"If the U.S. defaults on its debt and is unable to pay all its bills this summer, the pain will fall squarely on the defense industry.
National security is by far the largest category of discretionary federal spending, with budgets rising over the past two years to counter China's military expansion and tackle the conflict in Ukraine. Discretionary military spending reached three-quarters of a trillion dollars last year, up from $590 billion five years ago.
House Republicans led by Speaker Kevin McCarthy have demanded across-the-board spending cuts in exchange for raising the limit of the government's ability to borrow money, known as the debt ceiling. With a June 1 deadline looming, President Biden and Congressional Democrats maintain that the borrowing limit should be raised without preconditions and have called the GOP stance irresponsible.
The brinkmanship has driven investors from defense stocks and prompted efforts inside the Pentagon to mitigate any impact from the broader budget morass.
A Goldman Sachs index of stocks that depend heavily on government revenue has lagged behind the market overall, gaining less than 4% this year, compared with 7.4% for the broader S&P 500.
Even if Congress and the president temporarily resolve the crisis by suspending the debt ceiling to leave time for further talks, it would eat into the time Congress needs to write and pass a budget for the fiscal year starting Oct. 1. That would raise the likelihood the Defense Department will have to make do with a temporary budget known as a continuing resolution.
The debt-ceiling standoff has already led the House Armed Services Committee to delay its work on next year's defense budget.
"The Republican leadership's decision to take the debt ceiling increase hostage, to basically play chicken with the full faith and credit of our country, also cannot do anything but jeopardize our national security," said Rep. Adam Smith (D., Wash.), the committee's ranking member.
A continuing resolution likely would inflate the costs of military programs, delay the launch of new ones and prevent production increases.
The latest Pentagon budget request includes numerous new program starts, including the Collaborative Combat Aircraft system of uncrewed jets. Boeing and Kratos are among companies developing the aircraft.
Concerns that military spending could be cut -- or, at best delayed -- in a debt-ceiling fight have weighed heavily on investor sentiment toward the biggest military contractors. Shares in Lockheed Martin are down this year more than 7%, with General Dynamics and Northrop Grumman off 15% and 20%, respectively.
Rob Stallard, a defense analyst at Vertical Research Partners, said the stocks' performance reflects a "wall of worry" among investors over the broader budget debate.
House Republicans have proposed capping discretionary federal spending at 2022 levels and limiting growth to 1% a year for the next decade. Those limits would apply to discretionary military spending, which -- at $751 billion -- made up about 44% of the government's discretionary spending last year, according to the Congressional Budget Office. While Republicans are seeking a spending freeze, many members have voiced support for a larger increase in the military budget, though it would come at the cost of cuts in other areas.
While defense-company executives have been loath to quantify the impact of a disrupted budget, some have tried to position themselves as more protected than others.
KBR, a company that provides logistical support for the military overseas and for the U.S. space program, thinks services in those areas are so critical that the government can't cut back on contracts, Chief Executive Stuart Bradie said.
"What we're doing in space can't be turned off," he said.
Spending by the Pentagon and other agencies with national security missions tends to be uneven, with large contract awards skewing spending in any given month. That pattern often leaves them unaligned with the flow of tax revenue into the Treasury, requiring borrowing to close the gap.
The prospect of a disruption in federal spending during the summer months is particularly concerning. Contract awards tend to surge in the run up to the end of the government's fiscal-year end on Sept. 30, said executives and analysts." [1]
Zelensky could easily get huge stress. First Trump, now default, - what else could ruin finances of Zelensky's show?
1. U.S. News: Default Fears Weigh on Defense Industry. Cameron, Doug; Grossman, Matt.
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 13 May 2023: A.4.
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