A ballooning deficit, a slowing economy and the ever-present threats to national security are interconnected budget problems the Obama administration will be forced to address.

The Bush years have brought a 62% increase in defense spending from 2001 to 2008, according to a White House analysis.  Continuing such a pace is unlikely for the incoming administration. The defense industry and its shareholders are bracing for a slowdown, but they question how much of one.

"The concerns with respect to an Obama administration, is, what's the level of future growth?” said Jim McAleese, a defense analyst with McAleese & Associates.  “When the shareholder buys the stock, he or she buys it largely based upon the growth potential because the value of the current funding is already baked into the stock price today.  So what Obama represents is 'what's the continued future growth?'"

A centerpiece of the Obama campaign was to end the war in Iraq, apply those resources to the theater in Afghanistan and divert some of the military funding to pay for domestic priorities.

Though some within the Democratic Party are calling to end the war in Iraq immediately, the Obama campaign said it supports a “responsible and phased” withdrawal.  Also, much of the 2009 budget for the Department of Defense is in place, making it difficult for President-elect Barack Obama to drastically affect military spending.

“He couldn't impact, in a massive matter, the landscape,” said McAleese.  “If he really wanted to cut and wanted to have a draconian cut, it would be very, very difficult to implement those immediately."

Despite support for massive defense cuts by some Democrats, analysts say they believe Mr. Obama will continue to support the Army’s plan to add more than 65,000 troops over the next two years. From there, Congressional watchers from both parties are waiting to see which approach Democrats will take. 

“There's going to be a split down the middle between the Democrats. You're going to have folks like Barney Frank who want to turn the defense department upside down and really shrink it,” said Ron Bonjean, the former chief of staff to the Senate Republican Conference.  “You're going to have others who are more of the hawkish end who are going to want to insure that the right tools will be there to fight the War on Terror."

Those decisions begin with Mr. Obama’s selecting his first Secretary of Defense and will continue with an examination of how much the next administration is willing to spend on the military while so many interests are competing for federal dollars.