A stark pickup in government
spending, particularly in defense, has helped fuel a broad acceleration in U.S.
economic growth in the past year and a half, according to a Wall Street Journal
analysis of Commerce Department data.
The U.S. economy has expanded at a
2.9% annual rate since April of 2017, according to the Commerce Department’s
tabulations of the nation’s gross domestic product, or output. That growth rate
is faster than the 2.2% annual growth rate between mid-2009—when the expansion
started—and April 2017.
Faster government spending accounted
for nearly half of the acceleration, according to The Wall Street Journal
analysis.
The Commerce Department breaks down
various contributors to economic growth, including government spending,
business investment, consumer outlays and exports.
Defense shifted from contracting at
a 2.1% annual rate between June 2009 and March 2017, to growing at a 2.9% rate
since April 2017. The turnaround added 0.21 percentage points on average to the
nation’s overall economic growth rate, according to Commerce Department
figures.
When including faster spending on
nondefense items and spending at the state and local levels, increased
government spending accounted for 0.34 percentage point of the 0.7 percentage
point increase in the growth rate since April 2017, or nearly half.
Other factors are at play. Faster
business investment, due in part to energy investing, has contributed 0.3
percentage point to the growth rate, while faster consumer spending accounts
for about a third of the pickup. A slowdown in home building has subtracted
about 0.2 percentage point from the growth rate.
The Commerce Department will provide
its first estimate of third-quarter growth Friday morning, with new numbers on
which sectors are contributing most.
Economic growth is an important
point of debate in the midterm elections. President Trump
and Republicans say tax cuts and less regulation have accelerated growth.
Democrats say faster growth is uneven and unsustainable. The role of government
spending has gotten less attention from either side.
“There really had been some pent-up
demand within the Department of Defense for modernization, for training, for
maintenance,” said Todd Harrison, a senior fellow and defense budget analyst at
the Center for Strategic and International Studies. “Now [with] the sudden
increase in the budget in fiscal year 2018 and fiscal year 2019, you see some
of that pent-up demand being unleashed in the market.”
Defense outlays grew 6% in the
fiscal year that ended Sept. 30, thanks in part to a bipartisan budget agreement to
boost government spending this year and next by nearly $300 billion above
limits set in a 2011 law, including $165 billion more for military.
From fiscal year 2010 to fiscal year
2015, the defense budget was declining after Congress implemented discretionary
spending caps to help curb the deficit. Congress increased the caps slightly
between 2013 and 2017, but not by much, Mr. Harrison said.
A Republican-controlled Congress,
with support from Mr. Trump, moved this year to raise the caps as part of a new
two-year budget deal that began to take effect at the end of March.
That led to a surge in defense
outlays over the spring and summer. The gains are expected to continue into
2019 and 2020, as funding makes its way out of the Pentagon.
Big projects such as building
aircraft carriers require long lead times and likely won’t show up in military
spending for several more quarters, Mr. Harrison said. Spending on services,
such as maintenance and personnel, move through the system faster.
“I would expect that, with the
increase in the defense discretionary caps, that its contribution is going to
increase, and in fact it will be leading overall GDP growth by mid-2019,” said
Gus Faucher, chief economist at PNC Financial Services Group.
The budget increase has been a boon
for defense companies, as the military replaces worn-out equipment and updates
technology.
Lockheed Martin Corp. , the world’s
largest defense contractor, said Tuesday it expects revenue to increase up to
6% in 2019 as it boosts production of missiles and F-35 combat jets. The
company reported a $1.47 billion profit for the quarter ending Sept. 30,
compared with $963 million a year earlier. Its order backlog rose to $109
billion.
Boeing Co. , the world’s largest
aerospace company by sales, raised its revenue and profit outlook
for the year, thanks in part to strong demand for defense projects. The company
won a trio of Pentagon contracts in recent weeks, after four years of sales
declines in its defense unit.
“This is the first year (in this
decade) that we’re going to see mid-single-digit growth on average from the
major defense companies,” said Seth Seifman, an aerospace and defense analyst
at JPMorgan Chase. “As we look forward, the fact that you’ve got these budgets
that have already been passed, those are going to fuel growth in 2019 and
2020.”
It is rippling out to smaller
businesses. Adam Crouse said business has picked up over the past two years at
J & R Tools Inc., a machine shop in Loogootee, Ind., which works mainly as
a contractor to the Navy, Army and Marine Corps.
“We’ve hired three people in the
past couple months,” Mr. Crouse, the shop’s co-owner, said last month at a
White House economic summit for small-business owners. “The defense budget
helped out.”
Douglas Holtz-Eakin, a Republican
economist and former director of the Congressional Budget Office, cautioned
that the return of higher military spending might not last forever. The current
budget agreement expires in September 2019, and the next Congress might not go
along with more spending, Mr. Holtz-Eakin said.
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