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United States Small Business Administration 
Office of Advocacy 
RS 148_______________________________________________________________________________________________





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Purpose

Substantial reductions in U.S. defense spending are already legislated
or programmed to continue until 1999. These reductions will cut
the number of military personnel and civilian government defense
employees, as well as reduce jobs in private defense contractors
and their suppliers and subcontractors.

The Office of Advocacy of the U.S. Small Business Administration
is charged to examine changes in public policy that will affect
small business. Changes in the pattern of defense spending can
impact heavily on small business. Some small firms will lose contracts
or defense-related sales to the government or to prime defense
contractors, others will lose business servicing the government.

The objective of this research was to estimate the effects of
reductions in small business employment for the period 1992 to
1999 that result from cuts in defense expenditures for payrolls
and procurement. These effects are concentrated geographically
because most defense spending is heavily concentrated in comparatively
few local economies.

The study also provides a methodology for making regular updates
of the estimates in the future.

Scope and Methodology

Direct data on defense-dependent small business employment and
its location are not available. The levels and projected changes
in small business employment used in this study were derived from
state and industry information for defense purchases and contract
awards.

This study draws on previous work by NPA Data Services, Inc.,
published in Cuts in Defense Jobs in U.S. Counties, Metropolitan
Areas and States, 1991-2001. The researchers also used state-by-industry
expenditure projections from 1991 to 1997 from the U.S. Department
of Defense's Regional Defense Economic Impact Modelling Systems
(RDEIMS); data bases and reports of the U.S. Small Business Administration;
and state and two-digit industry Standard Industrial Classification
(SIC) code employment data from the U.S. Department of Commerce,
Bureau of Economic Analysis, Regional Economic Information System
(REIS). In addition, the study uses data and information from
other sources, notably, the analyses conducted at the Defense
Budget Project and the U.S. Department of Labor, and an analysis
of the potential effect of base closing on local economies performed
by the U.S. Department of Defense.

The estimates of future defense reductions are based on an analysis
of the fiscal year 1995 National Defense Budget and of the 1993
recommendations of the Base Closing and Realignment Commission.

The analytical data sets contain estimated projected job losses
by small business resulting from the defense cuts programmed for
the 1990s. These are given by state for all states and for the
Metropolitan Statistical Areas (MSAs), as well as for non-metropolitan
counties with significant projected job losses of defense jobs
by small business. The complete data base is available on diskettes.

Highlights

- Budget reductions in defense spending for compensation and
purchases, combined with the shrinking private defense industry,
are projected to result in a reduction of 1.8 million government
and private defense jobs þ from 5.6 million jobs in 1992
to 3.8 million jobs in 1999.
- Small firms will absorb about half of these budget cuts. Reductions
in defense spending will affect small business in two ways. First,
they will directly reduce government and large defense-contractor
firm purchases from the small business contractor, subcontractor
and supplier firms in the defense industry. Second, job losses
by military and civilian defense workers in government and workers
in the private defense industry will result in an indirect reduction
of revenues for small businesses. These indirect reductions are
larger than the direct effects and involve several rounds of a
multiplier effect.
- The short-term effects of reduced defense spending will be
concentrated in the industries and in the states and localities
that have received large amounts of defense business in the past.
The small businesses that are located in these areas will be most
severely affected. The states that will have the largest total
dollar impact are California, Texas, Virginia, New York and Florida.
The states that will experience the largest impact relative to
the state economy are Alaska, Hawaii, Virginia, California and
Mississippi.

Ordering Information

The complete report is available from:

National Technical Information Service
U.S. Department of Commerce
5285 Port Royal Road
Springfield, VA 22161
(703) 487-4650
(703) 487-4639 (TDD)

Order Number: PB95-100285

Cost: A10; A03 Microf.
*Last Modified 6-11-01