“You like me and I like you”
Trump promises to “load up” the US military
With Valentine’s Day next week, it seems fitting that President Trump has made public his love affair with the US military. He opened his first speech to service personnel on Monday with the words “you like me and I like you”, referencing the support he received from military voters during the election. He then promised to “load them up with beautiful new planes and beautiful new equipment.” Words which sent US defence stocks soaring. So is this really music to the defence industry’s ears?
Thus far President Trump’s commentary on defence has matched his election rhetoric. He is vowing to look after veterans, buy new equipment for serving personnel, increase troop numbers and get tough on inefficiencies in defence procurement. To me this sounds like a worrying combination from the perspective of the defence companies.
The reason the Investment lines (Procurement and RDT&E) of the US defence budget have been so squeezed over the past decade is that personnel costs have been rising higher than inflation. As a military veteran myself I am a firm believer in providing for ex-service personnel, however the current US veteran’s pension and medical arrangements have been proved unaffordable. If President Trump wants to maintain, or even improve the current offering, then personnel costs will consume an even higher percentage of the overall defence budget in the future.
Higher troop numbers and more equipment are undoubtedly positive for top line growth at US defence companies. However, President Trump has already showed with his F-35 price negotiations, that margins are going to come under pressure. He wants to buy more for less which will either impact quality or lower margins, or possibly even both.
The important area that President Trump has not yet spoken publicly about is how his ‘made in America’ strategy will impact defence exports. It is likely that defence exports from the US will decline under Trump’s administration for two reasons. Firstly President Trump is likely to be more selective over who he will allow to buy US equipment, and secondly other nations will be less likely to buy from such an overtly protectionist and insular government. This is concerning for the defence industry because exports tend to be higher margin.
So it seems that after Monday’s speech at CENTCOM President Trump is the military’s darling, but he is not likely to be inundated with Valentine’s cards from defence industry executives.
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