Why Does GDP Move Before G? It's all in the Measurement

TL;DR

The paper explains why GDP responds before G by showing that early GDP increases are driven by inventory accumulation from defense contracts, which are only reflected in G with a delay, affecting economic multiplier estimates.

Contribution

It uncovers the role of defense procurement obligations in the timing of GDP and G movements, highlighting measurement issues in economic shocks.

Findings

Defense news shocks increase inventories before G rises.

Contract awards Granger-cause G shocks, not defense news.

Early GDP response is driven by delayed contract accounting.

Abstract

We find that the early impact of defense news shocks on GDP is mainly due to a rise in business inventories, as contractors ramp up production for new defense contracts. These contracts do not affect government spending (G) until payment-on-delivery, which occurs 2-3 quarters later. Novel data on defense procurement obligations reveals that contract awards Granger-cause VAR-identified shocks to G, but not defense news shocks. This implies that the early GDP response relative to G is largely driven by the delayed accounting of defense contracts, while VAR-identified shocks to G miss the impact on inventories, resulting in lower multiplier estimates.