Wells Fargo: Hawaii most vulnerable to defense cuts

Hawaii is the state most vulnerable to federal defense budget cuts, according to a report released Monday by Wells Fargo Securities.

The report examines parts of the country that would feel the most pain from $85 billion in cuts that are set to automatically start taking effect March 1 without a bipartisan deal on sequestration. Actual cuts may be around 13 percent for defense and 9 percent for other programs because lawmakers delayed their impact, requiring savings over a shorter period of time. 

The report notes that federal defense spending in Hawaii is 14.6 percent of the state’s 2010 gross domestic product. Total federal spending is 15.8 percent of the state’s GDP. Both percentages are the highest among all 50 states and the District of Columbia.

“Among the states most likely to be impacted is Hawaii, home to the U.S. Navy’s Pacific Fleet, which could see layoffs and reduced income growth, which in turn would weigh on economic growth,” the report said.

Maryland, Virginia and the District of Columbia are also among the most vulnerable to the looming federal cuts, the report said.

“The District of Columbia along with its neighboring suburbs in Northern Virginia and suburban Maryland are particularly vulnerable due to the multitude of defense agencies and contractors located in the region,” said the report by Wells Fargo economists Mark Vitner and Michael Brownsaid.

Defense spending has been estimated to account for 9.8 percent of the combined D.C., Virginia and Maryland economies in 2010, the report noted.

The report cited Huntsville, Ala., and St. Louis as other areas vulnerable to defense cuts. 

“Both have outsized exposure to the aerospace industry and will see growth slow if the military purchases fewer fighter jets, missiles and helicopters,” the report said, noting that smaller towns that host large military bases are probably the most vulnerable.

Georgia, for example, is home to three areas like that, including Columbus, Warner Robins and Hinesville, according to the Wells Fargo report. As for larger metro areas, Navy towns like San Diego and Norfolk-Virginia Beach also could be affected. 

“In addition, Alaska with its Air Force, Army and Naval operations would also be disproportionately impacted from defense cuts,” the report said.

While nondefense cuts will be spread out more across the country, Maryland, Virginia and the District of Columbia ranked at the top for states with a high level of exposure to nondefense spending reductions, which could affect areas ranging from biomedical research to homeland security.

“Cuts in nondefense outlays would likely trigger significant furloughs, layoffs at civilian contractors and generally less business for supporting services, including law firms, caterers, airlines and hotels,” the report said.

The Wells Fargo report noted that while the impact of budget sequestration could be severe, there is some reason to believe that at least some of the cuts may be partially reversed in the months ahead.

“Regardless of the political outcome, we still expect some moderate impact on state economies from the pullback in government spending in the short term, as agencies hold off on major spending commitments and put hiring on hold,” the report said.

In Maryland, the so-called budget sequester negotiations have added uncertainty to the state’s own budget, which state officials say is otherwise in better shape than it has been for years since the recession. Gov. Martin O’Malley noted the uncertainty of the budget sequester when he unveiled his budget plan in January. O’Malley, a Democrat, increased the state’s Rainy Day Fund from 5 percent to 6 percent of the state’s $16 billion general fund. Altogether, the governor’s budget proposal leaves the state with about $1.1 billion in reserves to help adjust to federal cuts.