U.S. Bureau of Economic Analysis

In the first quarter of 2012, defense spending declined at an 8.1 percent annual rate, reflecting decreases in compensation of employees (accompanying a drop in the number of active-duty military personnel), in purchases of goods and services, and in investment for defense equipment. In contrast, based on defense outlays data in the Treasury Department’s Monthly Treasury Statement (MTS), some economic forecasters expected a smaller decrease or even an increase in defense spending, but this quarter’s MTS data on defense outlays were boosted by certain payments in the first quarter that reflected the timing of when bills were paid rather than the timing of when the actual purchases were made.

While the MTS records the cash outlays of the U.S. government, the Bureau of Economic Analysis (BEA) national accounts record defense spending on an accrual basis. In other words, the timing of expenditures recorded in gross domestic product (GDP) is intended to align with when the economic activity takes place. BEA routinely makes a number of timing adjustments, many of which are documented in the methodology paper, Government Transactions (MP–5).

In general, MTS data can be useful for tracking BEA’s defense consumption expenditures and gross investment, provided that users are aware of BEA’s adjustments to the MTS data and key methodological differences. The first quarter of 2012 is a case in point. MTS outlays for defense procurement increased in the first quarter; however, this increase was more than accounted for by an increase in Air Force procurement. Outlays for Army and Navy procurement fell. The increase to Air Force procurement outlays stemmed from a very large increase to Air Force “other” procurement. This account contains spending for noncombat vehicles, parts, small equipment, and other activities. This account is often volatile because of accounting practices rather than from actual fluctuations in procurement.

As a result, BEA’s analysts make timing adjustments for this account that spread this spending over the year based on the estimated fiscal year outlays from the federal budget (this adjustment may be thought of as a simple form of seasonal adjustment). Spreading the first-quarter spending related to the timing of payments for Air Force “other” procurement over the year removes the large spike in the first quarter that offset the declines in most other defense spending categories, resulting in the 8.1 percent decrease in the first quarter.

For more information on the relationship between the MTS and BEA’s estimates of federal government spending, see the box on page 6 of the February 2006 Survey of Current Business.