Saturday, October 27, 2012

Military Spending Boosts Third Quarter GDP

The advance estimate for third quarter GDP growth came in at a better-than-expected 2.0%. This was up from 1.3% growth in the second quarter and, on the surface, it looks like good news. With the election just days away, the headline number is extremely important to the Obama administration. A 2-handle on GDP growth this far along in an economic recovery is weak, yet it helps make the case that things are getting better.

The market, however, took it as a non-event. Perhaps investors noticed that a good chunk of the increase was due to government spending. Indeed, real (as opposed to nominal) national defense spending surged 13%. Conspiracy theorists might say that the government accelerated military spending in order to boost the GDP report and help make President Obama's case for reelection. I think it is more likely that the accelerated spending was due to the pending sequestration. Unless Congress acts soon, the military budget will be slashed. The increased spending at this time could simply be the Pentagon's way of preparing for the expected cuts.

Whatever the reason, it is extremely disheartening to realize that even with this huge surge in defense spending, third quarter GDP climbed just 2.0%. In fact, growth would have been just 1.4% had defense spending remained flat. No doubt this is information many Obama supporters would prefer the electorate not to know.