Behind the Huge Plunge in Defense Spending

If anyone was still wondering whether the biggest federal agency was cutting back its spending late last year in anticipation of a potential budget sequester, the answer came this morning -- and it was a resounding yes.

In announcing that GDP had shrunk by 0.1 percent in the fourth quarter of 2012, the White House said the effects of Hurricane Sandy were partly to blame, but then pointed the finger at a bigger culprit: a precipitous decline in defense spending.

Here's Alan Krueger, chairman of the Council of Economic Advisers, writing on the White House blog:

Federal defense purchases declined at an annual rate of 22.2 percent in the fourth quarter of 2012, the largest quarterly decline in 40 years.  A likely explanation for the sharp decline in federal defense spending is uncertainty concerning the automatic spending cuts that were scheduled to take effect in January, and are currently scheduled to take effect on March 1st. The decline in government spending across all levels reduced real GDP by 1.33 percentage points in the quarter.

Given that economists were anticipating a small increase in GDP, the results were surprising. Of course, as Brad Plumer notes in the Washington Post's Wonkblog today, defense spending always trails off in the fourth quarter, because the department, like other federal agencies, tends to squeeze a lot of spending into the third quarter because it's when the fiscal year ends. But a drop that breaks a 40-year record is another thing entirely.

And it's worth remembering that these cuts took place before Defense agencies recently went public with the news that they are slowing procurement spending, cutting contract workers and preparing for civilian employee furloughs in anticipation that a sequester will kick in at the end of February.