Moody’s on defense stocks: What market crisis?

The aerospace and defense sector will likely remain healthy for a long time despite the financial meltdown on Wall Street, according to Moody’s six-month update released today.

But there are worries about the future of US defense spending, which is expected to rise to a post-World War II record of $710 billion in fiscal 2009. Here’s Moody’s:

“On the defense side, a new administration in Washington could take a tougher stance on spending as the weakening US economy and the federal response to the credit crunch potentially refocuses spending priorities. Even without these concerns, the blistering pace of growth in defense spending in recent years is not sustainable over the long run, and we continue to expect steadily reduced defense outlays beginning after next year.”

The US Air Force tanker fiasco also sends a clear message to foreign suppliers eying the US market. Moody’s says:

As a consequence of the decision, non-US companies might believe the US government is favoring Boeing to preserve American jobs. This would weaken incentives for these companies to pursue contracts with the US.

Overall, expect the US defense spending to begin contracting in 2010 after an 11-year cycle of sustained growth. But the downturn isn’t likely to be extremely painful.

“Longer-term trends support strong defense outlays. Amid a continuing threat of global terrorism, lawmakers will not want to be perceived as soft on defense and homeland security. … There will be a substantial need to rebuild field assets.”


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