Different Paths Forecast for Defense Spending, Commercial Aircraft

Don't expect a growing U.S. economy to bolster spending on defense, but commercial-aircraft companies face friendly skies.

We are projecting that the U.S. economy will continue to expand in 2012, and most segments of the U.S. economy will participate in the positive trend. Make sure you have the capital, people, materials and equipment necessary to meet the need. Determine where bottlenecks in procurement, production and delivery might occur in the coming year with the assumption that you will be busier next year than you are today and spend some cash to fix those problems now.

The bullishness is not based on hope. It is based on a sound business-cycle theory that has delivered a 94.7% accuracy rating on key forecasts looking more than one year out. The positive outlook also is based on positive trends found in key extant leading indicators, including the U.S. Leading Indicator and the Purchasing Managers Index. The latest Purchasing Managers Index release (December) was very encouraging at 53.9. December marked the 29th consecutive month of growth in the manufacturing sector.

Global opportunities will be found in 2012 with business-cycle rise occurring in the United States and in China (and likely Japan as well). The good news in these economic zones should keep the EU zone from falling apart despite current financial strains.

China will find itself increasingly in the news during 2012 because of its housing issues, civil unrest, new leadership and colonization efforts. We expect that China's economy will continue to grow in 2012 and at a pace sufficient to avoid a political crisis or virtual economic downturn.

Defense Capital-Goods New Orders

We are projecting that the U.S. economy will continue to expand in 2012, and most segments of the U.S. economy will participate in the positive trend.

The annual trend for new orders for defense capital goods was 8.8% below the year-ago level when we went to press. The seasonal decay is more pronounced than typical and suggestive of more trend decline in the coming months. We are projecting that defense capital-goods new orders will end 2012 3.8% below 2011's already low number.

Defense spending is increasingly tied to strategic necessities, and the focus is shifting to the Pacific. The United States plans to station Marines in Australia and vessels in Singapore as a counterbalance to growing Chinese influence. Upgrading anti-submarine capabilities now is a priority for the United States and its allies along the South China Sea shipping routes. This need could bolster expenditures for naval equipment and software, currently at $11.7 billion, a slight 1.1% above the year-earlier level.

Failure by the congressional supercommittee now puts the 2013 Pentagon budget under further pressure, deepening the projected reductions from $500 billion to $1 trillion. While this potential reduction is in line with previous drawdowns, fewer personnel reductions are available, so a large portion of the cuts will come from programs.

Defense aircraft and parts new orders is tracking 12% below the same time last year on an annual year-over-year basis. New orders for the last 12 months are at a 42-month low. Internal trends do not indicate a quick turnaround in this market, and the outlook for 2012 is subdued.

In addition to the effects of political gridlock, new orders in this market have exposure to the current economic turmoil. While the F-35 JSF program received a boost with the Department of Defense's order of 30 aircraft, decisions on potential purchases from Japan, Turkey and South Korea are pending. JSF orders from Europe remain vulnerable to deficit-slashing measures brought on by governments operating under increasingly deep budget strictures.

Civilian Aircraft

The Civilian Aircraft Equipment Production Index is cruising at a robust 18.2% above the annual year-ago level. Our analysis suggests that participants in this industry will enjoy increasing opportunities throughout the year. Repair and maintenance sales should be healthy in the coming year given the positive year-over-year comparison in revenues for U.S. air-carrier passenger miles.

Annual commercial-aircraft production moved higher, finishing 2011 more than 21% above 2010. The outlook for future production of Boeing's new 737 MAX received a recent boost with Southwest Airlines' order for 150 aircraft. FedEx also placed an order, this one for 27 of Boeing's 767 jet freighters. 9

Contributing Editor Alan Beaulieu is an economist and president of ITR. He is co-author, with his brother Brian, of "Make Your Move," a book on spotting business-cycle trends.

Put the economic forecasts from Alan and Brian Beaulieu of ITR Economics to work for your company. These 94.7% accurate economic forecasts help you spot unfolding business cycle trends well in advance, giving you time to capitalize on changing market conditions. Subscribe Now

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