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Business
AN EIGHTH DISTRICT PERSPECTIVE
WINTER 1986/87

Eighth District Shares in Defense Industry
Spending
Federal spending on virtually all types of defense has
increased from the levels of the late 1970s. For example, the
value of Department of Defense prime contracts, adjusted
for inflation, expanded by 38.9 percent between 1980 and
1985. These expenditures tend to be concentrated within
regions, as six states, including Missouri, received half of
1985 prime contracts. This article describes how the Eighth
District economy shared in this expansion of defense
spending and focuses specifically on Missouri, which
dominates the contract defense industry in the region.1

Growth in the 1980s
The recent military buildup resulted in prime defense
contracts awarded nationally to grow from $91.6 billion in
FY 1980 to $127.4 billion in FY 1985, measured in 1982
dollars. This gain represented a 6.8 percent annual growth
rate, more than double the 3.3 percent rate recorded in the
last half of the ’70s. Federal nondefense purchases grew more
slowly in the ’80s, expanding at a 3 percent rate, thus
increasing the share of the total budget allocated to defense.
The real value of prime defense contracts received by the
D istrict industry during the ’80s grew even more
dramatically than in the nation, expanding at an 11.6 percent
annual rate, from $8.3 billion in FY 1980 to $14.5 billion
in FY 1985.2 This swift growth allowed the District’s share
of prime contracts to grow from 9.1 to 11.3 percent of the
national total during the 1980-85 period. This District
expansion is particularly impressive considering the sluggish
1.9 percent rate of growth of District contracts between FY
1975 and FY 1980.
The steady growth of defense-related
activity in the District in the early ’80s helped
offset general employment declines during
‘The Eighth Federal Reserve District includes all of Arkansas
and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri
and Tennessee. This article refers to all seven states.
2The value of prime contracts received in District states may
not measure the actual volume of work performed in the region
because a portion may be subcontracted to firms in other areas.




that period. While District manufacturing employment
dropped at a 5.9 percent annual rate between 1980 and 1982,
employment in defense-oriented manufacturing actually
climbed at a 15.5 percent rate. This countercyclical growth
was particularly evident in the St. Louis metropolitan area
where employment in aircraft and parts manufacturing,
almost entirely dependent on defense contracts, grew at a
2.8 percent rate between 1980 and 1982, while the rest of
the manufacturing sector lost jobs at a 5.7 percent rate. The
table on the next page shows that all District states, except
Illinois and Tennessee, experienced prime contract growth
faster than the national average between 1980 and 1985.
Contracts in Arkansas expanded most rapidly, at a 38.1
percent pace, largely due to increased production of guided
missile systems and related components in the Camden area.
Although the steady growth of defense spending apparently
helped mitigate the impacts of the 1982 recession in the
District, the economic contribution of defense contracts does
not necessarily act as a countercyclical stabilizer. That is
to say, defense expenditures typically are not made with the
primary intention of economic stabilization and it is probably
coincidental that they help offset economic downturns. At
other times, the completion of defense contracts or
cancellation of projects has resulted in dramatic fluctuations
in employment levels and exacerbated a decline in economic
activity. The 4.5 percent downturn in real federal defense
expenditures during the recession year of 1974, for instance,
is an example of procyclical defense spending.

Missouri Dominates District
Defense Production
Missouri received almost half of District
prime contracts in the ’80s, so changes in that
state are most influential in determining the
District’s growth of contracts. Missouri’s 12.6
growth rate was due primarily to growth in
the St. Louis area where over 90 percent of
the state’s defense-related production took

FEDERAL RESERVE BANK OF ST. LOUIS

WINTER 1986/87

Value of Prime Defense Contracts
Fiscal Year 1985
(m illions o f
current dollars)

United States
Eighth District
Arkansas
Illinois
Indiana
Kentucky
Mississippi
Missouri
Tennessee

$140,096
15,901
810
1,693
3,177
506
1,310
7,613
793

Real annual
rate o f growth:
1980-85

6.8%
11.6
38.1
6.3
13.3
9.4
9.3
12.6
3.0

Note: Prime contracts over $25,000
Source: U.S. Department of Defense

place in FY 1985. The $7 billion in prime defense contracts
received by the St. Louis area was greater than the amount
awarded to any other city in the nation in FY 1985,
representing 5 percent of the national total.
Most of the city’s contracts in FY 1985 were received by
McDonnell-Douglas Corporation (MDC), the nation’s
largest defense contractor that year. This corporation’s growth
in the St. Louis area reflects expanded production of combat
aircraft and missile systems. In October 1986, MDC, in
conjunction with Northrop Corporation, was awarded a $691
million contract to develop prototypes of the Air Force’s next
generation of fighter planes.
General Dynamics, the second largest of the nation’s
defense contractors in FY 1985, also is based in St. Louis,
but produces its defense-related goods elsewhere. General
Dynamics, for example, is responsible for much of the
missile production in Arkansas.
The $7.6 billion in prime defense contracts awarded to
Missouri firms in FY 1985 represents a substantial share
of the state’s economy. According to a survey by the U.S.
Census Bureau, the defense industry accounted for about
8 percent of the state’s manufacturing jobs in 1983. The total
effects of the industry, however, go beyond this direct impact.
As an industry’s output expands, its payments for local inputs
and disbursement of payroll stimulates employment and
income in other sectors of the regional economy.
It should be emphasized, however, that these are not net

impacts. Funds for defense expenditures must come from
taxation, government borrowing or money creation. To the
extent the source is tax payments from Missouri, private
purchasing power is reduced and transferred from
expenditures on private sector goods and services to defense
items. Deficit spending also has indirect costs (investment
crowding out) that make it difficult to determine the net
change from defense spending. The primary result of a rise
in government spending in a region may be a change in the
composition of economic activity, with a small, if any,
change in the level of output and employment.

Conclusion
During the next few years, uncompleted contracts and
federal defense appropriations not yet spent suggest
continued high levels of defense activity. In the longer run,
however, most analysts foresee a slowing of the swift growth
of defense spending. The Congressional Budget Office, for
instance, recently projected defense outlays to grow through
FY 1991 at a real annual rate of less than 1 percent, compared
with the 6.6 percent growth rate of defense purchases between
1980 and 1985. During the first half of the ’80s, however,
the defense industry’s rapid growth allowed employment
increases that partially offset job losses in the nondefense
manufacturing sector of the Eighth District economy.
—Thomas B. Mandelbaum

Business—An Eighth District Perspective is a quarterly summary of business conditions in the area served by the Federal Reserve
Bank of St. Louis. Single subscriptions are available free of charge by writing: Research and Public Information Department,
Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, Missouri 63166. Views expressed are not necessarily official
positions of the Federal Reserve System.




WINTER 1986/87

FEDERAL RESERVE BANK OF ST. LOUIS

EIGHTH DISTRICT BUSINESS DATA
Rates of Change1
Current Quarter
G en eral B usiness In d e x e s 2

U n ite d S tates
D is tric t
A rka n sa s
L ittle R ock
K e n tu cky
L o u isville
M isso u ri
St. Louis
T e n n e sse e
M e m p h is
M a n u fa c tu rin g E m p lo y m e n t

4 .9 %
1.7
7.0
0.7

1.9 %
4.3
3.0
0.4
3.4
5.4
5.3
-1 .7
4.5
1.3

2 . 1%

P erso nal In c o m e

11/1986

U n ite d S ta te s
A rka n sa s
K e n tu c k y
M isso u ri
T e n n e sse e

0 .8 %
1.4
2.4
2.6

2 .6 %
4.4
4.4
5.1

1 1 .8 %
4.7
9.7
4.6

2 .9 %
2.6
2.9
2.9
1.7
2.9
2.7
1.4
2.8
1.1

4 .5 %
4.6
3.8
3.7
5.3
4.1
4 .7
4 .4
4 .3
5.2

3 .5 %
3.5
5.5
5.1
1.6
6.8
3.3
3.5
4.1
4.3

-1 .0 %
-1 .9
-0 .9
-2 .4
-1 .3
-2 .5

3 .2 %
3.4
2.7
4.9
3.5
2.7

4 .4 %
6.5
8.3
5.8
6.1
6.5

6 .2 %
5.7
4.8
4.2
6.2
6.6

8 .4 %
8.7
8.2
8.1
8.9
9.2

8 .0 %
6.6
7.1
4.6
7.1
7.3

5 .6 %
2.2
12.6
1.9
7.8

7 .3 %
2.4
0.2
9.1
10.9

1 1 .4 %
11.2
8.3
9.8
14.2

111/1986

-2 .6
-1 .2

R etail S a le s 3

-

-1 .2
0.6

0.0

5 .9 %
3.0
-5 .3
4.3
5.1
3.3
111/1986
1 7 .1 %
10.4
6.0
12.2

0.0

Prices1

District Employment1
K ey In d u s trie s
F a b rica te d M etal P ro d u cts
E le ctrica l and E le c tro n ic E q u ip m e n t
N o n e le c tric a l M a c h in e ry
T ra n s p o rta tio n E q u ip m e n t
Food a nd K in d re d P ro d u cts
T e x tile and A p p a re l
P rin tin g and P u b lis h in g
C h e m ic a ls and A llie d P ro d u cts
C o n s tru c tio n




1983

111/1986

U n ite d S tates
D is tric t
A rka n sa s
K e n tu cky
M isso u ri
T e n n e sse e

U n ite d S ta te s
D is tric t
A rka n sa s
K e n tu cky
M isso u ri
T e n n e sse e

1984

111/1986

A rka n sa s
K e n tu cky
M isso u ri
T e n n e sse e

P ayro ll E m p lo y m e n t

1985

C urrent Q uarter

Current Year

C urrent Q uarter

Current Year

111/1986

111/1985 - 111/1986

111/1986

111/1985 - 111/1986

- 2 .0 %
8.7
-7 .0
-1 6 .8
12.3
-2 .9
-2 .4

-1 .8 %
-1 .5
-3 .5
-1 .2
4.4
-1 .2
1.5
-3 .5
7.0

2 .0 %
2.8
1.5
-2 .0
10.5

0 .6 %
1.8
1.5
2.8
4.4
0.4
3.6
-2 .2
-0 .4

0.0
30.3

0.0
2.5
-1 .2
-0 .1

3

EIGHTH DISTRICT BUSINESS DATA

U n e m p lo y m e n t R ate
U n ite d S ta te s
D is tric t
A rk a n s a s
L ittle R ock
K e n tu c k y
L o u is v ille
M isso u ri
St. Lou is
Tennessee
M e m p h is

C o n s tru c tio n C o n tra c ts 4
(m illio n s o f d o lla rs)

Average
1985

Average
1984

7 .2 %
7.6
8.5
6.5
9.4
7.3
5.8
6.5
7.8
6.6

7 .2 %
7.9
8.6
6.4
9.5
7.9
6.4
7.4
8.0
6.6

7 .5 %
8.3
8.9
7.0
9.3
8.2
7.2
8.1
8.6
7.3

Current
Quarter

Previous
Quarter

Same Period
1985

Same Period
1984

111/1986

11/1986

111/1985

111/1984

$534.7
63.6
107.4
154.9
208.9

$482.1
54.1
105.8
145.5
176.7

$ 4 6 9 .2
58.4
86.6
145.5
178.7

$ 4 7 0 .5
77.1
106.8
117.6
169.0

$404.8
60.6
115.8
129.4
99.0

$ 3 5 0 .7
31.9
69.5
124.3
125.1

$348.1
39.2
88.0
112.0
108.9

$ 2 9 2 .2
39.5
46 .8
94 .3
111.6

Current
Quarter

Previous
Quarter

111/1986

11/1986

6 .9 %
7.8
9.3
7.6
8.6
6.5
6.5
7.5
7.9
6.7

R e s id e n tia l C o n s tru c tio n
D istrict
A rka n sa s
K e n tu c k y
M isso u ri
Tennessee
N o n re s id e n tia l C o n s tru c tio n
D is tric t
A rk a n s a s
K e n tu c k y
M isso u ri
T e n n e sse e

NOTE: With the exception of employment and prices in key industries, all data are seasonally adjusted. Data for Arkansas,
Kentucky, Missouri and Tennessee are used to represent the District.
1 All growth rates are compounded annual rates of change. The 1983, 1984 and 1985 growth rates compare the fourth quarter of the
year listed with the fourth quarter of the previous year.
2Although each index is a comprehensive measure of economic activity, the Arkansas and Missouri indexes, computed by Southwestern
Bell, are not strictly comparable to the Kentucky and Tennessee indexes, which are computed by South Central Bell.
3Sources: Arkansas from Southwestern Bell, Kentucky from the Kentucky Revenue Department, Missouri and Tennessee from the U.S.
Department of Commerce.
4Excludes nonbuilding construction. Source: F, W. Dodge Construction Potentials, proprietary data provided by special permission.




Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102