Snapshot for August 13, 2003.

Defense spending skews economic growth estimates

The July 31, 2003 release of advance estimates of gross domestic product (GDP) showed that the annual real (inflation-adjusted) rate of economic growth increased to 2.4% in the second quarter of 2003, up from a 1.4% growth rate in the first quarter. This release was greeted as welcome news for a struggling economy.

The prime driver of this higher growth rate, however, was an unusually large increase in defense spending (up 9.6% from the first quarter). GDP growth minus the contribution of defense spending was actually lower than at any point since the official recession period in 2001.

The figure below charts the contributions to percent changes in GDP growth of defense spending and all other non-defense categories. The non-defense sector of the economy actually slowed down considerably from the growth rate reported in the first quarter of 2003, while the contribution of defense spending in the latest quarter (1.69%) was more than twice as high as the contribution of all other components put together (0.71%). To put it in historical perspective, the contribution of defense spending to GDP growth was higher in the second quarter of 2003 than in any quarter since 1967.

The non-defense numbers of the latest GDP report show little to be excited about. A sustainable recovery needs a broader base than an unsustainable spike in the contribution of defense spending to the GDP. Enthusiasm about the second-quarter GDP numbers should be tempered for now.

Source: Bureau of Economic Analysis.

This week’s snapshot was written by EPI economist Josh Bivens.

Check out the archive for past Economic Snapshots.