Outlook for the ‘90s : ...

The defense industry’s thrill ride up the Reagan Administration military spending boom is quickly changing into one of the scariest plunges in the industry’s long history, threatening a major consolidation in the next decade.

The 1980s opened with a national consensus to rebuild America’s military forces, a goal that led to a doubling of defense acquisition and the awarding of major weapons programs to virtually every prime contractor in the industry.

But a series of national scandals involving criminal fraud in the industry, overpriced spare parts and faulty weapons systems led to a congressional backlash. Regulations exploded, profit margins were squeezed and financing terms became penurious, forcing major increases in debt loads.

Worse yet, the Reagan spending boom encouraged the industry to add industrial capacity at a time when most experts agreed that there was already excess capacity. Another Pentagon policy of fostering competition failed to cut costs, but profits suffered.

By 1985, the great boom had already peaked and leveled out, though the long pipeline of funding from Washington continued to allow many contractors to grow for several years.

Although the thawing of the Cold War has just begun, it already seems likely that the nation’s 2.2-million-member armed forces will be reduced--and the arms industry along with it. Annual spending on defense has already been declining at 2% after inflation for several years, and political pressure is building to accelerate that decline.

Excess capacity will have to be reduced; some companies will leave the defense industry permanently, and contractors will be thinned out further by mergers among themselves.

But the aerospace industry has a bright future in commercial aircraft, in which Boeing and McDonnell Douglas have backlogs that will extend production into the next century. And the civilian space program is growing rapidly once again.