Is Government Spending Up or Down? The FY2026 Federal Budget Reality Check
Federal contract spending hit $681B in FY2025 — up 14% over 5 years. But not every category is growing. Here is exactly where spending is expanding, shrinking, and shifting.
The Headline: Up, But Not Everywhere
Total federal contract spending has increased in 5 of the last 6 fiscal years:
That is $83 billion in growth over 5 years -- a 14% increase. Adjusted for inflation, real growth is roughly 4-5%.
But the top-line number masks significant shifts underneath. Some sectors are booming. Others are contracting. If you are in the right space, federal spending is the best growth market in America. If you are in the wrong space, you are competing for a shrinking pie.
Where Spending Is Growing Fast
Cybersecurity and IT Modernization (+12% CAGR)
Federal cybersecurity spending has grown from $18 billion in FY2020 to over $32 billion in FY2025. The drivers:
NAICS codes riding this wave: 541512, 541519, 541511, 518210
Healthcare Services (+9% CAGR)
VA and HHS are the growth engines. VA medical center modernization, telehealth expansion, and EHR deployment (the Cerner/Oracle Health contract) are driving billions in new awards. HHS spending on pandemic preparedness infrastructure remains elevated.
NAICS codes: 621999, 541611, 541512 (healthcare IT)
Professional Services and Consulting (+7% CAGR)
Agencies are increasingly outsourcing program management, organizational consulting, and technical advisory services. The shift from product procurement to services procurement continues.
NAICS codes: 541611, 541612, 541618, 541690
Space and Missile Defense (+8% CAGR)
Space Force spending has grown from $13 billion at its inception to over $23 billion. Missile defense programs (MDA) and satellite communications are major growth areas.
Where Spending Is Flat or Declining
Traditional Construction (-2% CAGR)
Military construction (MILCON) budgets have been squeezed by operational spending priorities. While individual projects are large, the total pool has contracted.
Office Supplies and Furniture (-5% CAGR)
Remote and hybrid work reduced demand for traditional office procurement. GSA Advantage sales in office supplies are down significantly since FY2020.
Travel and Transportation Services (-3% CAGR)
Federal travel never fully recovered from pandemic-era cuts. Virtual meetings replaced many TDY requirements.
The FY2026 Budget: What Is Coming
The FY2026 enacted budget includes several signals for contractors:
Defense ($895 billion total, +3.1%):
Civilian agencies:
The DOGE effect: The Department of Government Efficiency has proposed significant cuts to federal workforce and agency budgets. Some of these proposals have been enacted, resulting in contract cancellations and hiring freezes at specific agencies. However, the net effect on contract spending is complex -- when agencies reduce headcount, they often increase contractor spending to maintain operations.
What This Means for Your BD Strategy
If You Are Growing
The sectors with the strongest tailwinds: cybersecurity, AI/ML, cloud services, healthcare IT, space, and professional consulting. If your NAICS codes overlap with these growth areas, the market is expanding faster than competition.
Use the [NAICS Competition Analyzer](/dashboard/naics-analyzer) to see if your specific NAICS codes are gaining or losing dollar volume year-over-year.
If Your Sector Is Flat
Flat overall spending does not mean flat opportunity. Within any NAICS code, contracts are constantly expiring and being recompeted. An 85,000-contract recompete pipeline means $200+ billion in work changes hands every 18 months, regardless of whether the total budget grows.
The [Recompete Pipeline Dashboard](/dashboard/recompete-pipeline) shows exactly which contracts in your space are expiring and which incumbents are vulnerable.
If Your Sector Is Shrinking
Consider adjacent NAICS codes where your capabilities transfer. A construction firm losing MILCON volume might pivot to facility maintenance (561210) or environmental remediation (562910), both growing categories. The [Pricing Intelligence Engine](/dashboard/pricing) can help you understand competitive pricing in a new NAICS before you commit BD resources.
The Bottom Line
Federal contract spending is up overall and has been for 5 consecutive years. But the growth is concentrated in IT, cybersecurity, healthcare, and professional services. Traditional procurement categories are flat or declining.
The question is not "is the government spending more?" The question is "is the government spending more on what I sell, at the agencies where I compete?" The data to answer that question exists. The firms that use it to guide their strategy outperform the firms that chase every SAM.gov posting blindly.
[See where spending is growing in your NAICS →](/dashboard/naics-analyzer)