Heavy hitters of the defense industry gathered in New York City late last month for an investor conference, and Lockheed Martin CEO Marillyn Hewson summed up the outlook.
The nation’s largest defense contractor and maker of the world’s most advanced fighter jet, the F-35, is expecting moderate, 3-5 percent growth over the next few years, Hewson told the conference.
Hewson touted a “strong, broad portfolio” that is putting Lockheed “very much on a path for continued growth.”
Those comments are in line with the rest of the defense industry, which has adopted a cautious optimism now that the initial euphoria over President Trump’s election and the prospect of a historic military buildup has mostly dissipated.
Trump’s defense budget, unveiled in May, lacked big new spending on weapons programs, and its future is mired in the complicated and unpredictable politics of the Capitol Hill budget process.
Instead of expecting a return to the Reagan administration buildup of the 1980s, Lockheed and other Defense Department contractors are taking a much more conservative view and betting a general upward trajectory in U.S. defense spending over the past few years or so will continue, one way or another, according to analysts.
“With the dawn of the Trump administration, the emotions have evolved a little bit,” said Doug Berenson, managing director of Avascent Group. “They went from euphoria to hopefulness to a little bit of disappointment at this point.”
Trump’s proposed $639 billion for the Defense Department, which includes $64 billion in overseas war spending, would be a $33 billion increase over this year’s enacted $606 billion department budget, according to analysis by the McAleese and Associates consulting firm. The total Defense Department base and overseas funding in 2016 was $580 billion.
But the budget failed to live up to the defense industry’s expectations after the president’s prior promises of a 350-ship Navy, more tactical aircraft and a larger Army and Marine Corps, especially since he included no caveats that the big increases would have to wait.
“When people heard the Trump administration talk about a significant increase in the FY18 budget, I think that there was an expectation that a lot of that increase could come in the procurement account, and it just didn’t,” Berenson said.
Navy shipbuilding was among the disappointments after the unveiling, though the service has since said it will request an additional littoral combat ship. Trump’s budget calls for eight new Navy ships, 70 of Lockheed’s F-35 Joint Strike Fighters and 14 F/A-18 Super Hornet fighters.
“The Navy shipbuilding budget was kind of … based on the old Obama administration budget, so there is not a big pop there. Not a big pop in aircraft programs,” said Roman Schweizer, an aerospace and defense policy analyst at Cowen, a Washington, D.C., research group.
Instead, research and development was a big winner in Trump’s budget, with a 19 percent boost in spending, which could signal a willingness by the administration to spend more later, according to the McAleese analysis.
Operations and maintenance also received one of the biggest hikes — 13 percent — and the Pentagon said the plan focuses on shoring up existing forces, which have been overworked and underfunded for years.
The military buildup promised by the president could come next year, officials said. However, in its first budget, the administration did not include the typical five-year plan for military spending, making forecasts more difficult.
“I think the market is really looking for stability, maybe some predictability, some calm,” Schweizer said.
That seems unlikely as Congress picks up Trump’s request and faces hammering out a defense budget before October amid a logjam of divisive, big-ticket debates, including caps on federal spending, $54 billion in nondefense spending cuts, the future of Obamacare and tax reform.
The spending caps are a key issue for defense. Passed in 2011, they are set to hold the Defense Department’s base budget at $525 billion for the coming year — the overseas war budget is exempt — if lawmakers cannot come to an agreement on raising the limit.
“There is still hope that there will be an agreement that will get the Department of Defense to a top line significantly north of the … budget cap for FY18,” Berenson said. “But I don’t think there is a lot of clarity on how that will happen, and I don’t think there is a lot of expectation that it is going to happen anytime soon.”
Analysts are predicting a budget stalemate at the end of the fiscal year this fall that will lead to another continuing resolution, a now common maneuver that could lock in the current, lower defense spending levels for months.
It would be another blow to the defense industry, preventing companies from starting new programs or keeping major development programs going, said Marc Numedahl, executive vice president at the lobbying firm Crossroads Strategies.
“CRs breed uncertainty, and for industry, just like the Pentagon, they don’t like uncertainty,” Numedahl said.
The initial Trump budget disappointment and the expected political turmoil on Capitol Hill are likely to keep industry expectations tamped down and in line with Hewson’s forecast, said Byron Callan, director of Capital Alpha Partners, a defense consulting firm.
The 3-5 percent growth is likely to hold for the industry at large, Callan said.
“To see something significantly higher, you’d have to see kind of a big budget breakthrough for the GOP, and you may need to see a conflict,” he said.
The current outlook is a far cry from the exuberance of November, but it is not necessarily a bad thing for the companies and contractors doing business with the Defense Department.
“It’s OK, it’s good, people can sense business is in upturn, but it’s not like they are buying cases of champagne,” Callan said.
