Edison Investment Research

FY18 US Defense Budget

Not as radical a departure from Obama as the headlines suggest

President Trump released his first full US Defense Budget yesterday. It requests a base budget of $574bn for FY18, and $65bn in Overseas Contingency Operations funding (OCO), making a total request of $639bn (as shown in the chart below). This would be a 3% increase year on year, and it is 3% higher than Obama requested for FY18. Whilst I acknowledge that the market environment looks better for the defence industry under the Republicans compared to the Democrats, I think the headlines this morning are focusing on the bullish rhetoric rather than understanding the nuances of the numbers. This budget is positive for the overall trajectory of defence spending and there is clearly going to be a focus on providing good equipment for troops, However, most of the uplift is consumed by higher troop costs and the Budget Control Act means there is uncertainty over whether this budget will ever come to fruition. In today’s blog I examine what I consider to be the three key questions; what has changed in this budget from Obama’s plans? Where will the extra money be spent? And how likely is it that the proposed budget is enacted by Congress?

US base defence budget and Overseas Contingency Operations funding ($m) FY01 – FY22 (Source: FY17 DoD Green Book & FY18 Budget materials)

US strikes budget deal to end six month long Continuing Resolution

Trump secures 3% uplift for defence, half of what he requested

The Republicans and Democrats reached a compromise over the weekend to avoid a government shut down in the US. They have agreed at $1.6trn omnibus spending bill for 2017, with $593bn for defence. The US is currently in Continuing Resolution (CR) which as Ultra Electronics noted last week has led to lower levels of government spending in the first half of 2017. The House is expected to vote on the Consolidated Appropriations Act of 2017 today, followed by the Senate on Friday, putting it on track for enactment before Friday’s midnight budget deadline.

US budget battles

End of 2017 Continuing Resolution looks likely as focus turns to Trump’s first budget

We are firmly in budget season. On this side of the pond Mr Hammond had his moment in the spotlight, but I was watching the news from the US because a few hours later the US House of Representatives approved the $584bn 2017 Defense Spending bill. This sets in motion the process to end the current Continuing Resolution (CR) that is only established until 28 April. The previous day, President Trump outlined his intent to spend $54bn (+3%) more than the Obama administration had planned to on defence in 2018. So what do we know so far and what can we expect?

Cyber wars

Will Russia’s attempt to influence the US election change global cybersecurity policy?

The news this week that Russia tried to influence the outcome of the US election is likely to have elevated cybersecurity up Mr Trump’s ‘to do’ list for when he takes office next week. The report from the Intelligence Agencies stated that “Russia’s effort the influence the election represented a significant escalation in directness, level of activity and scope of effort compare to previous operations.” Cyber is not a new topic, and has been a buzz word in the defence industry over the past five years as companies sought exposure to what has been seen as a growth market. However, cyber is still a very small percentage of revenues for the defence primes and the market has been very fragmented. In today’s blog, I ponder what impact Russia’s meddling in the election will have on cybersecurity.

F-35 funding in chaos

DoD and Lockheed Martin still struggling to agree contract terms

Earlier in the year I highlighted that there were serious problems with F-35 contract negotiations (Lockheed Martin names and shames the US DoD). Last week’s announcement that Lockheed is to receive $1.3bn of ‘stop gap’ funding to continue production of LRIP 10 whilst negotiations drag on, together with the unexpected and unilateral contract announcement for LRIP 9 earlier in November, indicate that the situation has got worse not better in the past four months. So what does the future hold for the programme, particularly under Donald Trump as President?

The ‘special’ relationship?

Carter and Trump's speeches raise big questions about US and UK defence

Events of the past week have raised some fascinating questions about the ‘special relationship’ between the United States and the United Kingdom. Firstly we saw Ash Carter (US Secretary of Defense) hold Theresa May and Michael Fallon’s feet to the fire to ensure the UK supports the US in its role as global policeman, and continues to spend 2% of GDP on defence. Subsequently Donald Trump set out his plans to increase the size of the US military without any explanation of how he would fund it. So what do these two acts of showmanship actually mean for the defence landscape?

Lockheed Martin names and shames the US DoD

Funding for the F-35 is "insufficient"

Lockheed Martin depends on the US Department of Defense (DoD) for c.80% of its revenues. Therefore for Lockheed Martin’s CEO Marillyn Hewson to name and shame the DoD as having overdue bills at Q2 results last week is not a decision she would have taken lightly. It caused me to wonder, what was Hewson trying to achieve?

Inside the White House

A guide to the US budgetary process

Last week I wrote about what Donald Trump as President of the United States might mean for the US Defence Budget and I noted that in an election year, the President’s ability to alter the budget is quite limited. Today I look at why that is the case by unpicking the rather confusing and protracted US budget process.

Trumping Clinton on defence spending

A look at the potential impact of Donald Trump as President on US defence spending

“I’m gonna build a military that’s gonna be much stronger than it is right now. It’s gonna be so strong, nobody’s gonna mess with us. But you know what? We can do it for a lot less.” (Donald Trump)

Donald Trump is somewhat of an enigma when it comes to his military strategy. On the one hand he seems to have the US defence primes in his crosshairs. He frequently criticises politicians and defence contractors for colluding to build costly and unnecessary weapons systems, and he is determined to reduce the procurement budget. On the other hand he has spoken of wanting to increase troop numbers, buy new equipment and bolster the US military presence around the globe, particularly in the Middle East and China.