Government Purchases
Real Federal consumption and gross investment grew 2.4 percent during 2006. This was the third consecutive year of growth at roughly 2 percent. Defense spending accounted for all of the increase during the four-quarter period, while nondefense purchases fell. The quarterly pattern of these Federal purchases has been volatile with sizeable increases in the first and fourth quarters of the year. Most of the first-quarter surge was in defense components.
Federal outlays (which include purchases, investment, and transfers such as Social Security) were boosted by a $111 billion appropriation in fiscal year (FY) 2006 for reconstruction and relief efforts arising from the 2005 hurricanes. In addition, the supplemental defense spending package for ongoing operations in Afghanistan and Iraq was $70 billion for FY 2006 and was passed in mid-June. An additional $70 billion emergency funding was provided in the regular defense appropriation act passed at the end of September 2006. Another supplemental appropriation for defense is likely for FY 2007.
Nominal Federal revenues grew 15 percent in FY 2005 and 12 percent in FY 2006. These rapid growth rates exceeded growth in outlays and GDP as a whole, and the U.S. fiscal deficit as a share of GDP shrank from 3.6 percent in FY 2004 to 2.6 percent in FY 2005 to 1.9 percent in FY 2006.
State and local government purchases rose 3 percent during 2006, up noticeably from rates below 1 percent during each of the 3 previous years. In the wake of the 2001 recession, this sector fell sharply into deficit in 2002. Revenues began to recover in 2003, and by the first half of 2006 the sector was out of deficit, allowing for an increase in state and local consumption and investment. This pattern of delayed response to downturns resembles the past several business-cycle recoveries.