Defense contractors brace for slowdown

At the 2008 AUSA Annual Meeting and Exhibition held last week at the Walter E. Washington Convention Center in the nation's capital, attendees expressed concern that a new administration might be forced to scale back on defense spending, the Washington Post reports.

The fear at the conference, which is hosted by the Association of the United States Army, is that cuts in defense spending might result partly from a global economic crisis and partly from talk by presidential contenders of the eventuality of bringing troops home.

Major weapons systems built by the likes of Falls Church-based General Dynamics Corp. or Lockheed Martin Corp. of Bethesda are likely to face new scrutiny ? potentially dealing a blow to an industry that has helped insulate the region from deeper economic pain.

"There's a lot of uncertainty out there," said Kevin G. Kroger, president of Pura Dyn, a small Boynton Beach, Fla., company, who came to the trade show to pitch the Army on buying more of its oil filters for armored trucks. "We're not sure where the budgets are going and what's going to get funded. It leaves us nervous."

Indeed, in his report on the show, Ron Epstein, an analyst at Merrill Lynch, said vendors acknowledged their worries about the rescue plan. "We expect the bailout plan will put downward pressure on defense spending," Epstein had written a week earlier in a research note to clients.

Although no one is expecting a dramatic drop in next year's Pentagon budget, there is a widespread expectation that spending will begin to level off. Many contractors have begun to prepare.

For example, Lockheed Martin is pursuing other areas of business to compensate for any slowdown in defense spending. And Raytheon Co. has begun to diversify by making several acquisitions to bolster its cybersecurity capabilities.

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