Military Spending and Economic Growth

Consumers continue to provide most of the spending behind the vigorous growth in the U. S. economy, according to a recent report from the Bureau of Economic Analysis. Business investment spending was the second largest contributor to growth, with military spending also contributing greatly to the government spending component of GDP.

"We are in the sweet spot of the recovery right now, and the second quarter is also likely to be strong," said Mark Zandi, chief economist at Economy.com, a forecasting and data-gathering firm. The question remaining for Mr. Zandi and other forecasters is this: What will happen in the second half of the year? Historically, the U. S. economy has faltered when military spending falls. Without spending on the war in Iraq, GDP would have expanded at an annual rate of only 3.5 percent.

Low interests rates and low inflation has given consumers hundreds of millions of dollars in extra spending power. Retail sales, home sales and consumer confidence all improved in March and that acceleration appears to have continued through April. The Bush administration suggests that some of the growth is the result of the Bush tax cuts.

Politically, neither party addressed the contribution of military spending to economic growth. GDP increased by $108 billion in the first quarter and military spending made up $17.4 billion of that increase. This is the highest quarterly impact of military spending on growth since the second quarter of last year when the war started.

"Clearly, military spending is more elevated because of Iraq than people had expected," said William C. Dudley, director of domestic economic research at Goldman Sachs.

The Bureau of Economic Analysis reported that most of the increased military spending went to the Air Force for "base support equipment". Very little of the spending went for weaponry, although spending priorities could change if the fighting continues to escalate as it has recently.

(Updated June, 2004)