US Defense Expenditure: Relationships and Projections

: This paper estimates the relationships between alternative measures of US defense spending and economic growth and government spending growth. The estimated relationships are derived from a plausible partial adjustment model that is based on the common practice of multi-year defense contracting and budget requests and appropriations. An attempt is made to forecast defense consumption spending, defense investment spending and, hence, aggregate defense spending till 2010, using the alternative forecast methodologies that are validated in-sample prior to their use in out-of-sample predictions. Two major findings emerge from this study. First, defense spending in general, is tied more to trends in government spending than economic growth. Second, a variety of simple linear smoothing moving average forecast models (used individually or in combination) as well as a partial adjustment model do surprisingly well in historical simulations of all types of defense spending.