A casual observer could easily conclude that the presidency of Donald J. Trump is in deep trouble. He has become the third president in U.S. history who will be tried in the Senate pursuant to articles of impeachment, and polls suggest that half the public want him removed from office. There is not a single day in his presidency when those polls have indicated broad approval for the job he is doing as chief executive.
Trump's approval rate has never been high, but that won't stop him from getting reelected. The ... [+]
However, despite the portentous headlines and nonstop impeachment coverage, Trump isn’t really in trouble. There are 47 Democrats in the Senate and, assuming every member of the chamber shows up to vote, it requires the votes of 67 senators to remove him from office. Proponents of his removal have no plausible way of closing this gap. So the president will survive impeachment.
Hard as it may be to believe in the current political environment, Trump also has a very good chance of being elected to a second term next year. The closest thing America has to an iron law of presidential elections is that if an incumbent avoids economic recession and seeks a second term, he gets it. That’s what has happened in every presidential contest since William McKinley managed to defy the odds in 1900.
If a president seeks reelection but faces recession during the last two years of his initial term, he always loses. It doesn’t matter whether he is a Republican like Herbert Hoover or a Democrat like Jimmy Carter. But if he avoids major economic setbacks and seeks reelection, that candidate always prevails. Trump will likely be no exception to this pattern.
Quite the opposite: if current economic conditions persist, he will be reelected with “coattails” that could hold the Senate for Republicans and maybe even take back the House. It appears voters are willing to put up with quite a lot from the White House if it can deliver low unemployment and steady economic growth—which is what we have today. In fact what we have is the best economy in a generation, delivering the unusual combination of steady job creation, record stock market prices and low inflation. No Democratic candidate can beat a chief executive who presides over the creation of a quarter-million new jobs in a single month.
This has important implications for the defense industry, which has benefited handsomely from Trump’s presidency. The share prices of the nation’s top three defense pure-plays (Lockheed Martin, Northrop Grumman and Raytheon) are all up about 50% since Trump’s inauguration, thanks to a demand environment in which military contractors don’t need to take market share in order to grow revenues and returns.
The budget game plan with which the White House began the year envisioned that outlays for the Department of Defense would grow about 25% between 2016 (the last Obama budget untouched by Trump) and 2020. Following recent budget action by Congress, it appears that military spending will remain on that vector. Outlays for so-called defense investment accounts—R&D plus procurement—are rising even faster. Outlays for weapons development look likely to rise over 50% between 2016 and 2020, while outlays for weapons procurement will rise on the order of 35%.
These are the best business conditions the defense industry has seen since the early Reagan years. While the Trump plan envisions outlays leveling off during a second term, there is little indication that the White House will shift its emphasis on weapons spending to readiness, force structure or domestic initiatives. So while the business environment in defense will gradually grow more demanding in the years ahead, a typical military contractor would be justified in believing that happy days are here again.
Other economic sectors such as tech have performed well during the Trump era, but what makes defense different is that the government is the only customer. It is a monopsony market. Even when the buyers of weapons are overseas, Washington decides what will or won’t be sold. Thus prosperity in the defense industry is directly traceable to the priorities of the president, in a way that the fortunes of most other sectors are not.
Although military contractors tend to shy away from taking sides in national elections, it is very obvious that Trump’s reelection next year would deliver more favorable business conditions to the defense sector than the election of a Democratic challenger. Democrats generally want to shift funding from defense to domestic programs, and even when they support defense, they tend to prefer spending on readiness and personnel rather than weapons.
So here’s a second iron law that applies to the presidency: when a Republican like Reagan, Bush or Trump occupies the White House, weapons spending goes up. When a Democrat like Carter, Clinton or Obama occupies the White House, weapons spending goes down. The only recent exception to this principle was Dick Cheney’s tenure as Secretary of Defense during Bush 41, because the Soviet Union was collapsing and future military needs looked modest. It did not take long before decisionmakers realized that history had not ended, and the partisan pattern was restored.
This notional chart is not based on hard data, but it captures how many in the defense industry view ... [+]
Compare, for example, President Trump’s track record on defense spending with the apparent plans of the candidates seeking the Democratic nomination. Their web-sites are largely devoted to proposing new domestic initiatives, and make scant mention of the military. They intend to fund these initiatives by raising taxes on corporations and investors, and more generally decry the impact of big business on the culture. There is little evidence Democratic campaign strategists are trying to leverage the votes of defense workers in key swing states such as Florida and Pennsylvania.
Thus, people in the defense industry can be forgiven for fearing that Democratic candidates would view their sector as a bill-payer for other priorities. I work with a number of big military contractors, so I know that not everybody in the sector is a Trump supporter. But the simple truth is that Donald Trump has been a godsend for the defense industry, and no Democratic alternative is likely to be as generous. So Trump’s likely election to a second term has to be viewed as a positive for military contractors.
