DS9 Document EFTA00606051

E: JAN 01.27.2017 ECONOMICS: US PERSPECTIVES NATIONAL DEFENSE: IS ANOTHER SPENDING BOOM ON THE HORIZON? + Joseph G. Carson, US Economist and Director—Global Economic Research, President Trump has promised to increase defense spending—and there's support from key members of Congress. If a large multiyear plan is approved, it would represent a sharp reversal from what has been the weakest trend in defense spending in the past 5O years. And the timing and scale would have important implications for the outlook on growth and inflation. National Defense—The Trump Plan President Trump has promised to deliver an ambitious program to rebuild the US military. It would include modernizing US nuclear weapons systems, investing more in cybersecurity, enlarging the navy's fleet and increasing the number of fighter aircraft for the air force. Trump's plan also includes additional military personnel—well over 100,000, according to some estimates. The details of Trump's first Pentagon budget will form part of the overall budget he'll submit to Congress in late February or early March. The actual funding request for the current fiscal year (which ends September 30) must be completed by April 30—that's when the current legislation funding the military budget is set to expire. More important, Trump's blueprint for the Pentagon budget could set the baseline for defense spending for at least the next four years. It's also worth noting that Trump's military expenditures could be at the low end of what some in Congress are proposing. For example, Senator John McCain, who chairs the Senate Armed Services Committee, recently released a white paper on defense spending, Restoring American Power. McCain argues that the US has underinvested in the military for several years, and that it is now vital for the US to substantially increase funding for the Pentagon. His plan calls for a $640 billion defense budget for fiscal year 2018, which is $58 billion above the current budget baseline. Moreover, the McCain defense plan urges an additional $430 billion in military spending over the next five fiscal years. Defense Spending Patterns Are Unlike Other Federal Programs History shows that defense spending programs are unusual in that they're neither cyclical nor countercyclical. Most often they are based on military and political strate- gies as well as ongoing readiness to respond to or engage in global encounters. Based on historical gross domestic product (GDP) data, there have been three large defense-spending programs in the past 50 years (Display 1). The first buildup Display 1 Defense Spending Comes in Big Waves Nominal Defense Spending 80 70 60 Vietnam SO War 40 30 20 10 0 110) 1201 EA 72 81 90 98 07 16 Reagan gulklup Iraq War Inner? Through September 20.2016 reartear movng rgerage Str-rce Bureau of Economc Ana,O4 and liner Anaryks occurred in the mid-1960s, during President Lyndon Johnson's term, and ran for five years. That was tied to the military engagement in Southeast Asia. The second large defense-spending boom occurred during the first four years of the Reagan presidency. This buildup was part of Reagan's political and military strategy to rebuild the military apparatus after what he saw as years of neglect. The third major increase started during the first term of President George W. Bush. This one was linked to events surrounding 9/11 and the following events in the Middle East. 1 EFTA00606051 From a political and military standpoint the Trump defense plan parallels the goals and objectives of President Reagan's military push. And with McCain's more aggressive plan aligned on the same premise of modernizing and improving the readiness of the US military, Trump will likely have the backing of this influential member of the Republican congressional leadership. Today's Economic Backdrop — Similar to the 1960s The economic and financial implications of a large, multiyear defense-spending plan must be weighed against the economic environment at the time of implementation. And from a historical context, today's conditions have more similarities to the economic setting of the mid-1960s than during the defense buildups of the early 1980s or early 2000s, which were either in recession or the very early stages of recovery. In contrast, the US economy in the mid- 1960s was already in its fifth year of expansion, the jobless rate of 4.5% was relatively low and inflation was tame (roughly 1.5%). Nonetheless, the extra defense spending boosted domestic demand growth and added significant pressure to labor costs, materials and supplies, and product prices. So much so that the acceleration in consumer price inflation (from 1% in 1961 to near 6% in 1970) from the start to the end of that business cycle was one of the largest of any economic growth cycle during the postwar period. Today's economic backdrop looks similar in many ways. The economy has been in recovery for seven years, the jobless rate is in the mid-4% range and inflation is stable (at around 2%). While many domestic and global factors are different now, we would still expect a large multiyear defense- spending program to add to growth and put upward pressure on labor costs and inflation in the coming years. Keep in mind that we're coming off the weakest five-year defense spending trend in the past 50 years, so Trump's defense spending need not match any of the prior three to have a major impact Stay tuned for the unveiling of Trump's budget and pay close attention to the defense spending request. A large multi-year program would definitely lift inflationary pressures. While we wouldn't expect an acceleration like that in the 1960s, a sustained rise of 100 to 200 basis points in general inflation would still seem reasonable—and far above what the Federal Reserve and financial markets are currently expecting.. The information contained herein reflects the views of AltianceBemstein LP. or its af Kates and sources it believes are reliable as of the date of this publication. AllianceBernstein LP. makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any prciection, forecast or opinion in this material will be realized. Past performance does not guarantee future results. The views expressed herein may change at any time after the date of this publication. This document is for informational purposes only and does not constitute investment advice. AlianceBernstein LP. does not provide tax. legal or accounting advice. It does not take an investor's personal investment objectives or financial situation into account investors should dscuss their individual circum- stances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument product or service sponsored by AllianceBernstein or its affiliates. Note to Canadian Readers: AlianceBernstein provides its investment management services in Canada through its affiliates Sanford C. Bernstein & Co. LLC and AllianceBemstein Canada, Inc. Note to European Readers: This information is issued by AffranceBernstein Limited, 50 Berkeley Street London W11 8HA. Registered in England. Na 2551144. AllianceBemstein Limited is authorised and regulated in the UK by the Financial Conduct Authority (FCA). Note to Austrian and German Readers: This information is issued in Germany and Austria by AB Europe GmbH. Local paying and information agents Austria—Uni• Credit Bank. Austria AG. Schottengasse 6.8, 1010 Vienna; Germany.—BHF-Bank Aktiengesellschaft, Bockerneimer Landstrasse 10, 60323 Frankfurt am Main. Note to Swiss Readers: This document is issued by AhanceBernstein Schweiz AG. Zurich. a company registered in Switzerland under company number CHE- 306.220.501. AllianceBemstein Schweiz AG is authorised and regulated in Switzerland by the Swiss Fnancial Market Supervisory Authority (FNMA) as a oftstnbutcr of collective investment schemes. Swiss Representative & Swiss Paying Agent BNP Paribas Securities Services, Paris. succursale de Zurich. Registered office: Selnaustrasse 16.8002 ZUrich. Switzerland, which is also the place of performance and the place of jurisdiction for any litigation in relation to the distribution of shares in Switzerland. The Prospectus. the key investor information documents. the Articles or management regulations, and the annual and semiannual reports of the concerned fund may be requested without cost at the offices of the Swiss representative. This document is directed at Qualified Investors only. Note to Australian and New Zealand Readers: This document has been issued by AllianceBemstein Australia Limited (ABN 53 095 022 718 and AFSL 230698). Information in this document is intended only for persons who quaify as 'wholesale dents" as defined in the Corporations Act 2001 (Cth of Australia) or the Financial Advisers Act 2008 (New Zealand), and should not be construed as advice. Note to Readers in Vietnam. the Philippines, Brunei. Thailand, Indonesia, China. Taiwan and India: This document is provided solely for the informatiorel purposes of institutional investors and is not investment advice. nor is it intended to be an offer a sokcitation, and does not pertain to the specific investment objectives. financial situation or particular needs of any person to whom it is sent This document is not an advertisement and is not intended for public use or additional distribution. AllianceBemstein is not licensed to, and does not purport to, conduct any business or offer any services in any of the above countries. Note to Readers in Malaysia: Nothing in this document should be construed as an invitation or offer to subscribe to or purchase any securities, nor is it an offering of fund management services, advice, analysis or a report concerning securities. AllianceBemstein is not licensed to. and does not purport to, conduct any business or offer any services in Malaysia. Without prejudice to the generality of the foregoing. AllianceBernstein does not hold a capital markets services license under the Capital Markets & Services Act 2007 of Malaysia, and does not nor does it purport to, deal in securities, trade in futures contracts, manage funds, offer corporate finance or investment advice, or provide financial planning services in Malaysia. Note to Singapore Readers: This document has been issued by AlianceBernstein (Singapore) Ltd. CABSI:. Company Registration Na 199703364C). ABSL is a holder of a Capital Markets Services Licence issued by the Monetary Authority of Singapore to conduct regulated activity in fund management and dealing in securities. AlfianceBernstein (Luxembourg) SA r.l. is the management company of the portfolio and has appointed ABSL as its agent for service of process and as its Singapore representative. The document has not been reviewed by the MAS. Note to Taiwan Readers: AManceBemstein LP. does not provide investment advice or portfolio-management services or deal in securities in Taiwan. The products/ services akistrated here may not be available to Taiwan residents. Bet ore proceeding with your investment decision, please consult your investment advisor. Note to Hong Kong Readers: This document is issued in Hong Kong by AllianceBemstein Hong Kong Limited Mei it*ff NOM a ficensed entity regulated by the Hong Kong Securities and Futures Commission. This document has not been reviewed by the Hong Kong Securities and Futures Commission. Note to Japan Readers: This document has been provided by AllianceBemstein Japan Ltd. AllianceBernstein Japan Ltd. is a registered investment-management company (registration number: Kanto Local Financial Bureau no. 303). It is also a member of the Japan Investment Advisers Association: the Investment Trusts Association. Japan: the Japan Securities Dealers Association: and the Type II Financial Instruments Firms Association. The producVservice may not be offered or sold in Japan; this document is not made to solicit investment. 2 EFTA00606052