An Aerospace and Defense Industry Market Index for 1950-2012 and the Connection With Defense Spending

Abstract

The U.S. aerospace and defense industry (ADI) is largely dependent on its U.S. government defense customer. Because of the vital yet specialized nature of that market, the health of the ADI should be assessed periodically to enable government and industry leaders to understand clearly how and to what extent changes to its capacities and capabilities can be forecast and incorporated in their policy deliberations for better decisions. It is widely assumed that changes in defense spending will affect ADI market health, but in fact, our research indicates that although true for four decades after 1950, the comfortable predictive connection between ADI equity valuations and defense spending underwent changes with the shift in ADI industry structure for the largest companies in the 1990s, and can challenge interpretation even at present. The role of large company order backlogs appears to significantly mediate the modern predictive relationship. The analysis used the ADI market health indexes by NDBI, indexes which are based on a representative industry sample of 97 companies divided by assets sizes for the entire 1950-2012 interval. The breadth and depth of the sample helps with interpretation of past and recent performance and in continuing model and predictive work.