Defense spending is becoming a smaller piece of the budgetary pie.
While spending on defense appropriations will increase just over $200 million for 2010 – basically a rounding error in Washington – the overall budget has ballooned, with the American Reinvestment and Recovery Act (ARRA) responsible for much of the growth.
By 2014, discretionary defense spending will outpace other discretionary spending by a scant $6 billion, the lowest such figure for years.
What’s more, the 2010 defense budget actually came in above the president’s request, with Congress pushing it back into (slight) growth. Obama wanted to cut defense appropriations by just over $1 billion.
Further limiting defense spending is the wind-down of Iraq. Afghanistan may pick up some of that slack if Obama decides to pursue a surge strategy – but there’s no guarantee that the administration will support an increase in America’s military presence in that region.
With Pakistan quickly becoming unsettled as well, the United States may be looking for the quickest way out, rather than committing more manpower and prestige to a fast-deteriorating situation.
Add in the shift in strategy towards small warfare, away from large – and the general penchant for Democrats to cut defense spending – and there is a better-than-average chance that large defense companies will face contracting demand over the next few years.
Of course, defense contractors aren’t helped by stories of selling 12-cent washers for $19, as Aecom recently did.
Nor has the shift towards pay-for-results models, which, since 2004, has required defense contractors to deliver before receiving large checks – and which has transferred some of the costs for servicing vehicles back to the manufacturer.
Finally, with the nation still in perilous financial waters – yet with the nation’s military still strong and relatively unchallenged – focus has been yanked from next-generation fighter planes and upgrading battleships. Today, America is more concerned with the public option and corporate bonus structures; even with the Fort Hood tragedy fresh, defense is currently an afterthought.
Domestic issues rule mindshare at the moment – and domestic issues are picking up a corresponding slice of the budget. Defense spending overall is likely to shrink – or, at best, grow much slower than other sectors. This doesn’t mean, of course, that any one company will necessarily plummet. Still, the overall atmosphere is likely to resemble the one currently surrounding Lockheed Martin, which just released 2010 guidance that trailed analyst estimates.
Until the economy is no longer the dominant issue of the day – or unless some new military threat emerges and grabs attention – expect more bad news out of the defense industry.
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