The US Defense Budget is Expected to Record a CAGR of -0.12% During the Forecast Period 2012-2017

With the US defense budget for 2012 valued at US$645.7 bn, the nation has the largest defense market in the world. Due to its high levels of military spending, a large number of opportunities are available to companies keen to supply the nation with defense equipment. However, the US defense budget, which declined at a CAGR of -0.77% during the review period, is expected to record a CAGR of -0.12% over the forecast period, largely due to the financial constraints caused by the global financial crisis.

Threats from North Korea and Iran, modernization initiatives, an arms race with China and Russia, ongoing military operations, and the protection of allies are expected to drive the defense spending of the US. The US perceives a potential nuclear threat from Iran and North Korea, through their acquisition of long-range ballistic missiles. The tension between the US and North Korea further increased in November 2010, when the US criticized the attacks carried out by North Korea on South Korea.

The US must modernize its aging fleet of equipment, such as fighter aircraft, helicopters, land defense systems, and maritime equipment; however, the rising unit cost of defense systems poses a challenge to procurement funding. The cost of military hardware is increasing due to technological advancements and a shortage of skilled labor in the design, engineering, and manufacturing sectors, coupled with the rising cost of input materials, such as metal. In addition, the per-unit overhead costs at production facilities increased due to a reduction in the number of units manufactured.

The US defense budget declined at a CAGR of -0.77% during the review period, to reach a value of US$645.7 bn in 2012. However, defense expenditure is expected to register a marginal decline of -0.12% in CAGR over the forecast period, declining to US$611.0 bn by 2017. Indeed, the government has announced defense budget cuts over the next five years, which will be achieved by reducing capital expenditure.

Source: ASDReports - Market Research
Date: Sep 17, 2012