Picture of Airplane Factory
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The story is similar to what’s going on elsewhere in the nation. Setbacks from the combined effects of terrorism and SARS as well as curtailed travel during the war with Iraq have cut commercial aviation production dramatically. Companies that would normally expand their facilities and workforce in response to the added demand of defense contracts currently have excess capacity. So instead of adding employees, the defense business is helping to forestall layoffs and shutdowns by contractors.

Boeing’s contract to assemble a missile interceptor in Huntsville, Ala., will also help maintain the status quo, providing jobs mostly for its existing employees. The Arrow 2 interceptor, developed jointly by the United States and Israel, will be produced along with the earlier Avenger system. Although Avengers are still being manufactured for export, demand is flagging. Thus, Arrow 2 production will fill the gap. Boeing employs about 2,600 people in the Huntsville area on various NASA and military projects.

According to industry analysts, shifting civilian capacity to military projects will offset, but not fully compensate for, shrinking commercial demand in the aeronautics industry. Reduced production of commercial jetliners alone — down to 380 planes in 2002 from 526 in 2001 — cost aerospace manufacturing $6.8 billion in sales, about 20 percent of last year’s total, says David Napier, director of the Aerospace Research Center.

Some of the region’s aerospace operations will still yield new jobs, however. For example, a Lockheed Martin operation in Alabama’s Pike County to assemble THADD missiles will add 150 new jobs there. And a Decatur, Ala., plant that produces Delta II and Delta III rockets will become the main headquarters for Boeing rocket production, adding another 160 jobs that are being moved from Pueblo, Colo. A Boeing contract for $150 million to upgrade E-6 Mercury plane cockpits will add 80 jobs at the former Cecil Field Naval Air Station near Jacksonville, Fla. Boeing recently created 95 new slots at Cecil, representing a doubling of the plant’s workforce in less than a year.

Picture of Military

Although some big military contractors such as Lockheed Martin and Raytheon have returned to profitability in recent months, the industry as a whole continues to struggle. Boeing registered a net loss of $478 million in the first quarter of 2003. In the aviation sector, military sales rose markedly in 2002, accounting for $50 billion of a total of $148 billion. Although increases in military sales helped offset losses in commercial sales, overall sales in 2002 were still down by about 3 percent. Total employment in the aerospace industry also dropped last year, sliding 72,000 from a total estimated at 712,000 workers.

Despite projected increases in military production in 2003, commercial production will continue to drop. Aviation industry analysts also project a decline for exports, which accounted for about $57 billion in 2002. Industry officials foresee a 6.8 percent downturn in total sales in 2003 — twice as steep as 2002’s losses of 3.2 percent — despite welcome infusions of military demand.

Technology shows signs of life
Defense spending has sparked rejuvenation, if not recovery, in the ailing technology sector, which is showing signs of life for the first time since the technology bubble burst in late 2000. The demand for technological sophistication in weaponry and battle strategy has given rise to a new round of research and development, providing hefty grants for university-based research groups and independent firms.

Georgia Tech Research Institute was awarded $60 million in 2001 to continue work on research projects that could eventually translate into superior weaponry. Researchers there are working on sensor systems to monitor cargo containers, intelligence visualization systems to help determine the position of hostile troops, and standardized systems to evaluate military efficiency and structure timelines for equipment updates.

Miltope Group Inc., a laptop computer maker based in Hope Hull, Ala., recently landed a $19.5 million contract to produce 2,000 computers that can endure the rigors of deployment and combat. Slated for use by the U.S. Army, the TSC-750M is designed to withstand blowing sand and other atmospheric stresses and can be used on the field, in tanks or in helicopters.

Florida, which is well poised to make great strides in the technology arena through its decades of involvement in the defense and space industry, has become the defense technology hub of the Southeast. The state’s 21 military bases and various defense-related industries have a $32 million impact on Florida’s economy each year, according to economist Rick Harper, director of the Haas Center for Business Research and Economic Development at the University of West Florida. Economic developers hope to parlay this mutually beneficial relationship into an even more lucrative arrangement by becoming technology pioneers in “cyberwarfare.”

Picture of Military Personnel
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Northrop Grumman’s Integrated Systems in Melbourne, Fla., has recently unveiled what it calls the Cyber Warfare Integration Network, or CWIN. Using approaches that seem to combine Disneyland, Mortal Kombat, and Doom, these facilities consist of multiple chambers that use sets, props and virtual reality to simulate battlefield conditions. The goal is to train soldiers to prepare for war under many conceivable circumstances. CWIN facilities can also be used to train police and firefighters for a whole range of critical scenarios. Another virtual reality training scheme is being hatched by a former Disney employee through his i.d.e.a.s. corp. He plans to create a sort of military training theme park called Battle Stations on the coast of Virginia. The military likes the idea: Simulation training centers are emerging throughout the region.

Government spending nationwide on computers, software and related services is projected to increase to $58.1 billion in 2003, up 17 percent from fiscal 2002. In an interview with Reuters news agency, senior defense analyst Jerry Weltsch with Frost & Sullivan predicted that the U.S. market for simulation and training alone will expand at the rate of 3.5 percent each year into 2008, with the Pentagon channeling $4.8 billion in defense dollars toward such high-tech projects.

Thus far, however, contracts have gone mostly to more conventional, proven applications such as a deal with Norcross, Ga.-based EMS Technologies Inc. to produce electronic systems that jam enemy radar and briefcase-sized communication systems that troops can carry into the field. According to a recent article in Fortune, entrepreneurs have been flooding the market with defense- and security-related technologies. However, venture capitalists remain leery of funding projects aimed at the Department of Defense.

Gulf Coast shipbuilding helps keep ailing economies afloat
Buffeted by diminished tourism, a steadily shrinking manufacturing sector and lackluster performance in services, Louisiana and Mississippi are in need of the boost promised by Northrop Grumman’s multi-million-dollar shipbuilding expansions.

Northrop Grumman Ship Systems (formerly Ingalls) on the Mississippi Gulf Coast is the state’s largest private-sector employer. It provides jobs for 11,000 workers in Pascagoula and Gulfport and hands out $8.6 million in payroll checks each week. In addition, the shipyard’s impact extends to another 6,500 workers whose jobs depend on the huge operation, according to a study by the Gulf Coast Economic Research Center at the University of Southern Mississippi.

A $288 million expansion of the Northrop Grumman facility on the Gulf Coast will create as many as 2,000 new jobs. The expansion will convert the Gulfport yard to a facility that will build ships out of military-strength composites.

“When you talk about shipbuilding, you don’t think about high-paying, high-tech jobs, but our employees in Mississippi average more than $40,000 a year,” says Den Knecht, vice president of Northrop Grumman Ship Systems, as reported by the Atlanta Journal-Constitution. The construction phase could add another 6,000 jobs, according to an economic impact study by Bob Rohrlack, executive director of the Mississippi Development Authority.

“That will be major,” says Rohrlack, in an interview with the Jackson Clarion-Ledger, “given the tough economic times we’re seeing nationwide.” Mississippi suffered one of the sharpest percentage drops in employment in the nation in 2001.

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Northrop Grumman now has orders for $5.3 billion worth of ships to be made in its Pascagoula yard, including a commission to head the team working on the high-tech DD(X) destroyer for the Navy. A number of other defense contract deals are pending. Although Pascagoula won’t get all the work, the payback will help the state break even on its investment in refurbishing the yards — $144 million over three years — by 2013, according to the impact study. The state of Louisiana, like Mississippi, will contribute about $50 million to help refurbish its Avondale shipyard, now owned by Northrop Grumman, which will match that amount to upgrade the facility.

The Avondale shipyard, the largest manufacturing employer in the state, received a $150 million contract to make LPD-17 dock-landing ships. Shipbuilding contracts for the state totaled $806 million overall in 2002.

Economist Loren Scott of Louisiana State University predicts that transportation equipment manufacturing will generate about 3,000 new jobs in Louisiana. He believes the Avondale yard will provide a significant boost to the Thibodaux-Houma metropolitan areas.

Military building shores up construction industry
Soldiers at Fort Rucker, Ala., are looking forward to better facilities. As part of the $10.5 billion military construction bill signed into law in October 2002, the base will receive $32 million for additions and improvements, including six new TH-67 training aircraft, OH-58 Kiowa Warrior simulators for training, security barriers for the base’s gates and a new fitness center.

Florida’s Hulbert Field will be outfitted with new command and operation facilities and a 144-room dormitory. Fort Benning in Georgia has been awarded $45 million for a new barracks complex and an urban assault course, while Fort Polk in Louisiana will add a $31 million digital training range.

Military construction projects such as these will inject $1.7 billion into the region’s building industry. This amount should help to offset slowing in the commercial construction industry that Atlanta Fed analysts expect to continue in most of the Southeast in 2003.

A look at the longer term
Defense industry analysts seem to agree that while military spending is helping sagging economies throughout the nation, it will not create a sustained rebound without considerable improvement in the commercial sector.

According to Wells Fargo economist Sung Won Sohn, as quoted in USA Today, “What tech really needs is for American companies to start spending again. War spending is helpful, but only for a short time.”

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According to U.S. Department of Defense projections, military spending in most categories is slated to peak in 2005 and plateau through 2007, ensuring a few years of modest but reliable growth in defense contracts. However, Loren B. Thompson, chief operating officer of Lexington Institute, a defense think tank, notes in an interview with Business Week that defense money could be “leeched away” by Congress as it faces other spending needs approaching the 2004 election.

Plans for closing military bases in 2005 also loom. While decisions have not yet been reached regarding which bases to close, the Pentagon has committed itself to weeding excess capacity. Base closures can have catastrophic effects on local and state economies.

Critics of national priorities, such as Tennessee State Representative Kathryn Bowers, believe that the amount earmarked for defense spending jeopardizes crucial domestic programs that fund education, roads, health care, public assistance and the arts. States are also struggling to meet budgets. Bowers points out that Tennessee faces a $400 million budget gap and that states collectively lack $17.5 billion to meet their obligations in fiscal 2003.

Regardless of the long-term impacts of military spending on the Southeast, most defense workers in Marietta, Pascagoula, Gulfport, Huntsville and Jacksonville can count on their jobs for the next few years. Like many others across the nation, these workers hope military contracts will prime the pump to keep the dollars flowing.

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