The people who make jets, aircraft carriers and surveillance technology for the US military thought they were going to cash in when Donald Trump beat Hillary Clinton on Election Day. Now they’re not so sure.
In a significant shift from the early months of the Trump presidency — when a bomber-jacket-clad Trump promised a “historic” rebuilding of the military from the deck of an aircraft carrier — top military brass are saying the build-up likely won’t come this year, or even the next.
“We didn’t get into this situation in one year, and we aren’t going to get out of it in one year,” defence secretary Jim Mattis said in a June 12 congressional hearing. “We’re going to have to have sustained growth in 2019 to 2023.”
The comments came as some Republican hawks in Congress expressed disappointment over the size of proposed spending hikes and the government’s inability to repeal the Budget Control Act, which sets limits on defence expenditures.
Wall Street appears to be tempering its expectations in response.
Defence stocks skyrocketed as markets reacted to initial news of President Trump’s election, and easily outpaced the Dow Jones industrial average in the four months following the election. But toward the middle of March — when the White House started circulating its initial budget proposals — stock prices of major weapons manufacturers like Lockheed Martin, General Dynamics and Raytheon slowed their ascent. And major government services firms like CSRA and CACI International, which have historically been a large employment engine in the greater Washington area, saw fairly substantial dips in their stock prices at the time, though they later recovered.
“I don’t think you can look at any of this budget process and conclude that there is going to be something materially different from before,” said Byron Callan, director of investment bank Capital Alpha Partners.
The defence spending increases that the White House introduced in its initial budget exceed the Obama administration’s defence spending levels by only a few percentage points. House Armed Services Committee Chairman Mac Thornberry, the Republican from Texas, is pushing a counterproposal that contains bigger spending increases. But those increases are unlikely to survive the caps imposed by the Budget Control Act’s sequestration process, which emerged from Congress in 2011 as part of a budget compromise.
A rollback of sequestration has been at the top of every defence lobbyist’s wish list since it was passed, but it hasn’t happened yet even though Republicans control both houses of Congress and the White House.
“Right now we all see that there is no concrete proposal on the table that changes the Budget Control Act itself,” said David Berteau, president and chief executive of the Professional Services Council, which lobbies on behalf of government contractors. “Until that changes, we’re playing at the margins, which is what we’re doing in 2017 and what we will continue to do in 2018.”
To compensate, some American defence firms are looking to foreign governments as a way of boosting sales.
“Between Europe getting its economic legs under it again, and that’s where most of the terrorism has been lately ... there’s a sense that global defence budgets are going to be increasing from now,” said Bob Kipps, managing director of KippsDeSanto, an aerospace-defence investment bank. “It’s less Trump rhetoric than the pace of events.”
As part of a deal closed earlier this year, Lockheed Martin, the world’s biggest weapons manufacturer, stepped up international sales of its signature F-35 Joint Strike Fighter. The 10th “lot” of 90 planes includes 35 fighters that will be sold to allied governments including the UK, Australia and Israel.
Expectations for international sales got another boost in May when the White House announced a $110-billion (Dh403.9 billion) arms deal with Saudi Arabia, but that deal came with its own dose of disappointment.
When the actual components of the agreement started to leak out, it became apparent that the deal mostly includes sales that were already in process before the president took office. Some face opposition in Congress.
“What the Saudis and the administration did is put together a notional package of the Saudi wish list of possible deals and portray that as a deal,” wrote Brookings Institution senior fellow Bruce Riedel in a blog post. “Even then, the numbers don’t add up. It’s fake news.”
Still, other areas of opportunity are on the horizon for companies that do business with the government. The White House has signalled its support for continuing to move government information systems out of private servers and onto the cloud, a broader shift in the way government operates that could entail new work for IT firms.
“If you think about the shift to the cloud, that’s just the way the market and technology is moving,” said Devin Talbott, managing partner of Enlightenment Capital, a private equity firm that invests in government contractors.
Talbott’s fund has been placing bets on companies that try to help government agencies move to the cloud and modernise IT processes. Those sorts of shifts were already in process before President Trump took office, and stand to continue even if there aren’t significant changes to the budget.
“It’s those areas that we see as inevitable and on the rise,” Talbott said.
It’s also possible that Trump’s push to slash regulations could give defence firms a boost. The Defence Department is covered by the Trump administration’s “one in, two out” executive order, which requires regulators to cut two rules for each new one they add. The Pentagon took early steps toward enforcing that order this week.
But even deregulation could be a mixed bag for defence companies. It could hold up new rules that the industry actually wants, for example.
“You not only can’t issue new regulations that are bad for business, you also can’t issue new regulations that are good for business,” said Berteau, the contractors’ association president.
