Looming defense cuts had uneasy contractors leaving industry long before budget crisis

FILE: April 23, 2012: The entrance of the Joint Systems Manufacturing Center, Lima Army Tank Plant, in Lima, Ohio.

FILE: April 23, 2012: The entrance of the Joint Systems Manufacturing Center, Lima Army Tank Plant, in Lima, Ohio.  (REUTERS)

The announcement that the Pentagon would scale back defense contracting amid massive budget cuts was unsettling but expected news for some contractors who have already left the industry amid the uncertainty that has loomed over them for nearly 18 months.

Retired Gen. Lawrence Ferrell, president of National Defense Industry Association, said after the announcement Thursday that some contract companies are already moving into more stable industries and that the uncertainty is having a withering effect on those who remain because they cannot take out loans and layoffs are taking the place of hires.

“They’re losing good people whom they likely won’t get back,” he told FoxNews.com. “And with them goes the cutting-edge expertise.”

Ferrell's comments followed Defense Secretary Leon Panetta saying the Pentagon will begin taking steps to freeze civilian hiring, delay some contract awards and curtail some maintenance to prepare for the drastic budget cuts, should Congress fail to reach a deal when members return later this month to Capitol Hill.

The automatic cuts are known as sequester – a law that took effect in summer 2011 after Congress failed to find a more measured way to cut federal spending. The White House and Congress tried unsuccessfully after the November elections to reach a deal, but instead agreed to a two-month extension.

Ferrell said Panetta was simply trying to “take preventive action” and position himself for the worse.

“Again, the real question is what will be the impact of the delays,” he said.

Panetta said the fiscal uncertainty also poses a “serious threat to national security."

The Pentagon is facing a spending reduction of nearly $500 billion over a decade, should Congress fail to reach a deal. And an additional $110 billion in automatic spending cuts to military and domestic programs will take effect in early March if no agreement is reached.

At the same time, Congress has not passed the 2013 defense department budget proposed last year by the Pentagon, instead approving spending equal to the fiscal 2012 levels.

As a result, the Pentagon will likely have to find an almost immediate $40 billion in savings should Congress fails to pass a new budget or avoid the automatic cuts.

“We know that even if sequestration doesn’t happen, defense will have to cut billions," Farrell said.

He and his group are not alone in their bleak assessment.

Last month, leaders of similar groups made similar predictions at a symposium at the National Press Club in Washington.

Dawne S. Hickton, president and CEO of RTI International Metals Inc., said the automatic spending cuts would curtail progress on programs that have been years in the making.

"What we’re manufacturing in our plants today is going in a military program two or three years down the road," she said, according to The Washington Times.

Ferrell said his concerns extend beyond the defense industry and sequester to include the entire economy and the country, should Washington continue to fail to reach more long-term solutions.

“We might not have a defense department or a defense budget,” he said. “We have to fix this.”  

The Associated Press contributed to this report.