Clayton Swope and Kari A. Bingen
In a speech on November 7, 2025, Secretary of War Pete Hegseth announced new measures to accelerate the fielding of new technology and advanced capabilities—complementing plans announced in August 2025 to transform the military requirements process. Among the many important structural and policy changes he outlined, one stood out: forthcoming guidance on how the Pentagon intends to provide “stable, clear, and consistent demand signals for industry to invest and scale production of lethal capabilities.” Persistent uncertainty in long-term defense spending levels, fluctuations in demand, and perennial priority shifts have long deterred business partners from making early capital commitments. At the heart of this challenge is trust—the Pentagon should want to instill in industry partners that it will ultimately buy what it says it will. If industry does not have confidence that the military will stick to its budget plans, it will hesitate to make the capital expenditures (capex) and private investments desired by Pentagon leaders. In short, the Pentagon needs to be a better customer.
Companies spend a lot of time trying to understand and forecast demand for their products and services before making investments by looking at historical trends, market conditions, and other indicators—essentially, companies make educated guesses on what customers want to reduce investment risk. Because no one can predict the future, market demand forecasts can be wrong and much-hyped new products can flop—think the Apple Lisa, Microsoft Zune, and Amazon Fire Phone. But defense companies essentially have only one main customer—the Pentagon—so an equivalent mistake can be fatal. In the past, to buy down that risk, the government picked up the bill for research and new product development. The Pentagon wants to change that and shift more upfront costs onto the private sector. But for defense companies to justify spending capex to build more production lines or self-fund new product development, they need to trust that the Pentagon will stick to its plans for buying more military kit, and see that such plans are backed up by money.
But an honest assessment of trends in U.S. defense spending does not necessarily encourage greater capital expenditures on product development and manufacturing capacity. While U.S. officials stress the need to invest more in defense, long-term defense spending levels have not shown sustained, dramatic growth. Rather, they have failed to even keep pace with inflation, resulting in real budget decline. Between fiscal year 2014 and FY 2025, U.S. defense funding fluctuated, peaking in FY 2024, when including Ukraine security assistance funding. The reconciliation bill passed in July 2025 included a $156 billion one-time boost in military funding between FY 2025 and FY 2029. Yet future growth in U.S. defense spending remains uncertain. Though the Trump administration advertised a trillion-dollar defense budget, to get to that number, it plans to use $119 billion from the reconciliation bill for defense purposes in FY 2026, asking Congress for $892.6 billion in its FY 2026 defense budget request. While outside the control of the Pentagon, repeated delays in passage of full-year appropriations and use of continuing resolutions add yet another element of uncertainty to defense spending.
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