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Trump defense spending could spur private sector job creation

The 10th Mountain Division soldiers plug their ears while comrades fire a 105mm Howitzer during a training mission for future conflicts on May 18, 2016 at Fort Drum, New York.
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The 10th Mountain Division soldiers plug their ears while comrades fire a 105mm Howitzer during a training mission for future conflicts on May 18, 2016 at Fort Drum, New York.

President-elect Donald Trump wants a U.S. military with more ships, more troops and more aircraft, but getting it won't be easy, even with a Republican Congress.

Still, the ambitious plan could translate into more jobs in the private sector from coast to coast. It could include work not only in building new fighter jets and missiles, but in shipyards in Virginia and elsewhere.

"The Trump plan — at least what we know of it so far — is probably so positive for defense overall that there's probably many more winners than there are individual losers," said Roman Schweizer, a defense analyst at Cowen.

Still, some industry observers suggest the new administration might place more emphasis on controlling costs by stressing the need for better terms, which would save the Pentagon money but could work against the defense contractors.

"You have defense hawks who want to increase defense spending and then you've got fiscal hawks who want to keep spending low." -Todd Harrison, Senior fellow, Center for Strategic & International Studies

Analysts estimate Trump's defense plan, which was disclosed during a national security policy speech in Philadelphia on Sept. 7, could add upwards of $250 billion more to U.S. military spending over the next four years, with a portion coming from freeing up funds from nondefense programs.

Trump said he will ask Congress to repeal sequestration, which is a relic of a debt ceiling compromise reached in 2011.

"Republicans are divided on the budget caps," said Todd Harrison, a senior fellow at the Center for Strategic & International Studies, a Washington-based think tank. "You have defense hawks who want to increase defense spending and then you've got fiscal hawks who want to keep spending low."

Harrison said the Trump defense plan is "somewhere between 3 percent and 6 percent annual growth above inflation" and at the high end would be in line with the defense buildup we saw in the early 1980s under Ronald Reagan.

Trump hasn't offered much detail on his defense plans beyond his September address.

Republican presidential candidate Donald Trump gives a national security speech aboard the World War II Battleship USS Iowa, September 15, 2015, in San Pedro, California.
Robyn Beck | AFP | Getty Images
Republican presidential candidate Donald Trump gives a national security speech aboard the World War II Battleship USS Iowa, September 15, 2015, in San Pedro, California.

Here are five major things we know now and how it could potentially impact different defense-related companies:

More ships: Trump's Navy plan calls for 350 surface ships and submarines, up from 276 today and above the Pentagon's current target of 308 ships over the next 10 years.

"Clearly shipbuilding is one sector that will benefit," said Cowen's Schweizer, a former acquisition professional with the Navy's Littoral Combat Ship program.

The analyst said the companies with the biggest potential exposure to Trump's planned ship build-up are major defense contractor General Dynamics, shipbuilder Huntington Ingalls and BWX Technologies, a maker of nuclear reactors for aircraft carriers and submarines.

An acceleration of Navy shipbuilding also could result in tens of thousands of new private-sector jobs created in shipyards on both coasts. It's unclear how many of the new submarines would be created, but the Navy's current submarine fleet stands at just over 50 and had been projected to fall to 41 boats in 2029, according to the Congressional Research Service.

As for carriers, the Navy has 10 in service and the $13 billion USS Gerald Ford will soon joining the others. "We believe the U.S. should have 13 carriers to meet our security obligations," said Tom Spoehr, a retired Army lieutenant general and director of the Heritage Foundation's Center for National Defense.

An F/A-18E and An F/A-18F (front) Super Hornet stand ready on the US navy's super carrier USS Dwight D. Eisenhower (CVN-69) ('Ike') in the Mediterranean Sea on July 7, 2016.
Alberto Pizzoli | AFP | Getty Images
An F/A-18E and An F/A-18F (front) Super Hornet stand ready on the US navy's super carrier USS Dwight D. Eisenhower (CVN-69) ('Ike') in the Mediterranean Sea on July 7, 2016.

More aircraft: Trump's Air Force would consist of at least 1,200 fighters, up from the present 1,113. Trump pointed out the average age of the current Air Force fleet is around 27 years and includes B-52 bombers, which were introduced in the 1950s.

All indications are the B-21 long-range strike bomber that went to Northrop Grumman is safe. The Air Force lifted its stop-work order on the $80 billion stealth bomber in February after the government denied a protest from Boeing.

Lockheed Martin's F-35 Joint Strike Fighter, a fifth-generation fighter program costing nearly $400 billion, is the most advanced aircraft in the U.S. military. Yet Trump hasn't always been a big fan of the program. Last year, he criticized the F-35 as "not very good."

Lockheed has been having meetings with Trump's transition team to discuss the F-35 and head off any attempts to downsize the program. Other partners on the F-35 program are Northrop and BAE Systems.

"If you pull the plug on that (F-35 program) it's going to be 15 years before we have something else to put in its place," said David Ochmanek, senior defense research analyst at the RAND think tank and a former deputy assistant secretary of defense in two presidential administrations. "That would be a seismic thing to disrupt."

More troops: Trump's Army would consist of around 540,000 active-duty troops, a figure he indicated the Army's chief of staff has sought. "We now have only 31 brigade combat teams, or 490,000 troops, and only one-third of combat teams are considered combat-ready," Trump said in September.

The Marine Corps also would be expanded under the Trump plan, going from 23 battalions today to 36, or around 10,000 more Marines. That's a figure the billionaire said the Heritage Foundation indicated was the minimum number needed to comfortably "deal with major contingencies."

"The funding increases would pay for soldiers and not equipment, and would therefore be of minor benefit to hardware manufacturers," said Credit Suisse analyst Robert Spingarn.

Still, the analyst believes there's some upside for larger munitions firms such as General Dynamics and Orbital ATK, as well as for missile companies such as Lockheed, Raytheon and Boeing.

Trump also pledged in his Philadelphia address that he would "seek to develop a state-of-the-art missile defense system" and modernize the Navy's cruisers with ballistic missile defense capability. He charged that under the previous two Democratic presidents the nation's "ballistic missile defense capability has been degraded."

Cyberwarfare: There's also a pressing need to "invest heavily in offensive cyber capabilities to disrupt our enemies, including terrorists," according to Trump.

The president-elect wants to make new investments in the cyber area that will both modernize the military's capabilities as well as lead to new job creation in the private sector. This could help IT and cyber-related government service companies such as Booz Allen Hamilton, ManTech and Science Applications International.

Trump also indicated that one of his first directives after taking office will be to ask the Joint Chiefs of Staff and some other departments to conduct reviews of cyberdefense capabilities for the purpose of identifying all vulnerabilities.

Burden sharing: Another defense issue Trump has addressed several times is the desire to have allies share more of the financial burden for security rather than American taxpayers. The U.S. has various treaties such as NATO and arrangements with Asian countries that provide for help against possible aggression.

Yet some believe the current arrangement of helping with weapons sales may actually reward the U.S. with economies of scale. Raytheon is considered one of the most exposed major defense contractors in terms of international military business.

"These same agreements allow for sales of major weapons systems which lowers the average cost to the U.S. military," said Howard Rubel, a defense industry analyst at Jefferies. "Based on current rhetoric, the new administration does not understand this subtle benefit, nor the benefit of interoperable weapons from radios to warplanes."