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A New Direction for Defense Spending?

We see little change from the current strategy.

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U.S. defense spending has generally declined as a percentage of total government spending as well as GDP over the past 60 years. Large spending spikes that occurred during World War I, World War II, and the Korean War were followed by more aggressive cuts than those after Vietnam and the first Gulf War. In our historical analysis of defense spending, the government's willingness to spend when the nation is under threat is clear. More concerning of late is the inability of the government to make material cuts, even though cuts do occur. Based on our analysis of spending before and after the recent conflicts, our take is that deep cuts should not be expected.

On Jan. 5, President Barack Obama announced the results of the first strategic review undertaken by Secretary of Defense Leon Panetta. The study outlines missions that the military should be able to execute and principles for attaining success. The president said the base defense budget will continue to grow even while meeting the cost-reduction requirements outlined in the Budget Control Act of 2011. However, his budget will probably exclude the sequestration cuts implied by the failure of the supercommittee in 2011. Nonetheless, our base-case scenario over the next five years still calls for reductions of 3% to the overall Defense Department budget and 5% to items more relevant to the defense industry as it includes reductions in overseas contingency operations along with cuts mandated by BCA 2011 and a portion of cuts from sequestration.

Neal Dihora does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.