Defense Equipment Investment and Depreciation

Reader JohnH asks “is there a net US GDP forecast that includes the depreciation of defense capital?”. For what I think is being asked (commonly known as NDP, or net domestic product), the answer is de facto yes.

That’s because the two move in tandem for the US in peacetime.

Figure 1: GDP (bold black), Net Domestic Product (blue), both deflated using GDP Deflator, in bn. Ch.2012$ SAAR. NDP is BEA series A362RC1Q027SBEA. NBER defined peak-to-trough recession dates shaded gray. Source: BEA, 2023Q2 2nd release via FRED, NBER, and author’s calculations.

It’s difficult to see that the two series comove almost one-for-one, so I show the log first differences of the two series, 1986-2023.

Figure 2: First log difference of GDP (bold black), Net Domestic Product (blue), both deflated using GDP Deflator, in bn. Ch.2012$ SAAR. NDP is BEA series A362RC1Q027SBEA. NBER defined peak-to-trough recession dates shaded gray. Source: BEA, 2023Q2 2nd release via FRED, NBER, and author’s calculations.

Now, since consumption of defense equipment capital is much smaller than total consumption of fixed capital (public and private), then one can be confident that forecasts of GDP and NDP growth are essentially the same. 2021 consumption of defense equipment was Ch.2012$ 77.8 bn, while 2021 consumption of fixed investment was Ch.2012$ 3310.9 bn.

Here’s a picture of gross defense equipment investment and capital consumption.

Figure 3: Gross defense equipment investment (bold black), and capital consumption (blue), in bn.Ch.2012$.NBER defined peak-to-trough recession dates shaded gray. Source: BEA 2023Q2 2nd release, tables 5.2.6 and 5.9.6, NBER, author’s calculations.

JohnH’s query was prompted by my discussion of growth rates for Russia GDP ex-defense, and in particular my speculation regarding the depreciation component of defense spending. I would venture to say Russian depreciation of military equipment is much higher than that for the US (prorated to size of economy) because (1) the Russians are currently engaged in a full scale war, and (2) the US is not.