Charting 60 Years Of Defense Spending, And Why The Mean Reversion Will Cost Millions Of Jobs

Tyler Durden's picture

Moody's is out with a comprehensive chart of defense spending since 1946 which shows that while over the years the average yearly amount spent on defense by the US government has been around $400 billion, in the past decade this amount has surged to an all time high of just under $750 billion. And while one can debate the reasons for why America spends 20% of annual revenues on military (and debate even more why this number has continued to surge under a Nobel Peace Prize winning president), one thing is rather certain: this number will decline in the coming months and years as Washington has no choice but to cut the defense budget. And while this will likely be a multi-year process, it will have substantial implications for not only the defense companies identified, but for their respectively supply-chains, resulting in hundreds of thousands and possibly millions of layoffs over the next decade as government-sourced revenue plummets and yet another layer of overhead will have to be trimmed.

Per Moodys'

Last week’s escalating political rhetoric and ongoing debate about the US statutory debt ceiling and deficit spending lead us to expect deeper-than-anticipated budget cuts that will negatively affect defense contractors doing business with the US government.

At almost $700 billion and about 20% of total annual domestic outlays (and more than half of discretionary expenditures), the world’s largest defense budget by a factor of 6x (China ranks second) remains politically vulnerable to becoming at least a partial solution to the longstanding deficit problem. Whether or not a satisfactory solution to the growing deficit problem is reached near term and the debt ceiling is raised, there is little doubt that pressure to trim excessive spending will persist.

Affected companies include prime defense contractors Lockheed Martin (Baa1 stable), Northrop Grumman (Baa1 stable), Boeing (A2 negative), Raytheon (Baa1 stable) and General Dynamics (A2 stable); other big US government defense suppliers such as Science Applications International (A3 stable), ITT (Baa1 review for downgrade), L-3 Communications (Baa3 stable), BAE Systems (Baa2 stable) and United Technologies (A2 stable); and ultimately the full contingent of companies in the supply chain to these large defense contractors.

For the past 10 years since the events of 9/11, the rapid build-up of arms and services, as seen in the exhibit below, made the defense business a good place to be, almost irrespective of specific program focus.

Now, with government budgetary pressures constituting a global phenomenon, defense spending is universally getting a broad reassessment after this period of very high growth, and defense contractors are consequently chasing fewer opportunities in a heightened competitive environment.

Before leaving office, former Secretary of Defense Robert Gates had already identified and/or effected $400 billion of cost cutting from canceling certain weapons programs and identifying overhead and efficiency savings. However, more than $300 billion of that savings is slated to be reinvested in similar programs and/or higher military priorities, leaving only $78 billion available for deficit reduction. In his April budget proposal, President Obama asked for $400 billion of incremental defense spending cuts, roughly equal to 7% of the Department of Defense’s projected base budget (excluding supplemental wartime spending) over the coming 10 years. Still a somewhat modest figure in real dollar terms, we now expect agreement on a much larger deficit reduction plan, partially prompted by the desire and need to avert an outright payment default and downgrade of the country’s Aaa government bond rating, which we placed on review on 13 July.

For the defense industry, that may mean a call to reduce spending at a multiple of the original $400 billion target, particularly if held to its proportionate share of the total budget. As the just-approved Fiscal Year 2012 Department of Defense Appropriations bill from the House works its way through the Democratic-controlled Senate, particularly against the backdrop of broader deficit-reduction talks providing added political fodder, this historically largely untouched defense category may get hit with a double-digit percentage reduction in base funding levels over the next few years.

An accelerated withdrawal from Iraq and Afghanistan will jump-start the reduction in total defense outlays (including such wartime supplemental spending), and this alone will have a meaningful impact on many companies. Going forward, it will be increasingly important for defense contractors to be on the “right” programs. Exactly which programs those are remains to be seen, though, given the increasingly broad and growing list of potential and actual threats to US national security.

The offset to all of this is the sector’s overall current health and participants’ strong financial profiles. As well, such prospective spending cuts at any meaningful level will also likely take many years to play out, particularly given the long-dated nature of most defense contracts. Moreover, the daily news feed invariably serves as a constant reminder that the world is still a very dangerous place. The real issue is one of affordability. Demand (and need) for the sophisticated weaponry, programs and services on offer by defense contractors will largely mirror the threat level and therefore remain high, particularly for the US government. In this regard, the industry enjoys a somewhat unique but mutually beneficial relationship with its most important customer.

Think today's layoff announcements by Cisco and Borders will be bad for the NFP? Just wait until the spending cuts start being priced in by various corporate treasury and CFO offices across the defense curve.

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Audacity17's picture

Where is the per-capita chart??

mynhair's picture

Don't say 'cap' when talking defense.  The Libs like it.

knukles's picture

Oh, pshaw.... say cap as many times and as fast around the libs as you can.  Once they fixate on the "cap" portion of the discussions (and they will, just like girls and shiny stuff) do a Bugs Bunny and slip in education, agriculture, green energy, taxes, whatever your little heart desires.....
It works absolute wonders.  Agree with 'em, get 'em going full tilt, light speed and then invoke principle.  They go apoplectic, like an epileptic having a seizure on a deck chair tryin' to imitate the Transformers.
To wit: One of my Uber-Liberal governmental employee golf buds (and I do mean that even by California standards...Jeeesssshhh) thinks that having business's boards of directors setting their own company bosses salaries is a conflict of interest which is why the biggliewiggliepigglies is paid so much.
I told him I agreed.
I thought he and I were gonna windup mating right there in the bunker just to the right of the first green. 
Until I pointed out that the same conflict of course applies to governmental employees and.... holy Jesus H Christ on a Crutch.  Principles don't matter with a lotta folks (of either political persuasion) so say cap a whole bunch.  Or immigration. Or penalty. Or equality.  Or justice... now there's one bein' worn to death. 

And what's great's as soon as the rest of the world figures out what the shorthand is for, then the PC doctrine has to find yet another term to abuse.

English for Dummies.


sun tzu's picture

We need a 10% across the board cut in all departments. There are too many paper shufflers and lawyers working for the goobermint.

chemystical's picture

Acording to a Congressman who appeared on C-SPAN a few months ago, the DOD's Acquisitions department has 6000 attorneys.


A search ofthe Net could not confirm that, but considering that lawyers comprised 10% of their last several hiring sprees since 2008, I don't doubt the Congressman.

DOD has 700,000 civilian employees now.  Acquisitions alone has around 150,000.

If we still routinely pay for every cost overrun despite that the overruns violate the contracts, and if we still pay for several new incarnations of the $2500 toilet seat, then why do we need 6000 lawyers to write and read and interpret contracts?  For that matter, why do we need what have to be 15,000 assistant managers to the undersecretary assistant directors whose sole job is to enforce the contracts?


Reminds me of the joke about "What do you call a bus with 50 lawyers heading over a cliff?"  A good start. 

Ying-Yang's picture

Should the defence budget be steeply cut the unemployed soldiers and private contractors can be hired guns for the elite. Oh wait they are now nevermind.

TaxSlave's picture

We need a 10% across the board cut in all departments.

Cut?  That means less increase, right?

10% raise instead of 20% raise = 10% cut.

I guess this is what 'pays for' the Tax Breaks For The Rich.


boooyaaaah's picture

Dwight on the military industrial complex


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.

Our military organization today bears little relation to that known by any of my predecessors in peacetime, or indeed by the fighting men of World War II or Korea.

Until the latest of our world conflicts, the United States had no armaments industry. American makers of plowshares could, with time and as required, make swords as well. But now we can no longer risk emergency improvisation of national defense; we have been compelled to create a permanent armaments industry of vast proportions. Added to this, three and a half million men and women are directly engaged in the defense establishment. We annually spend on military security more than the net income of all United States corporations.

This conjunction of an immense military establishment and a large arms industry is new in the American experience. The total influence -- economic, political, even spiritual -- is felt in every city, every State house, every office of the Federal government. We recognize the imperative need for this development. Yet we must not fail to comprehend its grave implications. Our toil, resources and livelihood are all involved; so is the very structure of our society.

In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the militaryindustrial complex. The potential for the disastrous rise of misplaced power exists and will persist.

We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together.

Akin to, and largely responsible for the sweeping changes in our industrial-military posture, has been the technological revolution during recent decades.

In this revolution, research has become central; it also becomes more formalized, complex, and costly. A steadily increasing share is conducted for, by, or at the direction of, the Federal government.

Today, the solitary inventor, tinkering in his shop, has been overshadowed by task forces of scientists in laboratories and testing fields. In the same fashion, the free university, historically the fountainhead of free ideas and scientific discovery, has experienced a revolution in the conduct of research. Partly because of the huge costs involved, a government contract becomes virtually a substitute for intellectual curiosity. For every old blackboard there are now hundreds of new electronic computers.

The prospect of domination of the nation's scholars by Federal employment, project allocations, and the power of money is ever present

  • and is gravely to be regarded.

Yet, in holding scientific research and discovery in respect, as we should, we must also be alert to the equal and opposite danger that public policy could itself become the captive of a scientifictechnological elite.

It is the task of statesmanship to mold, to balance, and to integrate these and other forces, new and old, within the principles of our democratic system -- ever aiming toward the supreme goals of our free society.


Another factor in maintaining balance involves the element of time. As we peer into society's future, we -- you and I, and our government -- must avoid the impulse to live only for today, plundering, for our own ease and convenience, the precious resources of tomorrow. We cannot mortgage the material assets of our grandchildren without risking the loss also of their political and spiritual heritage. We want democracy to survive for all generations to come, not to become the insolvent phantom of tomorrow.

mynhair's picture

Is Zandi's fingerprints on it?

Cleanclog's picture

Look at the years of the ramp up.  Will the mean reversion be called the "W" in honor of George W who authorized all that spending, mostly on war in Iraq that had nothing to do with 9-11?  

Or shall we just call it a "Raw" Deal.  Raw being war spelled backwards as we means revert.

mynhair's picture

It means be prepared to live Red Dawn.

theopco's picture

That would fit about right in with your level of rationality, wouldn't it.

sun tzu's picture

Pelosi and Reid were in charge of Congress beginning Jan 2007 and the spending continued straight up and didn't even slow after 0bama was elected. Now we're involved in a third war. I have to blame both sides for the insanity. The Iraq War by itself didn't cause the ramp in war spending. 

papaswamp's picture

5...operations in Yemen, Pakistan, Afghanistan, Libya and Iraq.

boricuadigm-shift's picture

These companies will just have to move their business overseas! :-)  Bull defense Russia & China!

max2205's picture

Say goodbye to the DC housing market

High Plains Drifter's picture

you watch what happens. they will go across the pond and start doing business with the chinks........

Cleanclog's picture

We call the Pacific the pond now too?  Figured it should have a different name, being much bigger than the Atlantic and all.  Lake? Loch? Sea?

Ropingdown's picture

Defense elements sold to the Chinese has already begun.  When Michael Schwarz, as CEO of Raytheon, couldn't get permission to sell missile guidance technology to the Chinese due to its obvious military uses, he gave the National Democratic Committee 1 million.  And Clinton gave him the export permit.  Simple.  Makes you glad you fought a supposedly-American war.  The game has been too clear for 20 years:  "All this patriotic stuff is great guys, but we in corporate America need growth and better margins.  So we're going start investing in China, and we're going to sell the stuff in America, and you guys are going to defend us to make sure the Chinese don't just take our stuff, right?  You're patriotic young men and women, aren't you?"  Pre-chinese Wilson ProStaff tennis racquet? $189.  Made in China Wilson ProStaff tennis racquet?  $189.  Get the picture, consumers?  Soldiers?

chemystical's picture

Let's not forget Bernard Schwartz at Loral Air and Space.  The export application to use a chinese rocket to launch highly sensitive tech into satellite was denied by DOD and DOS and NSA, so Willie shopped it to Ron Brown over at the DOC.  Brown rubber-stamped the fraud.  The technology magically disappeared when the satellite's rocket magically failed to lift off and magically exploded.  Then the People's Army cordoned off the area and refused to allow anyone to examine it, saying, "Take our word for it.  The tech was destroyed and there's not a shred of it remaining.  (wink wink)."


Brown later got a bullet to his skull while flying in the middle of the night in a severe thunderstorm and aboard the only plane in the fleet that lacked proper nav equipment and a black box.  The 1st responders (Red Cross?) stated on CNN that they found were survivors, and then a few minutes later said, "Oops.  We meant there were no survivors."  Then the air traffic controller decided to commit suicide.


Schwarz & Schwartz.  Go figure.  Same tribe who stole and sold other tech to China.  Anyone remember the real Wedtech story?  The murder of the invistigative journalist?  (Danny Callasaro or something like that).  Magic Lantern?  Echelon?   With allies like that...who needs enemies?  Good thing the new US Amb to ISR has stated on the record that ISR is his highest priority and that his boss Obama told him so.  Nevermind making the USA your - putative employer - your highest priority.  Soulless pieces of shit spawned from and for that "shitty little country".

bakken's picture

You are forgeting the sale of nuclear sub technology, silent propellor manufacture, that the Israelis stole from us and sold to Japan(Toshiba) which company accidently sold machine tools to the USSR.  We should have nuked Israel back then.

FunkyMonkeyBoy's picture

All that defensive spending didn't amount to a hill of beans on 9/11... oh wait, yes it did, it was executed to 'perfection' (well good enough for the average U.S. joe to fall for that evil piece of theater hook, line and sinker, and without question)... go team!

mynhair's picture

We are talking about the wars against poverty, drugs, obesity, right?

If only that much had been spent on a war against Liberal stupidity.

Bob's picture

Hey, cunthair, they got you driving the clown bus on afternoon shift again this week?

Ya really need to lay off the drugs--when you're at work, at least. 

mynhair's picture

We won the war against poverty to the tune of $10 trillion?  Damn MSLSD, they never mentioned it.

karzai_luver's picture

hair you idiot

we are fighting a Defense of Poverty,drugs,obesity,right?


You fuckwads are all alike.

Audacity17's picture

But didn't Obama say spending was stimulus?

mynhair's picture

Only when it goes to ACORN.

knukles's picture

I do so love it When the libs start a junkin'.  Just think, maybe even gettin..... mad. 
Plain downright pissed off.

Keep up the good work.

Bob's picture

Sometimes you can get a real hearty divide-and-conquer riot goin' on in the boyzroom!  Impressive, albeit ignant. 

Most of the time you get put into place, however.  Let's see all the little pee-pees out!  Ready . . . set . . . piss away!

mynhair's picture


Got a timeline on when you move out of your parent's basement?

Or when you can apply for a GED?

knukles's picture

See they've started, junkin' up a storm.

snowball777's picture

His Herr (Hitler) can't play...Granny got him "fixed" where he wasn't broke (now if only they could do something about the brain-damage from when he was playing in the street for too long).

chemystical's picture

...and Pelosi said that unemployment checks are the fastest way to stimulate the economy. 



chemystical's picture

...and Pelosi said that unemployment checks are the fastest way to stimulate the economy. 


Paraphrased: unemployment creates job.  Right Nancy, and war is peace. 


Didn't she also say that every dollar in unemployment checks adds two dollars to the GDP?


If we all quit our jobs, the country will be in the black in no time.  Wish she and the other 535 would go first.  Then tack on another 9 from SCOTUS, and then Biden and then the Soulless Dicksucker-in-Chief.



Manzilla's picture

Let's name it BO. If we are gonna whine about Bush than we should whine about Obama as well. Gotta love a guy that gets voted into office promising not to be like Bush but than ends up continuing everything he started. Ahhhh the hypocracy.

karzai_luver's picture

Nobody could possibly believe he would be different.


This obama - bush you all speak of could just as well be muppets.

They only get "options" provided by your rulers.

party on buttcracks



chemystical's picture

In 2012, of the voters who voted for Barry to prove that they weren't many will vote against him to prove they aren't idiots?


Neverending War For Everlasting Peace. 

Rainman's picture

Defense contractors have been planning on a 30% cut in USA defense biz since ODrama won the election. They'll cultivate more overseas biz. The merchants of destruction don't much care about the humans on the receiving end of their products so long as it ain't them.....and oil profits have gotta' go somewhere.

Maniacs especially love expensive boom-boom toys.

papaswamp's picture

Hey O closed the biggest overseas defense contract in US history...give him credit where credit is due. That peace prize was good fro something..peace through superior firepower.

ZackAttack's picture

Ridiculous to have a gold-plated $400b fighter program when the Banker Party and the Other Banker Party are pompously debating whether grandma gets private label cat food or not.

Has anyone asked the military if they could manage to make do with, you know, 800 of them instead of 2500? And of course all those F-16s, FA-18s we already have.

What exactly are we defending Japan against, again?

After NATO finishes demonstrating its military mastery in the killing dunes of Libya, maybe they can take over holding back the red menace at the Fulda gap.


Bobbyrib's picture

Maybe Grandma should get rid of her cat(s).

snowball777's picture

And get rabies? Or do you just froth at the mouth naturally?

spdrdr's picture

Absolutely.  Science is yet to breed out the proclivity of cats eating their owners following their demise.  They start with the eyes, and work outwards.

Evil bastards.

knukles's picture

We're supposed to be defending against climate change... you know and it's direct results like tsunamis, earthquakes, volcanoes, hurricane, typhoons, rain, heat, drought, cold, and the like
And just like the dumocraps stimuli, ain't worked yet worth a fuck cause we didn't enuf, yet.

TaxSlave's picture

We're fulfilling our Manifest Destiny, and that takes a lot of blowin' stuff up.

Think of all the poor window businesses that will suffer when we stop breaking all those windows.

And the undertakers!  What will they do?  Their children will go hungry!