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The business situation: third-quarter 1985.


THE pace of production picked up modestly in the third quarter, according to the "flash' estimates. Real GNP increased at an annual rate of 3 percent, up from 2 percent in the second quarter (table 1).1

1. Quarterly estimates in the national income and product accounts are expressed at seasonally adjusted annual rates, and quarterly changes in them are differences between these rates. Quarter-to-quarter percent changes are annualized. Real, or constant-dollar, estimates are expressed in 1972 dollars.

The procedures used to prepare the "flash' estimates --that is, estimates prepared 15 days before the end of the quarter--are the same as those used to prepare the estimates released after the end of the quarter. However, the source data that are available for the "flash' estimates are limited to only 1 or 2 months of the quarter and are preliminary in some cases. BEA makes projections of the missing source data. The major source data that are available are: For personal consumption expenditures (PCE), July and August retail sales, unit sales of new autos through the first 10 days of September, and sales of new trucks for July and August; for nonresidential fixed investment, the same data for autos and trucks as for PCE, July construction put in place, July manufacturers' shipments of equipment, and business investment plans for the quarter; for residential investment, July construction put in place, and July housing starts; for change in business inventories, July book values for manufacturing and trade, and unit auto inventories for July and August; for net exports of goods and services, July merchandise trade; for government purchases of goods and services, Federal unified budget outlays for July, State and local construction put in place for July, and State and local employment for July and August; and for GNP prices, the Consumer Price Index for July, and the Producer Price Index for July.

The estimates for the second quarter are revised; see table 2.

In contrast to the recent pattern, the increase in U.S. production appears to have roughly matched the increase in U.S. demand. Over the four quarters ending in the second quarter of 1985, U.S. demand--as measured by real gross domestic purchases-- had outpaced U.S. production by more than 1 percentage point. The difference reflects both a decline in foreign sales of U.S. production (exports) and an increase in sales in the United States of foreign production (imports). In the third quarter, exports again declined, but imports declined as well.

It appears likely that little, if any, inventory accumulation occurred in the third quarter. Thus, as in the second quarter, a slowing in the rate of accumulation contributed negatively to the changes in real GNP and in real gross domestic purchases. Among final sales other than net exports, personal consumption expenditures again registered a sizable increase. Both fixed investment and government purchases--reflecting the pattern of particularly volatile subcomponents --registered changes markedly different from those in the second quarter. Fixed investment was flat after a substantial increase, and government purchases were up sharply after a moderate increase.

Inflation slowed modestly. The GNP fixed-weighted price index increased 3 percent, down from 4 percent in the second quarter; prices of gross domestic purchases followed a similar pattern. Energy prices accounted for most of the slowing; after a substantial increase in the second quarter, they changed little in the third.

Third-quarter developments in the components of real GNP and in personal income are sketched below on the basis of data available as of mid-September.

Personal consumption expenditures registered a sizable increase, although less than the 5 percent registered in the second quarter. The increase was less evenly spread in the third quarter than in the second. An increase in durables, larger than the second quarter's 7 percent, was accounted for by motor vehicles, as sales of both autos and trucks increased sharply; furniture and household equipment edged down after a long climb. Nondurables changed little after a 4 1/2-percent increase, reflecting the pattern of food as well as clothing and shoes. Services increased at about the second quarter's 4 percent.

Nonresidential fixed investment slipped after a 14 1/2-percent increase. Both structures and producers' durable equipment (PDE) contributed to the swing. In PDE, most of the swing was accounted for by computers, which are quite volatile from quarter to quarter. Purchases of computers accounted for much of a large increase in PDE in the second quarter and more than accounted for a decline in the third. The effect of computers on PDE was partly offset by motor vehicles; largely reflecting autos, purchases of motor vehicles declined in the second quarter and increased in the third. In structures, the swing was concentrated in commercial structures other than office buildings and in industrial structures; most categories changed little in the third quarter.

Residential investment increased somewhat more than the 6 1/2 percent registered in the second quarter. The third-quarter increase was largely in the components other than new construction that together make up about one-third of residential investment. Each of these components--additions and alterations, commissions on the sale of residences, and mobile homes--increased in the third quarter. The recovery in residential investment from the recent low in the fourth quarter of 1984 also has been largely in these components. Over this period, single-family construction, which was flat in the third quarter, has increased moderately. Multifamily construction, which was up in the third quarter, has declined over this period.

Little, if any, appears to have been added to business inventories in the third quarter, after moderate accumlation --about $8 1/2 billion (1972 dollars)--in the second. Thus, the contribution of inventories to the change in GNP was negative, although a little less so than in the second quarter. On the basis of fragmentary information, it appears that farm inventories continued to accumulate, although somewhat less than the $3 1/2 billion in the second quarter. Accumulation in recent quarters has put farm stocks at levels that are taxing the capacity of storage facilities. Nonfarm inventories appear to have been reduced after accumulation of $5 billion in the second quarter. Auto inventories more than accounted for the reduction. After a substantial increase in the first quarter, auto inventories have been run down to levels below that considered desirable by the industry. Overall, it is likely that the ratio of business inventories to total final sales moved toward the low end of the 3.01-3.09 range within which it has fluctuated during the last 2 years.

Net exports appear to have increased slightly, as exports declined less than imports. As in the second quarter, the changes were largely accounted for by merchandise trade. In exports, agricultural products registered another sharp decline in the face of ample worldwide supplies; nonagricultural exports increased somewhat after a second-quarter decline. In imports, petroleum was flat after a large second-quarter increase that may have reflected some purchases that had been deferred in the first quarter when petroleum prices were declining. Nonpetroleum imports again edged down.

Government purchases increased substantially after a 3 1/2-percent increase in the second quarter. In Federal purchases, both defense and nondefense increased. The recent volatility in nondefense purchases is traceable to transactions of the Commodity Credit Corporation (CCC). The third-quarter increase in nondefense purchases, and also the second-quarter decline and the first-quarter increase, were accounted for by these transactions. Crop prices have been falling, and, as they fell below support levels, farmers have taken the option of placing substantial amounts of wheat, corn, and some other crops with the CCC. In State and local purchases, third- and second-quarter increases were in construction, largely highways.

Personal income, as it has in every quarter since the beginning of 1984, increased less than in the preceding quarter: it increased $27 billion, compared with $31 billion in the second quarter. One source of the slowing in recent quarters, and by far the largest source in the third quarter, was farm proprietors' income. Farm income declined $3 billion on average in the first and second quarters and plummeted $10 1/2 billion in the third. Increases in subsidies had propped up farm income in the first and second quarters, but, in the third quarter, subsidies declined $8 1/2 billion. In addition, declines in crop and livestock prices in the third quarter more than offset increases in production.

Wage and salary disbursements increased roughly $3 1/2 billion less than the second quarter's $28 billion. Manufacturing increased after no change, but all other major groups--other commodity-producing, distributive, services, and government and government enterprises--increased less than in the second quarter. Transfer payments increased roughly $5 billion more than the second quarter's $1/2 billion. A major factor in the step-up was an increase, after a decline, in retroactive Social Security payments. Personal interest income registered another small decline, reflecting the declining rate of interest paid on personal assets. Other components of personal income registered changes that were similar to those in the second quarter.

The change in, but not the level of, personal taxes and nontax payments in the third quarter reflected the impact of the timing of refunds on 1984 Federal personal income taxes. Refund payments are netted against tax payments in calculating personal taxes, and, because refunds were shifted from the first quarter to the second, personal taxes were unusually large in the first quarter and unusually small in the second. The impact on the change in taxes was a plus $27 1/2 billion in the first quarter, a minus $55 billion in the second, and a plus $27 1/2 billion in the third. Excluding these impacts, personal taxes increased about $14 1/2 billion in the second quarter and--reflecting the smaller increase in the tax base and about $3 billion in legislated reductions --roughly $9 1/2 billion in the third.

Disposable personal income--that is, personal income less personal taxes--declined roughly $10 billion in the third quarter, in contrast to a $71 1/2 billion increase in the second. Excluding the effect of the tax refunds, the third-quarter increase in disposable personal income was roughly the same as the second quarter's 2 1/2 percent. However, these increases only about matched those in prices; again excluding the effect of the tax refunds, real disposable income declined 1/2 percent in the second quarter and was about flat in the third.

Although the increase in personal outlays was several billion dollars less than the $51 billion in the second quarter, personal saving declined sharply, reflecting the huge swing in disposable personal income. The personal saving rate, which had moved up in the second quarter to 5 percent, dropped below 3 1/2 percent in the third. Although the pattern of change in the saving rate was probably affected by the tax refunds, the thirdquarter level probably was not.

Second-quarter corporate profits

Revised second-quarter estimates show that profits from current production --profits with inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj)--increased $6 billion, to $298 1/2 billion, following a $1/2 billion increase in the first quarter. The revised estimate is $1 billion higher than the estimate issued a month ago. Profits from the rest of the world were revised up $2 billion; domestic profits of nonfinancial corporations were revised down $1/2 billion.

Domestic profits of financial corporations increased $5 1/2 billion, to $34 billion, following a $1 billion increase. Domestic profits of nonfinancial corporations declined $1 1/2 billion, to $242 billion, following no change. Profits from the rest of the world increased $2 billion, to $23 billion, also following no change. Profits from the rest of the world reflected increases in earnings on direct investment in Western Europe and Canada, which more than offset decreases in Latin America and Australia.

Profits before tax (PBT) differ from profits from current production by the IVA and CCAdj. In the second quarter, both adjustments increased: the IVA by $1 1/2 billion, to $2 1/2 billion, and the CCAdj by $6 billion, to $75 billion. PBT declined $1 1/2 billion, to $221 billion, following a $6 1/2 billion decline.

Profits with IVA but without CCAdj--the variant of profits available by industry--increased $1/2 billion, to $223 1/2 billion, following a $4 billion decline. Increases of $5 billion in domestic profits of financial corporations and of $2 billion in profits from the rest of the world slightly more than offset declines in domestic profits of nonfinancial corporations. Overall, the domestic profits picture is essentially the same as that described in the August "Business Situation.' Among financial corporations, profits of savings and loan associations increased sharply, because their costs of raising funds have gone down with interest rates. Among nonfinancial corporations, profits of manufacturers --particularly of motor vehicles and pertoleum products--and profits of transportation and public utilities were down, but trade profits increased.

Second-quarter NIPA revisions

The 75-day revisions of the national income and product accounts estimates for the second quarter of 1985 are shown in table 2.

Table: 1.--GNP and GNP Prices

Table: 2.--Revisions in Selected Component Series of the NIPA', Second Quarter of 1985
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Publication:Survey of Current Business
Date:Sep 1, 1985
Previous Article:Foreign direct investment in the United States: country and industry detail for position and balance of payments flows, 1984.
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