The companies that make jets, bombs and aircraft carriers for the U.S. military are telling investors that the defense business will still be booming under a Democrat-controlled House of Representatives, even as a split Congress threatens a return to partisan gridlock.
The reason, one defense executive said, is that the Democratic takeover of the House could weaken Republican deficit hawks in Congress at a time when their influence is already diminished.
“One concern that we did have was relative to deficit hawks,” Raytheon chief executive Thomas Kennedy said at the Robert W. Baird Industrial Conference in Chicago. “And it turns out that with most of the deficit hawks were in the House and on the Republican side.”
He went on to say the Democratic takeover “changes the equation” relative to conversations around the national debt.
“The environment is actually nice now because it’s settled. We know exactly what it is," Kennedy said. "The uncertainty has been taken out, and we know that we don’t have this issue with the deficit hawks moving forward. So we’re actually very very optimistic.”
House Republicans lost a number of deficit-minded representatives. Virginia Rep. Dave Brat and Texas Rep. Pete Sessions, who both pushed a constitutional amendment requiring Congress to pass a balanced budget every year, narrowly lost to their Democratic opponents. Deficit hawks had already been marginalized in the Republican party, with just a single Republican representative opposing the GOP tax bill over budget issues.
Investment analysts studying the defense industry appear to largely agree with Kennedy.
In a Wednesday morning note to investors entitled “It’s always a party, regardless of party,” Jefferies investment analyst Sheila Kahyaoglu noted the 2006 midterm election, in which Democrats seized the House at the height of the U.S. war in Iraq. Defense companies’ share prices climbed an average of 18 percent during that year.
Defense stocks are thought to be among the most recession-proof assets on Wall Street. Companies who derive their revenue from military spending are somewhat insulated from the ups and downs of global markets. But the D.C. area experienced its own mini-recession in 2013 when the so-called “sequestration”-induced budget cuts — which emerged from a 2013 budget impasse that also caused a temporary government shutdown — set new limits on defense spending.
For years, those defense spending limits forced numerous U.S. defense contractors to dampen their expectations for growth. Companies that sell land vehicles to the military, for example, saw their contract obligations decline by more than 50 percent between 2013 and 2015, according to a recent report from the Center for Strategic and International Studies.
“We all have a bit of a hangover from the damage that sequestration inflicted on our military and our position in the world,” Mac Thornberry (R-Tex.), the outgoing head of the House Armed Services Committee, said Thursday. “When you cut defense it has real life-and-death consequences. There are those who want to use defense as leverage … or I would say hostage … to get things in other areas. We broke that this year.”
Defense contractors and their lobbyists will be closely watching Thornberry’s replacement for cues on how he or she will approach procurement reform, oversight and other issues moving forward. The most likely choice appears to be Rep. Adam Smith, a Washington representative whose District includes the cities of Renton and Bellevue to the East of Seattle.
In initial platform statements Smith has struck a decidedly different tone than Thornberry.
In early statements outlining political priorities, Smith speaks about “aggressive oversight” of the Pentagon’s budget and weapons programs, and auditing Defense Department agencies to better determine where and how funds are being spent. He also has also expressed opposition to a Trump Administration plan to rebuild the U.S. nuclear arsenal, calling the $1.5 trillion plan “unrealistic and unaffordable,” arguing that “president Trump’s new nuclear arms race” will “wreck the budget” and draw resources away from other priorities.
Still, Thornberry says he and other congressional Republicans will be able to work with Democrats moving forward.
“Of course there will be differences….he’s talked about the nuclear issue and that has been a difference between Republican and Democrats for as long as I’ve been in Congress,” Thornberry said Thursday. “But when we get into the classified briefings, Republicans and Democrats agree that the defense cuts that began in 2010 were too much.”