The US defense budget is expected to record a CAGR of -0.12% during the forecast period 2012-2017

Monday 17 September 2012, Amsterdam

With the USdefense budget for 2012 valued at US$645.7 bn, the nation has the largestdefense market in the world. Due to its high levels of military spending, alarge number of opportunities are available to companies keen to supply thenation with defense equipment. However, the US defense budget, which declinedat 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 constraintscaused by the global financial crisis.

Threatsfrom North Korea and Iran, modernization initiatives, an arms race with Chinaand Russia, ongoing military operations, and the protection of allies areexpected to drive the defense spending of the US. The US perceives a potentialnuclear threat from Iran and North Korea, through their acquisition oflong-range ballistic missiles. The tension between the US and North Koreafurther increased in November 2010, when the US criticized the attacks carriedout by North Korea on South Korea.

The US mustmodernize its aging fleet of equipment, such as fighter aircraft, helicopters,land defense systems, and maritime equipment; however, the rising unit cost ofdefense systems poses a challenge to procurement funding. The cost of militaryhardware is increasing due to technological advancements and a shortage ofskilled labor in the design, engineering, and manufacturing sectors, coupledwith the rising cost of input materials, such as metal. In addition, theper-unit overhead costs at production facilities increased due to a reductionin the number of units manufactured.

The USdefense budget declined at a CAGR of -0.77% during the review period, to reacha value of US$645.7 bn in 2012. However, defense expenditure is expectedto 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 announceddefense budget cuts over the next five years, which will be achieved byreducing capital expenditure.