US defense spending is still going strong, whatever the Republicans may say

October 24, 2012
Obsession
Fiscal Cliff
October 24, 2012

The Republican party and its presidential candidate, Mitt Romney, have made much in this election campaign of the claim that the US is forsaking its military might. But it turns out that the Obama administration hasn’t seriously slashed defense spending—at least, not yet. Aircraft manufacturer Boeing and aerospace and defense firm Lockheed Martin both said that defense spending was going strong when they reported earnings today. Indeed, Boeing even said there was “unusual strength” in its defense sales from the quarter.

Boeing reported revenues (pdf) of $24.26 billion in its Defense, Space & Security unit for the first 9 months of the year—up 11% from 2011. Lockheed Martin (which gets about 80% of its revenues from the US government) said its revenues year to date had risen to $35.08 billion from $34.29 billion for the same period in 2011.

What’s more, data show that, while defense investment has slackened somewhat in the past couple of years, it is still well up on where it was before the financial crisis and has been growing this year:

Tap image to zoom
Real national defense gross investment has decreased only slightly since 2010. It has actually increased in 2012. <em>FRED</em>

Obviously, this trend would change sharply if the “fiscal cliff” takes effect at the end of this year. So-called “sequestrations”—or automatic budget cuts—would slash funding for most military programs by 9.4%, according to a report from the Congressional Budget Office.

Admittedly, not all of Boeing and Lockheed Martin’s revenues are coming from the US. In a conference call today, Boeing executives credited international sales for some of their stand-out results [rough transcript from Factset]:

“It was a very strong volume year for our defense business, driven by international successes. Even without sequestration it would be hard to beat that next year. Although I’m not giving guidance, I think [matching these results] would be a challenge because of the absolute strength of this year.”

That said, these firms’ strong results in defense-related operations this year still owe a lot to the US government, which accounts for a full 41% of the world’s defense spending. (By comparison, the next-largest spender, China, accounts for 8.2%.) In spite of all the chatter from Washington, that high-spending trend hasn’t changed at all.

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