Defense spending isn't what’s driving the US economy

The booming US economy, which grew at a 4.9% annualized rate in the third quarter of this year, can be credited to Barbenheimer, Taylor Swift, a land new houses—but not cash flowing to the defense sector as the US seeks to arm allies like Ukraine and Israel.

This week, US president Joe Biden asked Congress for an additional $105 billion in funding, mainly to purchase weapons for Ukraine as it attempts to repel a Russian invasion, and for Israel as it responds to Hamas’ attacks earlier this month. It’s not clear if Republicans in Congress will vote for this spending, with some sympathizing with Vladimir Putin and others embracing antisemitic figures.

Defense spending has been rising, but thus far it hasn’t hit the heights we saw during the US occupation of Afghanistan and Iraq.

In the last year, the US has significantly increased purchases of aircraft, missiles, ammunition, and other equipment, according to figures from the Bureau of Economic Analysis. The biggest growth in military spending hasn’t come from equipment purchases, but from the cost of supporting US personnel, as service members have been deployed to Europe to reinforce the US commitment to the NATO alliance; those costs had been falling since the US withdrew from Afghanistan in 2021.

In the context of this week’s report on US economic production, defense spending added 0.28 percentage points to the 4.9% annualized economic growth. In other words, it was less important to the robust third quarter than American purchases of recreational goods and vehicles.

While the defense business is doing well, it still faces concerns over supply chains to obtain key materials and components for weapons. It also faces economic pressure to consolidate, but without violating anti-trust laws—particularly as the DOD frets about the ability to produce enough weapons. For those reasons, the owners of US defense contractors haven’t seen a major windfall; at least not yet. One ETF that tracks 33 aerospace and defense companies remains below its pre-pandemic heights:

That could change if the Republican party indicates it will support military aid for US allies. But even if the GOP fails to support Ukraine and Israel, that doesn’t mean there isn’t opportunity ahead for defense firms. US national security strategists are focused on a potential conflict with China and plan to invest in high-tech weapons and surveillance systems—assuming, of course, growing budgets, and that the US military isn’t dragged into new conflicts in the Middle East.