Just as earthquakes take time to generate tsunamis, so is it with one of the largest increases in Pentagon dollars in memory - dollars are entering the pipeline but we are double digit months from those dollars hitting defense company coffers.
Since early February we have known that a truly significant increase in budget authority for the Pentagon is in the books for the current 2018 fiscal year and that it will be sustained in FY 2019 which commences on 1 October. Congress modified the Budget Control Act so that the FY 2018 budget topline will be a full 10% above the authority granted in FY 2017 which was already 4.5% above the level authorized for FY 2016. FY 2019 will add 2% y/y for inflation. While Congressional plans for budget authority for 2020 and beyond are unclear, the Pentagon is planning to match inflation for the next five years. (see my note of "Trump On Track to Outspend Reagan Buildup". Our chart captures the current state of play on budget authority:
Headlines focus on the months/years-long Congressional fights over budget authority and the daily announcements of contract awards. While these are of course vital data points, outlays are what drive company revenues and quarterly earnings reports.
Total DoD outlays for FY2018 through March are only 4.3% higher than the comparable period for FY2017 despite a 10% increase in budget authority.
The Pentagon's "Green Book" defines it perfectly: "Outlays are the liquidation of the federal government’s obligations and generally represent cash payments. Outlays in a given fiscal year may represent the liquidation of obligations incurred over a number of years. There is a time lag between budgeting funds (congressional appropriation), signing contracts and placing orders (obligations), receiving goods or services, and making payments (liquidation of obligations)."
Given investor interest, we zero in on Pentagon outlays for investment (Procurement + R&D) since 2010 and discount outlays for personnel and operations/maintenance. The chart is in constant FY19 $B and compares outlays for investment in green (color of money) to investment budget authority in red.
Takeaways:
- For the last four years, outlays for investment have been running ~25% below the peak spending during the Iraq/AFG wars.
- The nature of defense procurement dampens the biannual volatility of Pentagon budgeting.
- The trend in outlays has definitely turned. While outlays will be 10% below the period 2008-2010, that period was an outlier in constant dollar terms since WWII. By 2020, but not until then, outlays will exceed the peak investment outlays of the Reagan years, viewed as a golden age for defense investment.
