* Possible two-month delay only prolongs uncertainty
* Question remains about truncated time frame for cuts
* Pentagon budget had been set for roughly 10 percent cut in
By Jim Wolf and David Alexander
WASHINGTON, Jan 2 Pentagon officials and weapons
makers on Wednesday expressed relief after Congress approved a
two-month delay in huge budget cuts, but warned that a
longer-term fiscal solution is urgently needed to lift the
uncertainty hanging over the sector.
"Congress has prevented the worst possible outcome by
delaying sequestration for two months. Unfortunately, the cloud
of sequestration remains," Defense Secretary Leon Panetta said
in a statement. "Congress cannot continue to just kick the can
down the road."
Votes by Congress on New Year's Day delayed automatic budget
cuts known as "sequestration" until March 27, when lawmakers
must vote to increase the U.S. debt ceiling.
The 157-page deal reached on Tuesday to avert the "fiscal
cliff" delayed $109 billion in U.S. spending cuts - including
$54.7 billion due to come out of military spending, but left
many larger issues unresolved.
Defense shares were lifted by a rally in the overall market
as investors breathed a sigh of relief about the last-minute
deal, but some companies' shares lagged the broad market due to
continued uncertainty about future military spending.
"Merely delaying sequestration by a couple of months will do
little to resolve the uncertainty and chaos surrounding the
defense budget," said Todd Harrison, an analyst at the private
Center for Strategic and Budgetary Assessments.
Lockheed Martin Corp, the Pentagon's biggest
supplier, said it hoped the agreement would help eliminate the
need for automatic across-the-board cuts it said would harm
government programs and national security.
Until then, "there will be an overhang on our industry that
stifles investment in plant, equipment, people, and future
research and development essential to the future health of our
industry," said Jennifer Whitlow, spokeswoman for the maker of
F-35 fighter jets and Aegis missile defense systems.
Lockheed's shares closed 1.1 percent higher on the New York
Stock Exchange, trailing 2.5 percent gains for the overall Arca
Defense Index and Standard & Poor's 500 Index.
The biggest defense industry trade group, the Aerospace
Industries Association, urged lawmakers to work toward a
"If sequestration is not solved in the next 57 days, it
would be an abdication of responsibility by the leaders of this
country, one that will only heighten Americans' cynicism and
cement the public image of a gridlocked Washington that simply
doesn't work," said the group's president, Marion Blakey.
Lockheed and other big arms manufacturers including Boeing
Co and Northrop Grumman Corp have complained
about the difficulty of running their businesses while facing
the potential indiscriminate, automatic spending cuts.
Northrop Grumman shares closed 0.9 percent higher on
Wednesday while Boeing advanced 2.3 percent. General Dynamics
Corp, which won several large shipbuilding orders last
month, closed 2.8 percent higher.
The U.S. unit of Britain's BAE Systems said the
uncertainty had "made it virtually impossible to plan near and
long-term business decisions" and urged Congress to find a
balanced, long-term solution before the March deadline.
The cuts are setting up to be even more painful if lawmakers
don't agree on an alternative by March 27, since they would have
to be squeezed into a shorter period.
President Barack Obama has excluded uniformed military
personnel from being hit by the spending cuts, but some of the
department's 800,000 civilians could face up to four weeks of
furloughs, or unpaid leave.
If the Pentagon must implement cuts after the March
deadline, hundreds of thousands of employees may be forced to
take up to a month of leave within just four months, which could
create significant disruption of Defense Department operations.
Pentagon spokesman George Little could not specify how many
civilians might be furloughed if the cuts were implemented, but
he declined to rule out the possibility that virtually all
800,000 might have to take at least some unpaid leave.
"This is not an abstract concept. This is something that
will have an impact on real people, doing real work on real
missions for this department," Little said.
Loren Thompson, a Virginia-based defense consultant, said
the news was not all bad.
He said the last-minute agreement by lawmakers signaled that
sequestration cuts were unlikely to ever be implemented as
currently planned, although some additional cuts were likely.
"When the chips are down, the two parties can find common
ground and that means sequestration is not going to happen the
way it is currently mandated," Thompson said. "This is not just
a reprieve for the defense industry, it's a signal that the
worst aspects of sequestration are never going to occur."
Byron Callan, analyst with Capital Alpha Partners, said an
eventual compromise was likely to include some further cuts to
defense spending, in addition to $487 billion in cuts already
due to be implemented over the next decade.
"Defense spending absolutely will be part of the next debt
ceiling/sequestration cliff debates," Callan wrote in a note to