The incredible shrinking U.S. defense industry.

• Author: Davis, Tom
• Position: COMMENTARY

* The latest Fortune 100 list contains only four companies categorized as "aerospace and defense" firms, down from 15 in the Eisenhower era. After reaching a peak in the early 1970s, the numbers of firms in A&D has steadily declined even during the Reagan administration's defense buildup in the 1980s.

The trend in the economic power of defense firms also is noteworthy. In 1961, in constant dollars, the Fortune 100 produced less than $ 1 billion in economic activity as measured in annual revenue. However, the defense firms identified on the 1961 Fortune 100 accounted for nearly 30 percent of this total, which made them economic powerhouses.

But from 1961 to 2015, while the revenues of the overall Fortune 100 have soared from less than $ 1 billion to nearly $8 billion, those firms in the defense industrial base have not kept pace. Defense firms have fallen from nearly 30 percent of the Fortune 100 revenue to less than 3 percent, with the pure defense firms now less than 1.5 percent. This says, among other things, that companies once having a significant defense segment, but viewing it as secondary business line, have largely sold or closed those units and exited the defense market.

When it comes to corporate earnings, the story is more complex, but not fundamentally different. In terms of generated profits, the overall Fortune 100 has become enormously more profitable since 1961. The earnings of the Fortune 100 in constant figures have increased by more than 900 percent, or by nearly a 6 percent compound annual growth rate.

This is a strong testament to the power of the U.S. economy and corporate performance. But, as with revenue, defense firms have not kept pace with this growth and have increased earnings by less than 70 percent, which translates to a compound annual growth rate of 1.3 percent.

As for margins--earnings divided by revenue--the trends reveal some interesting developments. First, in 1961 the defense companies in the Fortune 100 were, as a group, operating at a loss, the only sector doing so. While President Eisenhower was warning about the size to which the defense industry had grown, he was evidently unaware that government policies and company managerial practices were threatening the long-term health of the industry by making it unprofitable.

By the early 1990s, those companies that were only partially in defense had caught up with the overall margin of the Fortune 100, while the pure defense companies continued performing...