• Global ‘Black Hole’ Risk Rising: A Discussion With Danielle DiMartino Booth

    Former Fed advisor Danielle DiMartino Booth will discuss key economic developments and the outlook for Fed rate cuts with Hedgeye CEO Keith McCullough.

Takeaway: FY 2019 will be the high water mark for Pentagon budget authority but outlays continue to grow 5.3% CAGR in constant dollars through 2020.

Pentagon spending is at an inflection point.  In the light of recent Presidential pronouncements, a likely shift in Congress, and a change in economic outlook, it is time for some cold facts.

The Pentagon's total annual  budget authority (base + OCO) has increased by $106B or 18.3% over the past four years: from $580B in FY 2016 to $686B in FY 2019.  In real dollars (inflation adjusted) the FY 2019 budget is +$63B or 10.2% higher than FY 2016.  

The Pentagon has been assuming that it would receive the same level of funding through 2024 as FY 2019 adjusted for inflation = $701B in FY 2020.  ($701B in Pentagon spending (051) equates to $733B in "total defense" spending (050) which includes $32B for DoE.)

There is a $150B gap between what the law prescribes for FY 2020 ($550B) and what the Pentagon has been planning. OCO spending can make up some of the gap but OCO was only $69B in FY 2019 and there is a broad consensus to get away from the OCO loophole in the future.

The President recently announced FY 2020 "total defense" spending would be reduced by ~$32B.  This would mean that the Pentagon would request for FY 2020 would be $669B instead of $701B, a 4.5% decrease from the current plan and a 2.5% decrease from the FY 2019 appropriation. This would still be $119B more than allowed by the Budget Control Act.

FY 2020 WILL BE AN INFLECTION POINT IN THE PENTAGON BUDGET - Screen Shot 2018 10 31 at 8.22.51 PM

The impact of possible reductions in Pentagon budget authority on most defense company revenues is still years away.  There is a time lag of one to three years (or more) between Congressional appropriations and the actual outlays which drive defense company revenues. The vast majority of the increases already appropriated by Congress for FY18 and 19 appropriations have yet to be obligated let alone paid out yet. The outcome of the brewing FY 2020 budget authority fight will have little to no impact on the fact that Pentagon investment outlays are growing at a 5.3% CAGR in constant dollars. 

FY 2020 WILL BE AN INFLECTION POINT IN THE PENTAGON BUDGET - Screen Shot 2018 10 31 at 10.00.48 PM