Defense budget boosts US economy as civilian sector starts to slow
Defense spending has been the United States economy's biggest gun and likely will remain so for roughly another year, experts say. The Defense Department reforms called for by the Republican and Democratic staffs of the Senate Armed Services Committee in a report issued Wednesday would not affect the impact of Pentagon spending in the short run.
Defense spending ``certainly has been the fastest growing part of the economy'' in recent years, says David Wyss of Data Resources Inc.
Pentagon outlays loom large in determining the outlook for 1986, because forecasters are unsure how robust consumer spending will be next year. Individuals have run up their debts to record levels and cut way back on savings, making robust growth in consumer spending quite doubtful.
Growth in military spending ``certainly will'' outpace growth elsewhere in the economy, says Delos Smith of the Conference Board, a business research organization.
There ``is no question'' that defense spending will grow faster than spending by consumers in 1986, adds Nariman Behravesh, chief US economist for Wharton Econometric Forecasting Associates. He expects inflation-adjusted military spending to grow 4.5 percent next year, while consumer spending climbs 3 percent.
Military spending is expected to climb in 1986 even though Congress ``froze'' the 1986 military budget, allowing no growth above inflation in fiscal 1986. That apparently contradictory result is explained by time lags in the defense buying process.
For example, when Congress authorizes the Navy to buy a new aircraft carrier, very little of the money gets spent in the first year. In fact, spending on the ship will continue for about five years, according to the Congressional Budget Office. The same lags apply, to a greater or lesser degree, to other hardware the military buys.
So, although Congress has frozen the new spending authority it gave the Pentagon in budget year 1986 ( which started Oct. 1), the Defense Department will continue to spend on its backlog of authorized programs approved in previous budget years. The spending backlog is estimated at between $50 billion and $75 billion.
While analysts expect defense spending to keep providing fuel to the economy, the rate of increase will be slower than in the early years of the Reagan administration.
And by 1987 ``the picture starts to change,'' Mr. Behravesh says, as congressional budget controls start to bite. That year he expects defense and consumer spending will grow at about the same pace. Mr. Wyss says he thinks the two may equalize by the middle of 1986.
There are a variety of reasons defense spending will slow somewhat from its recent rapid pace, other than budget trims made on Capitol Hill. For one thing, Congress is putting increased heat on the Pentagon to cut contracting abuses. Added oversight slows the purchasing process, experts say. Also, some of the backlog represents the Pentagon's overestimating the costs of inflation, so some of the authorized spending may never take place.
Still the Pentagon's role in the economy will remain an important one. Its hardware purchases have helped prop up the US manufacturing sector, which has been damaged by imports. In the September industrial-production figures released Wednesday, production fell 0.1 percent, the second decline in three months. This performance would have been worse if defense and space production had not climbed a strong 1 percent.