Home » Budget Industry » Pentagon, Defense Industry Brace for Expected Dip in Future Funding


Pentagon, Defense Industry Brace for Expected Dip in Future Funding

Defense industry leaders expect Fiscal Year 2019 – which starts Oct. 1 – to be the crest of the current defense spending cycle, with many insiders expecting a downward slide to a funding trough to start as early as FY 2020.

Since World War II, defense spending has gone in cycles, with stretches of year-over-year funding increases only lasting a couple of years before Congress slows down the flow of cash, Todd Harrison, the director of budget analysis at the Center for Strategic and International Studies, told USNI News this week.

“The one thing you can count on is it won’t continue indefinitely,” Harrison said.

Harrison told USNI News that all signs point to prolonged FY 2020 budget approval process, which could drag on for 12 to 18 months.

CSIS

Historically, when budgets are delayed, Congress passes continuing resolutions, which freeze spending to the previous year’s level. But, there’s a huge caveat heading into FY 2020 – the Budget Control Act of 2011, which capped federal spending for 10 years, was never repealed.

“The budget caps would go into effect in January 2020,” Harrison said. “We’d be back to a sequester” if FY 2019 spending levels were allowed to go into effect at the beginning of FY 2020.

Without congressional action, the decrease in defense funding would be dramatic. The base Department of Defense budget would drop to $549 billion in FY 2020 and $564 billion in FY 2021, according to a July 2018 report by the Congressional Research Service. The FY 2019 defense budget, recently signed into law, set spending at $717 billion.

The defense industry knows what a looming congressional budget fight could do to the Pentagon’s current high levels of spending. Executives are preparing Wall Street analysts for what likely lays ahead: Congress reducing the cash flow to the Pentagon and what that will mean to corporate bottom lines.

During second-quarter earnings conference calls earlier this month, some chief executives hinted defense industry is preparing for the downward federal spending trend to start in a year.

USNI News previously reported that Mike Petters, chief executive of Huntington Ingalls Industries, told analysts, “this is the most exciting time I’ve seen in shipbuilding in 30 years.”

He listed a host of Navy contracts awarded to HII and reported second-quarter revenues of $2 billion, an increase of 7 percent from a year earlier and a big part of why HII reported total revenue growth of 8 percent from a year earlier. Petters also detailed a few major projects the company was bidding on.

Yet during the same call, when asked by analysts about the future, Petters suggested HII expects the Pentagon spending to soon decrease and reaffirmed a previous prediction of 3 percent revenue growth for the next several years.

“Yes, we’ve had a couple of good quarters, but we’re comfortable with our 3 percent estimate over a longer timeframe,” Petters said.

Bruce Tanner, the chief financial officer of Lockheed Martin, similarly hinted to analysts the company expects Pentagon spending will soon slow down. Answering an analyst’s question, Tanner said Lockheed Martin’s recent string of successes winning government contracts was at the upper end of what should be expected. He warned analysts not to interpret the recent Pentagon spending trend as being long-lasting.

“This is not a pull forward; this is an upper for both to 2018 and future years as well,” Tanner said about the rate and size of recent contract awards.

Meanwhile, leaders at BWX Technologies, a supplier of nuclear propulsion equipment and missile launch tubes to Navy aircraft carrier and submarine builders, are hedging their bets on what to expect in terms from future contracts.

When discussing second-quarter results with analysts, Rex Geveden, chief executive of BWX, said the company’s current $150 million capital expenditures plan – money it is reinvesting in its production capabilities – is based on the Navy’s current plan to build two Virginia-class submarines each year.

When considering proposed additional Virginia-class submarine building and a proposed increase in Ford-class carrier production, he said funding has yet to be appropriated and contracts have not been awarded. BWX isn’t ready yet to include these projects in its capital expenditures plans.

“What we haven’t capitalized and built into our operating plans and our capital plans are the upside things, such as the additional Virginias in 2022 and 2023, which would hit our books in 2020 and 2021 because of long-lead nature of the equipment that we supply,” Geveden said.

  • Duane

    This post addresses a short term consideration – the tail end of sequestration if Congress does not relax the budget caps. After the BCA expires automatically, however, that problem goes away. It is more likely than not that Congress will relax the budget caps in 2020.

    The much longer term and therefore more serious issue is the effect of the humongous tax cut voted by the GOP Congress last year that will greatly depress Federal revenues for many years to come, with multi-trillion deficits projected by the mid-2020s. That will make it nearly impossible to avoid future defense cuts.

    Politics will therefore govern, in both this November’s election results, and in 2020. The volume of reaction to Trump, Trumpism, the GOP tax cuts, and the GOP Congress’s supine surrender to Trump will determine whether the GOP tax cuts get rescinded, or if those tax cuts will continue to gut our national defense as now projected.

    • EyeInTheSkye

      Keep in mind that each budget deal relaxing the caps actually just suspends the caps and punts the end date of them into the future, so there is a good chance we’re still hearing about sequestration well into the 2020s due to congressional deadlock. Of course, that assumes demographics allows for the GOP to remain the stagnant party of white (mostly men) people.

      Best case scenario is the GOP implodes and throws off the evangelical dead weight that prevents it from evolving its economic policies to something a little more grounded in reality, so we can get back to having sane economic policies on both ends of the political spectrum. As it stands right now, the Democrats keep having to balance the checkbook after a few years of GOP profligate spending. I’d rather the DoD have stable growth rather than a couple years of massive spending reined in by several years of “oh wow, we can’t afford any of this.”

      • Secundius

        The 2011 Sequestration was extended from a 5-year Sequester to a 10-year Sequester. The “Official End” of the 2011 Sequestration is in Mid June 2020…

        • Duane

          Yup … the BCA does not extend due to budget cap suspensions, and will expire at the end of FY2020 unless Congress enacts a new law. Which seems extremely unlikely.

      • Bryan

        You and Duane hit on some key problems. What makes you vote, think, desire for the future is politics. What seems to be remiss in your thinking is….Republican, Democrat, Indy, who cares? Often all those political movements are wrong when it comes to reality. They all want to win.

        That type of thinking works and is fun when it’s…Cowboys vs. Steelers… while we have a beer. When it comes to our kids….not so much. History not only shows you are wrong, but it suggests that it’s not going to go so well for your Great Grand kids. That’s true if they are lovely Democrats or Evil Republicans or Evil Democrats and lovely Republicans.

        Stop trying to, “Win” and start trying to think through the 2nd and 3rd order effects of what your political masters are saying. No matter the letter after their name what you will find is….often they are full of crap.

        Welcome to the Alt-middle.

        • Duane

          The political problem gets multiplied whenever both houses of Congress and the Presidency are controlled by one party. That ends up becoming carte blanc for the radical crazies to bulldoze their way thru to stupid results that fit their twisted ideologies … same result whether it is extreme left or extreme right wingers that take over. We saw that in 2017-2018, 2009-2010, and in 1993-1994.

          The voters usually are repelled by the results of one party “rule”, and votes the rulers out of office at the next election. That seems highly likely as the result come Nov. 6.

          Divided government works best, because it forces compromise. Compromise always produces a better, more popular result in a country that is effectively split and which the vast majority do not like radical policies.

          The pendulum continues to swing. America will not like seeing our defenses drastically cut … the last time we did that 9.11.01 was the result. The problem is that the greedy Republicans sold the future for today’s tax cuts. If the Democrats were to take over all of Congress and the Presidency in 2020, no doubt they will give our military another huge 90s style haircut.

          If voters were smart, we’d vote for divided government, which always works best. After all, what most Republicans consider the most recent “golden age” was in the 1980s, the entirety of which had divided government with two really good GOP Presidents and the Dems in charge of the House the whole decade, and in charge of the Senate for a few years. Lots of really important and good stuff got done when both parties had to compromise.

      • sferrin

        “As it stands right now, the Democrats keep having to balance the checkbook after a few years of GOP profligate spending.”

        ROFL, deluded much? Zero doubled, D-O-U-B-L-E-D, the national debt, all by himself. He spent more into debt than all Presidents before him COMBINED.

  • Ned

    Good news! Defund the Military Industrial Complex. It has become an obsolete institution ever since Eisenhower warned of it’s disastrous rise to unchecked and misplaced power. No longer a benefit to the American people or the world.

    • Ctrot

      I wish people remembered the entirety of Eisenhower’s 01/17/61 speech rather than just the single line that fits their agenda. Such as: “A vital element in keeping the peace is our military establishment. Our arms must be mighty, ready for instant action, so that no potential aggressor may be tempted to risk his own destruction.”

    • Secundius

      From a President that Complained about the EVER Growing Military Industrial Complex, sure didn’t have any problems Spending the Taxpayers Money to FEED “that” EVER Growing Military Industrial Complex…

      • sferrin

        You can always tell a tin-foil hat nutter by their use of the “MIC” boogieman.

    • vetww2

      NED, Please read what President Eisenhower ACTUALLY said. It is considerably different thah what the excerpted statement states.

  • DaSaint

    Can’t keep it up indefinitely. Decisions are going to have to be made. There are a lot of expensive ships being procured. Watch the FFG(X) procurement. At some point, those projected 2 ships per year will impact the DDG procurement levels. Also don’t be surprised if the ‘decision makers’ decide to do 12 Flight II San Antonios instead of 13, and 12 ARGs as opposed to 13 to save a few billion.

  • Ctrot

    Meanwhile “mandatory” spending on social programs continues to rise, consuming at least 75% of the overall federal budget.

    • NavySubNuke

      Come on now, those votes don’t buy themselves!
      The number of politicians who care more about this country then there next election is vanishingly small and only getting smaller.

    • EyeInTheSkye

      Which are a completely different revenue stream/issue than discretionary spending driving large deficits. But let’s also just ignore the fact that Congress (led by “fiscal conservatives”) irresponsibly just slashed taxes while cranking up spending just about everywhere else. When we were on track to keep shrinking the deficit. By all means, continue to offer nothing of value other than “mandatory spending bad!”

      By the way, the military is one of the largest social welfare programs in the US, and while it is Constitutionally a discretionary spending issue, I’d hardly argue it isn’t a mandatory expenditure.

      • Ctrot

        Different revenue streams? Are you serious? Everything the US federal government pays for comes from one source: US Taxpayers, in one way or another. Anything beyond that is sophistry.

        And you must have missed the news that federal revenue is UP after the tax cuts. But then facts never matter to people like you. And by “people like you” I mean those who refer to the US Military as a “social welfare” plan, revealing their ignorance of both the military and the meaning of the word welfare.

      • sferrin

        Jesus. This post is Exhibit A as to why there should be an intelligence requirement to vote.

        • vetww2

          I agree with you. We have the finest Congress, that, MONEY CAN BUY!

          • Secundius

            Will Rogers said the same thing at the Republican Convention in 1927…