Pentagon contracts plunged 66 percent to $15.7 billion last month, the lowest level since January, driven by automatic U.S. spending cuts and a partial government shutdown.
The slump reflects a shifting landscape for companies such as General Dynamics Corp. and Raytheon Co., whose sales have declined after years of gains propelled in part by two wars.
The Defense Department’s contracting is being constrained by a temporary federal budget that includes the across-the-board reductions, said Loren Thompson, a defense analyst with Lexington Institute, an Arlington, Va.-based research organization. It also was blunted by the October government shutdown, as the Pentagon furloughed employees involved in acquisition, he said.
“You put those two things together, and there’s a substantial problem in the amount of contracting activity compared with what the Pentagon was planning,” said Thompson, who also consults for companies.
The automatic cuts under a process called sequestration would take about $52 billion from the military’s request of $526.6 billion, excluding war costs, for the current fiscal year.
They are part of a broader slowdown in military spending. Declines in defense outlays have subtracted 0.28 percentage point a quarter on average from gross domestic product over the past two years, according to Commerce Department data.
The number of civilian federal employees, excluding those working for the Postal Service, was 2.13 million in October, the fewest since July 2009, according to Labor Department figures. The 526,600 Defense Department civilian workers in September marked a four-year low.
The Pentagon announced 185 awards in October with a maximum value of $15.7 billion, compared with 717, or $46 billion, in September, according to data compiled by Bloomberg.
None of the military contracts last month topped $1 billion in value. The month’s largest award was a $939.1 million extension of a rocket-services agreement with United Launch Alliance LLC, a joint venture owned by Lockheed Martin Corp. and Boeing Co.
The legislation that Congress passed to continue funding through Jan. 15 includes the reductions under sequestration. It also limits the Pentagon from getting started on new projects until a regular appropriations package is enacted, Defense Secretary Chuck Hagel said last month.
The military has fallen behind on its acquisition work, Thompson said. About 800,000 federal workers were sent home when the shutdown began Oct. 1. Defense employees handling contracting initially were furloughed, and efforts to catch up will be complicated by spending restraints and the traditional slow times around the holidays, he said.
Thompson said he didn’t expect contract awards to return to normal until late January at the earliest, and only if Congress passes a regular spending bill that month.
“If we get another shutdown, it’s Groundhog Day,” Thompson said, referring to the Bill Murray movie in which a TV weatherman relives the day over and over again. “It’s a mess.”
The value of last month’s announced awards was less than half the $37.4 billion from the same period a year earlier, according to military acquisition data compiled by Bloomberg. Many of the contracts were announced Oct. 18, two days after the government shutdown ended, because the Pentagon didn’t publish its daily roundup of awards during the disruption.
The Defense Department is required to announce contracts of at least $6.5 million.
House and Senate negotiators are trying to write a budget for the rest of the 2014 fiscal year that avoids sequestration. The defense industry is lobbying Congress to develop an alternative to the scheduled budget reductions, which began March 1 and will cut $1.2 trillion in federal spending over nine years if no action is taken.
A year ago, Pentagon officials were “operating under the assumption that sequestration would not occur,” said Brian Friel, an analyst at Bloomberg Industries. “Defense buyers were getting things on contract, whereas now the reality of sequestration seems to be setting in.”
The federal shutdown began after House Republicans refused to pass legislation keeping the government running unless the bill delayed or ended funding for President Barack Obama’s health care law. The Patient Protection and Affordable Care Act of 2010 is intended to extend coverage to millions of uninsured Americans.
The budget battle may erupt again when the temporary funding bill expires in January, said Mark Amtower, who runs a government contracting consulting firm in Clarksville, Md.
“Who knows if it’s going to be resolved, given the fact that they went ahead and did the shutdown,” said Amtower, who gives “even odds” that Congress won’t agree to fund the government after January. “There are a couple of groups with extraordinary money on the right fringe that will push remaining Tea Party people to go as far as they can. All of this impacts the award of contracts.”
The month’s biggest contract, to United Launch Alliance, based in Centennial, Colo., was announced Oct. 18. The Air Force uses the venture’s Delta IV and Atlas V rockets to launch satellites.
Jessica Rye, a United Launch spokeswoman, declined to comment on the award.
The Navy selected 14 companies to compete under a $900 million contract to provide technology and communications services under what’s known in military parlance as C5ISR (command, control, communications, computers, combat systems, intelligence, surveillance and reconnaissance).
The contract, the month’s second largest, went to companies including Bethesda, Maryland-based Lockheed and Arlington, Va.,-based CACI International Inc.
A group of small businesses won an $872 million award on Oct. 31 to support fire and emergency services equipment. Harris Corp., based in Melbourne, Fla., received an $847 million modification for Army radios. Aerospace Corp., based in El Segundo, Calif., was awarded a $788 million contract for space-engineering services.
— With assistance from Kathleen Miller and Victoria Stilwell in Washington.