The past decade or so has been a good time to be a contractor working for the US military or intelligence agencies. Between 2000 and 2010 the military budget grew 9 per cent a year, to about $690bn, faster than the budget as a whole or any of the big budget items besides Medicare. The Department of Homeland Security had a fiscal 2010 budget of $55bn, $15bn more than five years before.
More recent years have been tougher. In 2010 both the secretary of defence and the CIA director went on record in the Washington Post voicing serious concerns about how many key jobs were being filled by contract employees. But the debate is not just over who should fight wars or collect intelligence. It is about how many soldiers and spies the country can afford. Hence the 2011 Budget Control Act and its threat of sequestration. If Congress is unable to agree to cut the federal budget by $1.2tn over 10 years, automatic cuts kick in next year with the axe falling heaviest on the military.
Shares in the largest contractors that make the fanciest weapons systems – Raytheon, General Dynamics, Lockheed Martin– have held up over the past few years. Smaller contractors that specialise in providing personnel and technical support have had a tougher time. L-3, SAIC, ManTechand CACI Internationalhave all lagged behind the wider market badly. SAIC announced last week that, in an effort to create shareholder value, it would separate its low-margin IT and services arm from its higher-margin technology solutions business.