Defense spending boosts economy as U.S. mulls more aid for Ukraine and Israel

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The U.S. economy has gotten a pop from higher defense spending since the late spring. Now a new conflict in Israel as well as the ongoing Ukraine war could provide another boost in the months ahead.

In the 2023 fiscal year that ended in September, the U.S. supplied about $60 billion in mostly military aid to Ukraine to help the country fend off the Russian invasion.

Amanda Agati, chief investment officer of PNC Financial Services, estimated 30% of $60 billion in aid to Ukraine has already been spent on U.S. defense equipment such as trucks, weapons systems and ammunition.

These purchases have shown up in industrial production. Defense-related production has jumped an average of 1.5% a month since May, double the typical increase from 2010 to 2019.

Defense production has also increased nearly 10% in the past 12 months — the fastest rate in more than two years. Not only has the U.S. given more military aid to Ukraine, it also has to replenish its own dwindling stockpiles of weapons.

“Whenever you have an increase in spending, about 60% is spent in the first year,” noted Bernard Yaros, lead U.S. economist at Oxford Economics who covers the federal budget.

The well of defense spending is not about to run dry, either.

President Biden is now asking for an additional $70 billion — $60 billion for Ukraine and $10 billion for Israel in its renewed conflict with Hamas.

While some amount of spending is likely to be approved, analysts say, it’s unclear exactly how much. The House is still paralyzed in the absence of a Speaker and there’s opposition in House Republican ranks to significant new aid for Ukraine.

“If the Senate were running the show, you’d have more significant increases for the Pentagon,” said Yaros, alluding to the upper chamber’s strong bipartisan support for Ukraine.

Yet barring the U.S. getting directly involved in a new military conflict, defense spending is unlikely to influence the economy as much as it did during the Iraq and Afghanistan wars more than a decade ago.

Aside from the aid for Ukraine, U.S. defense spending has risen about 3% a year under the Biden administration and it takes up a much smaller portion of the federal budget than it used to do.

The share of military spending as a percentage of gross domestic product has fallen to 2.7%, the lowest level since 1999 and also near the lowest level on record, according to government figures.

Senate Republican Leader Mitch McConnell on Wednesday criticized Biden for trying to cut defense spending in prior budgets, urging the White House to adopt a more aggressive approach in light of growing global tensions.

Yet given large and persistent U.S. fiscal deficits, analysts doubt the U.S. will boost defense spending to the same levels that prevailed more than a decade ago.

“It’s not going to be the good times for defense when the U.S. was fighting two wars in Afghanistan and Iraq,” Yaros said. “With high deficits, we are not going to get the same defense spending.”

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