On Friday, the government announced that the economy had grown at a 2 percent annual pace between July and September. That stunned many analysts, who were expecting much weaker growth. So what happened?
The Pentagon happened. Government defense expenditures surged by 13 percent between July and August. You can see the breakdown at the Bureau of Economic Analysis site. The Pentagon spent significantly more on weapons, training, operations, and maintenance. (Ammunition purchases, for instance, doubled.) Had these expenditures not occurred last quarter, the U.S. economy would have grown at a mere 1.36 percent pace.
So was this surge in spending unusual? Not necessarily, say defense analysts. The first thing to note is that defense expenditures and investment are incredibly noisy from quarter to quarter. Some of that is due to the fact that military spending is “lumpy” — a big aircraft order will show up all at once. Here’s a graph of the quarterly change in defense spending since 2010. Note the big ups and downs:
Still, the huge uptick last quarter was unusual. So what happened? Here’s one explanation: “In the Pentagon, you have to use it or lose it by the end of the fiscal year in September,” says Lawrence Korb, a former assistant secretary of defense now at the Center for American Progress. “You see this a lot. ‘We’ve got to fly a lot this month for training, otherwise Congress will take back the money they gave us.’ “
Michael O’Hanlon, a defense analyst at the Brookings Institution, concurs that defense expenditures often rise just before the end of the fiscal year in September. Every year, Congress provides the Pentagon with a certain amount of budget authority. If the military doesn’t spend the full amount, there’s the risk that lawmakers could come back the following year and reduce the defense budget. “The Pentagon wants to show that the money’s well spent,” says O’Hanlon. “But they can also fall out of favor with Congress if they spend too little.”
But then why was the surge in military so unusually large this past quarter, compared with previous Septembers? Two reasons. First, the Pentagon is facing the prospect of sharp budget cuts at the end of the year as part of the looming sequester. There’s been some talk that the military could even lose money that’s already been budgeted but hasn’t been spent yet — so the Pentagon has additional incentive to spend funds now that have been budgeted over multiple years.
The other factor, Korb and O’Hanlon note, is that Congress was late in setting the defense budget for fiscal year 2012: The budget was finally patched together through continuing resolutions in the winter. So, for a significant period, the Pentagon was unsure exactly how much it could actually spend. That could help explain why defense expenditures and investments were relatively anemic earlier this year and then skyrocketed right before the fiscal year ended in September.
“It looks like what we’re seeing is a confluence of budget and political factors,” says O’Hanlon. This past quarter was, in essence, an excellent time for the military to sign a bunch of contracts and spend its funds. And that’s exactly what happened.