L.A. Aerospace Firms Coming Down to Earth.

When President Bush took office in January, L.A.'s defense industry was licking its fiscal chops.

With Defense Secretary Donald Rumsfeld at the helm and the Republicans controlling Congress, all signs pointed to an increase in military spending - and with it, more business for local defense contractors. The biggest plum: a $60 billion National Missile Defense system.

It still may happen. But last winter's bullishness has given way to diminished expectations. Part of it has to do with a less hawkish mood in the Senate now that the Democrats are in control and Republican moderates have started to assert some independence from the White House. There's also concern that an economic slowdown is already eating into a trillion dollar-plus budget surplus that had been counted on to fund the new projects.

And efforts by Rumsfeld to restructure the Pentagon's spending priorities, part of a quadrennial defense review to be completed in September, are proving more time-consuming and complicated than expected.

"The defense budget increase is $18.4 billion, I'm told the biggest since the mid 1980s," Rumsfeld said in outlining, the Bush administration's 2002 budget request during a Pentagon briefing last month. "But the trend lines are still negative... they are improving but still below our target levels."

Defense: Promised Buildup Slow to Come

Local defense contractors are moving ahead with research, development and testing of programs in which the Pentagon has expressed an interest. Yet they are only cautiously optimistic about receiving the necessary funding to complete many of the projects.

"It is not going to be a huge budget windfall, like was expected," said Jon Kutler, president of Quarterdeck Investment Partners Inc., a Century City defense investment and consulting firm. "I'm disappointed at Rumsfeld. The handwriting on the wall is that there are not going to be the kinds of major restructuring of the way the Pentagon does business that would have been expected by this team."

How many new lobs?

The uncertainty is reflected, at least in part, in the stock of local contractors. Northrop Grumman Corp., after trading in the high $90 range as recently as March, slipped to $79.83 on July 18. The company opened the year trading at $83.25 a share on Jan. 2. Boeing Co. shares have also slipped lower, closing at $57.13 on July 18 from $62 a share at the start of the year.

There continues to be a steady decline in the number of local defense-related jobs after nearly a decade of post-Cold War consolidation and cutbacks. This year's total is only 113,000, according to the Economic Development Corp. of Los Angeles County, down from 128,000 in 1999 and 274,000 in 1988, during the height of the Reagan administration's defenes spending.

While no one expects a return to the Reagan ears, the question is how much higher the Bush initiatives can bring up that job number.

"Given the nature of defense spending, Rumsfeld is the one who will make the decisions, and to try to project what he would do wouldn't be smart," said David Schwab, a spokesman for TRW Inc., whose Carson and Redondo Beach operations have current and proposed programs for the U.S. Army. "I don't think that's a smart business maneuver."

The picture isn't entirely bleak. There continue to be signs that an array of projects, including the Joint Strike Fighter, C-17 cargo plane and B-2 bomber, stand a strong chance of moving forward. That would mean billions of dollars pouring into the region and thousands of jobs.

Some funds have already been committed.

The U.S. Air Force anticipates spending $84 million for 60 of Northrop's Global Hawk unmanned aerial vehicles, and a deal is in the works to sell six of planes to Australia.

Still pending is a Pentagon decision to develop the Joint Strike Fighter, which would become the core of the country's air defenses. A green light means more than $100 billion could flood into local subcontractors.

One of two team leaders -- Lockheed Martin for Northrop or Boeing for Raytheon -- will receive an engineering and manufacturing development contract this fall, and Pentagon officials have said that team will ultimately receive the production contract if it is funded. It would be the largest military program in history.

Star Wars redux 

Missile defense remains the biggest question mark hanging over the industry.

Bush has been talking about the plan as if it was separate from the defense budget rather than a part of it. Yet, the estimated $60 billion in funding for hardware production would mean drastic cuts in other areas of the budget.

"It's not going to happen," said Kutler. "There will be up-front R&D (money) but you won't see the hardware happen. The threat is somewhat dubious and there are far more important things to spend money on."

Other analysts disagree, pointing to the fact that the production contract over a decade or so would not cost any more money than administrations dating back to Reagan have been appropriating annually for development.

Bush, for instance, recently added a $2 billion supplement to the $6 billion figure that President Clinton approved in the proposed 2002 defense spending plan.

"When it's ready for production, they are done with R&D," said Paul Nisbet, a partner in the Newport, R.I.-based JSA Research Inc. defense consulting firm. "You just use the same monies that are being annually appropriated - the same level of activity. The continued funding at about $8 billion would benefit L.A. There's a lot of defense technology being done there and some of if pertains to missile defense."