Outlays lag budget authorizations by 1-3 years but are the best forecaster of near term earnings for defense contractors. Outlays in FY 2020 and 2021 are tracking to be among the highest in US history.
FY 2020 Q1 DoD outlays for investment (procurement + RDT&E) were $61.1B, up $11.3B (22.6%) compared to the first quarter of FY 2019 according to new US Treasury figures.
- Procurement spending for the quarter was $36.3B, up 26.5% (+$7.6B) y/y
- RDT&E spending was at $24.8B, up 17.3% (+$3.7B).
The Q1 totals and the Y/Y increase show that the record increases in Pentagon budget authority granted by Congress in FY 2018 and 2019 are now hitting the defense industry's factory floors and R&D centers. The Q1 results indicate that outlays in the ongoing fiscal year are on track to exceed the forecasted FY 2020 total of $238.3B, which already exceeds FY 2019 levels by 11.4%. Note that FY 2019 was 12.8% higher than FY 2018 which was 10.1% higher than FY 2017. Overall, Pentagon investment outlays in President Trump's first term are tracking to a CAGR of 11.4%.
To put the level of outlays in perspective, note that in constant dollars the "Trump buildup" will exceed the Reagan buildup in while focused on similar investments, i.e., weapons for a war with a near peer competitor. Outlays will peak in FY 2021 and then gradually decrease as budget authority toplines will be flat in FY 2021 and perhaps even decrease thereafter regardless of the election as OCO spending is reduced.
