Two unrelated fiscal policy discussions underway in Washington point to bipartisan agreement to alleviate the Pentagon’s inflation pain on wages and fuel costs, and to provide more money to combat pandemic challenges. The nascent talks could wrap these items into a package to fund government (FY22) beyond the February 18 expiration date for the current continuing resolution (CR), or as separate legislation.
The announcement on Friday that President Biden will give his State of the Union address on March 1 likely means the FY23 budget will be delayed until that month. This indicates the White House hopes to have a FY23 baseline from Congress by then. That baseline could come in decisions this or next month about the current CR. Risks are low of a government shutdown in a midterm election year, and the possibility of a deal on routine and supplemental funding might attract sufficient bipartisan votes for an agreement.
For context, debt-financed emergency supplementals often garner bipartisan support after harmless partisan posturing. The most recent supplemental passed on September 30 last year garnering 254 – 175 votes in the House of Representatives and 65 – 35 in the Senate. The National Defense Authorization Act (NDAA) enacted at the end of last year passed 88 – 11 in the Senate and 363 – 70 in the House, despite authorizing $24 billion more than the president requested. Of all the appropriations subcommittee bills, defense usually closely tracks authorizers’ work.
Tracking the major subcategories of defense spending reveals increasing support since 2018 for operations and maintenance (which includes fuel expenditures) and personnel. Secretary Lloyd Austin has been vocal since last month that inflation has become a readiness worry. Conversations hover around a $40 – $50 billion increment for FY22 defense spending. The bump in research and development to major defense contractors and their subcontractors reflects the increased priority to artificial intelligence, cybersecurity, and data analytics.
Sector investors closely watch changes to funding for defense priorities. The defense/aerospace S&P SPDR ETF bounced as mid-fall bicameral discussion underscored bipartisan support, faltered on Senate disagreements recovered shortly after a deal was reached in mid-December. Electoral politics and geopolitics support an upward Pentagon spending trend.
As the Covid discussion increasingly focuses on endemic rather than pandemic preparation, the Biden administration wants more money for testing and other purposes, including hospital support. The restaurant lobby also wants more money to prevent further establishment closures. As supplemental legislation takes shape no doubt others will seek additional funding for other purposes.
Guessing how and when all this plays out is not yet a useful exercise. If we’re correct about shutdown aversion, many paths could lead to an agreement. Bipartisan support for the troops and Covid managing activities could lead to a $200 billion or less bill that obviates the February 18 fiscal deadline. Our sense is both parties have incentives for a small 1Q22 fiscal package.
Weekly Outlook
This is the first week of the year both bodies of Congress will be in session. Federal Reserve Board confirmation hearings will dominate headlines Tuesday and Thursday as Senate Banking Committee members ponder the timing and scope of tightening policies, related views on inflation effects, and the trading practices of Fed officials. Ukraine conversations in Geneva and elsewhere keep alive geopolitical tensions between the US and Russia. Tougher language from both sides the past three days reaffirms a quick resolution remains unlikely. We’ve not detected anything pointing to a January resurrection of BBB but the small bill fiscal talks, if successful, might clear a February path. Delaying until March the State of the Union address and the president’s FY23 budget also reduces pressure on a January BBB debate. We remain dubious of a deal nearing $2 trillion but it’s possible the winter cooling off in Machin/Biden talks ushers in a new, if less ambitious effort.
