Inflation in Military Ships and the U.S. Economy
by Evan Hubener
During the latter portion of the 20th century, the cost of the U.S. Navy’s ships outpaced inflation in the broader economy. Some of these increases are attributed to added complexity and additional requirements; other factors include the rising costs of skilled labor, but unless a larger share of the nation’s budget is allocated towards shipbuilding, or if the unit costs of individual ships fall (due to reductions in ship size or scope), the size of the Navy’s fleet will probably fall as a result. And indeed, the number of ships in the Navy’s fleet did fall; in 1948, the fleet size was 737, and by 2000, it was reduced to 318, peaking at 1,122 in 1953. The fleet size has since been reduced further, and in 2019, there were 290 ships in the Navy’s fleet. The current policy of the United States is to increase the size of the fleet, as soon as practicable, to 355 battle force ships (H.R. 2810, Sec. 1025).
Two of the Navy’s programs that will be adding to the fleet size are VIRGINIA class submarines and Gerald R. Ford class aircraft carriers. The recently awarded Block V contract for 9 VIRGINIA class submarines, was signed for $22 billion, and the first four Gerald R. Ford class aircraft carriers (CVN 78 – CVN 81) have a unit procurement cost of about $12 billion. These ships are costly to construct, but these costs raise additional questions. For example, has ship inflation changed in more recent years? Have the Department of Defense efforts to control costs been effective? How does the escalation in the cost of military ships compare to similar projects, like non-military ships, or to inflation in other industries, like aerospace or manufacturing? And finally, how does the price escalation of military ships compare to inflation in the U.S. economy as a whole?
Methodology and notes on the analysis
Publicly available data that track price inflation for ship construction, in addition to other industries, are produced by the Producer Price Index (PPI), a program at the U.S. Bureau of Labor Statistics (BLS) that measures the changes over time in the prices received by U.S. producers for their output. The PPI is a constant quality index, and it excludes price changes that are due to physical changes in a good. The data are also disseminated by the economic research division at the Federal Reserve Bank of St. Louis (FRED), which adds a number of features to time series data, like interactive graphing, and indicators of recessions. This analysis uses data from the PPI and begins in June 1996, which is the first year that the inflation data for Military, Self-Propelled Ships (which includes military branches other than the U.S. Navy) are continuously available. Price increases are reported as a total percentage increase from June 1996 (figures 1 - 3) and as annualized changes (summarized in table 1). The data series for Non-Military, Self-Propelled Ships has been discontinued by FRED, but is still published by the BLS. Observations for December 2019 and later are preliminary as of this writing. In addition, the data series for Aerospace and Military, Self-Propelled Ships contain gaps (which are detailed in the appendix). In these instances, the data were imputed to maintain the time series, and the imputed data are a simple average of the nearest two observed data points.
Military and Non-Military Ships
So how does inflation for Military, Self-Propelled Ships compare to Non-Military, Self-Propelled Ships? From 1996 to 2019, inflation for non-military ships (a 129.7 percent increase) is nearly three times higher than for military ships (a 47.3 percent increase). Though the indices tracked somewhat closely through 2005, inflation in non-military ships has since considerably outpaced military ships (figure 1).
One factor that can hold military ship construction in check, despite often being sourced in a monopoly or duopoly environment, are long term contracts. Non-military ships are generally priced on a per-ship basis, which can be more sensitive to changes in supply and demand and to the prices of inputs (materials and wage rates).
Military Ships, Aerospace, and Manufacturing
Comparisons can be made to similar other industries as well, like aerospace, and to the manufacturing sector, which both seek to increase the quality and capability of their products. Despite higher volatility of the military ship and manufacturing sectors when compared to the aerospace sector, the military ship industry tracks closely over time with the overall manufacturing industry. During the period of June 1996 to February 2020, military ship inflation, which rose by 47.3 percent, was slightly outpaced by manufacturing, which rose by 53.5 percent. However, both military ship building and manufacturing in general had lower inflation than the aerospace sector (a manufacturing segment), which experienced price increases of 71.8 percent (figure 2).
Military Ships, Consumer Prices, and Producer Prices
Lastly, Military Ship inflation is compared to two broader economic measures, the Consumer Price Index (CPI), and the Producer Price Index. Price inflation for the broader economy, as measured by the CPI, have outpaced both the PPI and military ship inflation, with the CPI increasing by 65.3 percent from June 1996 to February 2020. Though both are more volatile than the CPI, military ship inflation and the Producer Price Index have tracked closely over time, with increases of 47.3 percent and 53.5 percent, respectively (figure 3).
The total price increases and the annual price increases for all series presented are tabulated in table 1.
The headline costs of adding to the U.S. Navy’s ships may certainly look high, but price rises for military ships since 1996 have been more modest than price increases in commercial ship building and similar industries and also more modest than price rises for U.S. producers and U.S. urban consumers as a whole. Despite procuring in a non-competitive marketplace, it appears that some of the efforts to control price increases have paid off, as price inflation for military ships has been nearly flat over the past decade. Provided the economy is growing, this will allow the Navy to invest more in shipbuilding and maintenance without allocating a larger budget share towards construction.
Both Aerospace and Military, Self-Propelled Ships have gaps in the data series. The gaps in the data, and the imputations are documented in table 2.