What does the future hold in the defense sector with the Trump victory and a Republican Congress? As with all questions this soon after an election, it may take some time to get a definitive answer, but let’s take a quick look.
One thing is for sure, the Defense sector will be in shock for months to come as it tries to figure out what a Trump administration means and how to position for it.
Since Donald Trump was never forced to offer specific details on issues of importance to defense during the campaign, voters and pundits were left guessing as to how his world view would translate into results in the many sectors that make up our complex military.
We can be fairly certain that Trump’s win likely means future budget requests above sequestration spending caps for the Defense Department based on his campaign rhetoric of rebuilding our military. Now, whether Congress goes along with or fights Trump, with Democrats pushing for equal gains for domestic spending and many fiscal hawk Republicans wanting to lower spending overall, remains to be seen.
No doubt it will be a tough fight due to the reality of defense funding. Congress and the White House either have to comply with the existing caps on military spending ($609.9 million in fiscal 2017) or will need to raise the limit. If that doesn’t occur, a “sequester” – an automatic reduction in the Pentagon budget –will need to be implemented that will keep DoD at the approved level.
Additionally, much of the DoD funds are already tied up in appropriations for large military platforms—think F-135 Joint Strike Fighter, Zumwalt Class Destroyers, and Ballistic Missile Defense to name a few. Will Trump be able to win over Congress and have them shift funds (or appropriate new funds) with only a single seat majority in the Senate and with each congressional member vying for their own projects? Who knows? However, if past is prologue as it generally is in D.C., I would not bet the ranch on it.
So, does Trump have any other options? He does, because, as is typical in Washington, there is a potential back door. Congress and the president could agree to continue to use the Overseas Contingency Operations (OCO) fund to get around the caps and avoid a sequester. This fund is a separate pot of funding operated by the DoD and State Department that was originally used to finance the wars in Iraq and Afghanistan. It does not count against the caps, and has been used in the past to prevent a sequester. Trump campaigned on the “crushing of ISIS” and the OCO fund could allow him to propose growth by funding the technology, resources and material it would take to defeat ISIS.
So, who will be the winners in the defense sector with the new administration? Hard to tell for sure, but companies that can demonstrate they can employ commercial off the shelf (COTS) technology in the areas of cyber, communications, unmanned platforms, security and training could be big winners by helping to squeeze costs out of DoD programs and allowing for more growth. The big defense contractors will still be winners with any growth as they have the long-term contracts and are the ones that can manufacture the military hardware we need to project power globally. Finally, another group of winners will be military personnel, their families and veterans. Trump spoke directly to these groups in his campaign and was very clear in his promises to provide them more support.
Keith Strubhar is a senior vice president at MSLGROUP, based in the Washington, D.C. office, with more than 20 years’ experience specializing in aerospace, defense and energy. Prior to joining MSLGROUP, Strubhar served as Director of Communications at Raytheon.