Defense Secretary Leon Panetta has warned that a potential $1 trillion cut to the Pentagon budget could raise U.S. unemployment by 1 percentage point but analysts differ on how many jobs could be lost and what that actually means for the economy.
The Pentagon estimates that defense spending supports about 6 million jobs -- about 3.8 million directly and indirectly in the private sector, 700,000 directly by the Defense Department and about 1.5 million active duty military positions.
Under the August debt reduction deal between President Barack Obama and Congress, the Pentagon has been directed to reduce spending by more than $450 billion against projections based on the White House 2012 budget request.
The same reductions are about $350 billion when measured against a Congressional Budget Office projection of defense spending.
The Pentagon estimates those cuts, which would peak in 2013 and 2014, could result in 500,000 to 630,000 lost jobs, potentially raising the U.S. unemployment rate by four-tenths of a percentage point.
If a congressional super committee fails to reach an agreement on steep deficit reductions, that could trigger automatic across-the-board cuts that would require another $600 billion cut in national security spending.
That, the Pentagon estimates, could result in the loss of 1 million to 1.5 million jobs, further raising unemployment by up to 1 percentage point.
Tom Captain, head of the aerospace and defense unit at Deloitte LLP consultancy, said about 1 million people were directly employed in the defense industry.
A 2010 Deloitte study of the industry found that each employee generates an average of $313,000 in revenue. Assuming that level of spending is required to support a defense industry worker, then every $1 billion cut in procurement and contracting could reduce employment by nearly 3,200 jobs.
If the Pentagon is ultimately forced to cut spending by $1 trillion over 10 years, about half of the annual reduction, or $50 billion, could come from procurement and contracting. A $50 billion cut would translate into more than 160,000 lost jobs, Captain said.
The staff of the House Armed Services Committee issued a memo last week estimating 200,000 civilian Defense Department employees could be furloughed as a result of cuts of $1 trillion, with large impacts felt in Virginia, Texas and California. It did not explain how it reached that figure.
Gordon Adams, an American University professor who worked on defense at the White House during the Clinton administration, said jobs would be lost due to program cuts but it missed the point to look at the numbers in isolation.
The package on debt and deficit reduction is aimed at cutting government spending with a view to encouraging overall economic growth and job creation, he said, so cuts in one area are intended to spur growth in another.
A down-slope in one set of jobs and an up-slope in another set of jobs says the end employment effect might be zero or even positive, he said.