Sequester impact: more than meets the eye.

• Author: Farrell, Lawrence P., Jr.
• Position: President's Perspective

* Recent news reports seem to imply that sequester isn't so bad after all. The economy doesn't appear to be falling off the cliff. Corporate earnings are good, and the market remains on an upward vector. Jobs are being created, and unemployment is falling, though at a tepid pace and as a result of more part-time jobs. The downside to falling unemployment is that total employment remains down, and as a percentage of the workforce it is at a historic low. But pundits generally agree that this sequester thing has been overstated and overblown.

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The defense sector merits further analysis. First, the largest defense companies are beating expectations on earnings per share. In the second quarter, top defense firms such as General Dynamics, Lockheed Martin, Boeing Co. and Raytheon Co. reported better than expected performance. On the surface this all seems quite good, until one drills down a bit more.

At GD, only the aerospace segment is up. Combat, marine and information systems all are down in operating income, and project a steady decline in backlog. For Lockheed, revenue is actually down and the aeronautics and information systems segments are flat with mission systems and missiles up in profit.

Boeing's performance is driven by an uptick in commercial and international sales of airliners. It also benefits from an aggressive cost-cutting program. In Boeing's military segment, revenue is down though earnings are up. Raytheon's revenue is up slightly though backlog is down. Intelligence, information and services, and space and airborne systems divisions are down in both revenue and operating income, while integrated defense systems and missile systems are comfortably up because of robust international sales.

The conclusion is that when one digs deeper, the results are more mixed, with increases driven by cost cutting, and commercial and international business. The U.S. defense market is now showing signs of a beginning slide. Recall that the sequester cuts for 2013 were $37 billion. Some of the reductions were accomplished through prior year unobligated balances. And what most folks don't talk much about are reductions to 2013 outlays--the money actually spent. Because some money is not spent the same year it's authorized, the reduction in outlays for 2013 was $20 billion, rather than $37 billion, according to Bloomberg Government estimates. In 2014, the sequester would amount to $52 billion but the outlay hit grows by 50...