Defense cuts starting to pinch economy

— -- Tighter defense budgets are starting to pinch the nation's economy, slowing a sluggish recovery even before sharper spending cuts could kick in next year.

Military defense spending fell by about $12 billion, or 3%, from October through May compared with the same period in the previous federal budget year, according to the Congressional Budget Office.

The Bureau of Economic Analysis, which measures defense-related spending more broadly, said last week that weaker defense spending shaved half a percentage point off first-quarter growth. Instead of growing 2.4%, the economy grew 1.9%.

Already, defense contractors are feeling the effects. Lockheed Martin CEO Robert Stevens said recently that his company's workforce is 18% smaller than three years ago, and "the pace of our hiring has slowed considerably."

Much more cutting is in the pipeline.

Congress is reviewing President Obama's 2013 budget, which will begin a 10-year process of cutting $487 billion from the military, required by last summer's congressional deal to cut spending in exchange for increasing the federal debt ceiling. Defense contractors face another half-trillion dollars of automatic cuts mandated by the same law, triggered by lawmakers' failure last fall to agree on a long-term deficit-reduction plan.

The National Association of Manufacturers says all of those defense cuts could slash 1 million jobs, including 134,000 in manufacturing.

The government spent $163 billion on the Iraq and Afghanistan conflicts in 2011. The cost fell to $115 billion this year, and $88.5 billion is being sought for the 2013 fiscal year starting Oct. 1, according to the Pentagon.

Defense Secretary Leon Panetta has criticized the automatic cuts and urged legislators to make a budget deal to prevent them.

The cuts are expected to be hardest on industries and regions of the nation that rely on the Army and the Marines, said Chris Lafakis, an economist at Moody's Analytics. That's because the military is also working on a strategic repositioning that will reallocate resources to the Navy and Air Force and shift some emphasis from Europe and the Middle East to forging closer military ties with Asia.

Areas such as Tucson, St. Louis and Fort Worth that are heavily reliant on defense spending are most at risk, Lafakis said.

Richard Kogan, senior fellow at the liberal Center on Budget and Policy Priorities, says defense cutbacks hurt the economy. "When the economy is operating below capacity, more spending is good and less spending slows it down," he says.

But the cuts "aren't huge compared to what states (and local governments) have done," Kogan says.