Counterparties: The non-industrious military complex
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America‚Äôs economy defied expectations and shrank 0.1% in the fourth quarter — analysts expected 1.1% growth. And it‚Äôs all the military‚Äôs fault. Or at least, the fault of declining defense spending.
Brad Plumer runs through just how significant the fall off was:
Government defense expenditures plunged by a staggering 22.2% between October and December… The Pentagon spent significantly less on just about everything except military pay. Had the Pentagon not cut back on spending, the economy would have grown at a weak but positive 1.27% pace.
While Plumer notes that military spending often falls from the third quarter to the fourth, T Rowe Price‚Äôs chief economist Alan Levenson pointed out in a note to clients that the decline was the single largest decrease on record. Dylan Matthews has a great chart showing just how out of synch defense spending (and inventories) were from the rest of the economy. On a more granular level, this graph from Reuters shows capital expenditures at Lockheed Martin and Northrup Grumman, everyone‚Äôs favorite cluster bomb assemblers and ¬†drone manufacturers, falling off a cliff.
The stimulative effects of defense spending are nothing new. Just think WWII or, more recently, the Washington, DC area, where the economy has grown about three times faster than the rest of the country since the financial crisis.¬†Last fall more than a few economists cut their¬†fourth quarter forecasts despite upward government revisions to third quarter growth. Back then, the surge in third quarter defense spending didn‚Äôt look sustainable.
Even more cuts could be on the way: the automatic budget cuts — i.e. ‚Äúthe sequester‚ÄĚ — that Republicans look increasingly willing to let go into effect on March 1 are heavily weighted towards the military and are projected to shave 0.7% off this year‚Äôs GDP.
All of this is part of the long process of getting military spending down to pre-9/11 levels: the US accounts for 40% of total defense spending globally. As that happens, America won’t be able to rely on the military industrial complex to prop up growth. — Ben Walsh
On to today‚Äôs links:
The Fed warns itself that it could lose money on its massive bond portfolio – WSJ
Everyone at Davos was worrying about the Fed causing a “1994 moment” – Business Insider
January‚Äôs FOMC statement – Federal Reserve