Even though automatic spending cuts by the US government have yet to go into effect, defense contractors in Massachusetts are already laying off employees, freezing salaries, and putting new projects on hold because of uncertainty over the federal budget.
Business executives said the local defense industry is in a state of paralysis, unable to make basic decisions because political leaders in Washington have so far been unable to agree on a budget compromise that would head off
some $46 billion in automatic spending cuts to military programs this year that are scheduled to start taking effect Friday.
“We are just holding off on making any investments — capital, people, or anything,” said Tom Colatosti, chief executive of Oasis Systems Inc., a Lexington supplier of technology services to the Pentagon.
Some of his employees are also quitting because of the potential sequester cuts, he said. They are leaving the defense industry altogether in search of work elsewhere in more secure sectors of the state’s tech economy.
“You can’t blame them,” said Colatosti. But, he said, all the stress created by the potential for deep cuts “undermines our capability to deliver the best people.”
US military spending accounts for roughly 4 percent of the Massachusetts economy and employment base, with the government sending $13.7 billion in contracts to some 2,500 businesses and institutions in the state in 2011. Though the cutbacks so far are not being broadly felt across the Massachusetts economy, they are quickly adding up.
Contractors making cutbacks include Raytheon Co., the biggest recipient in Massachusetts of US defense spending, which recently reduced its worldwide workforce by 3,000; American Science and Engineering Inc., a Billerica maker of bomb-detection equipment, that has said it will cut 40 positions; and BAE Systems, which is eliminating 200 jobs at its Nashua, N.H., facility and potentially another 3,600 in its US ship repair division after the Navy said it might cancel maintenance orders.
Meanwhile suppliers to those big contractors warned that they are sure to follow suit with cuts if the spending reductions take place as scheduled.
“The ramifications are running through all of us in this industry,” said Sebastian Sicari, chief executive of kSaria Corp., a Methuen supplier of fiber optics equipment for Raytheon and other defense contractors. “It ripples down from the defense agencies, to the prime contractors, to us directly.”
While other parts of the Massachusetts high-tech community, as well as health care and science-related operations that depend on federal spending, are worried about the potential cuts, none have seen the cutbacks and postponements that are already evident at defense contractors.
Defense spending accounts for some 70 percent of US contracts awarded to Massachusetts businesses and institutions.
Even before the threat of the automatic spending cuts, known as sequestration, loomed over the industry, defense contractors were having to cope with $487 billion in Pentagon spending cuts that were introduced last year, as well as lower spending as the wars in Iraq and Afghanistan have wound down.
Now, the sequester could potentially bring about an additional $500 billion in military spending cuts over the next decade.
“No doubt the federal market continues to present uncertainties and challenging conditions,” said Jim Regan, chief executive of Dynamics Research Corp., an Andover military contractor, in a statement last week about the company’s most recent earnings. The company reported a net loss of $24 million last year.
The company failed to report any guidance for the year ahead because of the deep uncertainties about budget cuts.
Chris Anderson, president of the Defense Technology Initiative, a regional industry group, warned that if all the different automatic spending cuts take effect, New England could eventually lose as many as 90,000 defense-related jobs.
Already some local contractors are rethinking their reliance on the US government for much of their business. Raytheon, for instance, has been stepping us sales to foreign governments to counter fewer purchases from the US military.
The company declined to comment.
Oasis Systems gets all of its revenue from the Department of Defense, but Colatosti, the chief executive, said that for the first time he is looking outside the Pentagon for business.
Though it hasn’t laid off any workers, Colatosti said his 600 employees are anxious about the future and he spends “100 percent of my time” planning in the event the federal cuts go into effect.