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The business situation.

the BUSINESS SITUATION

REAL GNP, a comprehensive measure of U.S. production, declined 2.1 percent in the fourth quarter of 1990--its first decline since a 1.8-percent drop in the second quarter of 1986. Real gross domestic purchases declined 4.2 percent. Inflation as measured by the (fixed-weight) price index for gross domestic purchases stepped up to 6.3 percent, reflecting higher energy prices (chart 1).(1)

The motor vehicle and construction industries more than accounted for the fourth-quarter drop in GNP; output in the rest of the economy--that is, GNP excluding the output of these industries--continued to record weak growth, 1.1 percent (table 1).(2) The motor vehicle and construction industries had both showed substantial volatility earlier in 1990:

* Motor vehicle output had dropped

in the first quarter--its fifth

consecutive quarterly decline--before

increasing in the second and third

quarters, and

* Construction output had jumped

in the first quarter--interrupting

a 4-year downtrend--before

declining in the second and third

quarters.

Among the major components of GNP, personal consumption expenditures and fixed investment declined in the fourth quarter after increasing in the third; inventory investment (that is, change in business inventories) declined substantially more than in the third quarter. These fourth-quarter declines were partly offset by increases in net exports (after a small decline in the third quarter) and in government purchases (after a smaller increase in the third quarter).

In personal consumption expenditures, motor vehicles accounted for more than two-fifths of the drop. In fixed investment, motor vehicles and construction more than accounted for the drop.

Inventory investment swung from an accumulation of $4.7 billion in the third quarter to a liquidation of $16.3 billion in the fourth. In the last four business cycles (as identified by the National Bureau of Economic Research), inventory accumulation, not liquidation, was typical in the quarter after a peak in GNP. The aggregate inventory-sales ratios published in table 5.11 of the "Selected NIPA Tables" have typically increased at, and immediately after, peaks in GNP; however, the ratios declined in the fourth quarter of 1990 after changing little in the third.

Net exports increased $22.9 billion in the fourth quarter. Exports increased $11.9 billion, and imports declined $11.0 billion. The decline in imports was more than accounted for by lower purchases of petroleum and petroleum products; presumably, the drop in petroleum imports was both a response to large price increases in the third and fourth quarters and a consequence of the drop in GNP.

Federal defense purchases accounted for most of the fourth-quarter increase in government purchases. No doubt a large (although not precisely quantifiable) part of this increase reflected Operation Desert Shield; it is not clear how much of the increase came from higher imports of defense goods and services or from a running-down of business inventories of defense goods, both of which would offset in GNP the increased purchases.

The year 1990.--In 1990, real GNP increased 0.9 percent--its smallest annual increase since the recession of 1981-82. Except for government purchases, all of the major components of GNP were weaker in 1990 than in 1989, just as they had been weaker in 1989 than in 1988 (table 2). Gross domestic purchases also stepped down in 1989 and 1990. The price indexes for gross domestic purchases and for GNP increased at about the same rate as in 1989; an acceleration in prices of personal consumption expenditures was offset by decelerations in prices of the other major components.

Motor vehicles

Real motor vehicle output dropped 44.5 percent in the fourth quarter after increasing 14.2 percent in the third. Sales fell sharply after changing little, and inventories edged down after increasing slightly. (Auto and truck output, sales, and inventory investment are shown in tables 1.17-1.20 of the "Selected NIPA Tables.")

In terms of units, domestic car production dropped to 5.6 million (seasonally adjusted annual rate) in the fourth quarter from 6.9 million in the third; fourth-quarter production was the same as first-quarter production, which was the lowest level since the fourth quarter of 1982. Domestic car sales fell to 6.6 million; the only strength in sales was in luxury cars, as consumers stepped up purchases before a Federal tax on luxury goods became effective on January 1, 1991. Domestic car inventories declined to 1.3 million; because of the drop in sales, the inventory-sales ratio edged up to 2.4. Sales of imported cars declined to 2.4 million in the fourth quarter, the lowest level since the third quarter of 1984.

Sales of new trucks dropped sharply to 4.2 million in the fourth quarter; light domestic trucks accounted for most of the drop. Truck inventories declined for the second consecutive quarter.

The fourth-quarter fall in motor vehicle production reflected manufacturers' anticipation of weak fourth-quarter sales; it also reflected a third-quarter production level that may have been inflated by shorter-than-normal downtime at plants for model changeovers. (Downtime was shorter than normal because manufacturers introduced a number of 1991 models earlier in the year.) Current plans for the first quarter of 1991 call for a small cut in production.

The fourt-quarter drop in sales reflected factors specific to the motor vehicle industry, as well as general factors underlying the weakness in total consumer spending. Aggressive fleet marketing programs offered by manufacturers, which began in the third quarter, added less to sales in the fourth quarter than in the third. Sales-incentives programs offered to consumers by manufacturers in the fourth quarter were modest compared with the third-quarter programs. New-car prices increased sharply in the fourth quarter after declining in the second and third quarters. Sharp jumps in gasoline prices in the third and fourth quarters and uncertainty about future prices due to the situation in the Middle East also may have contributed to lower vehicle sales.

Among the general factors behind the drop in sales, real disposable personal income declined 3.6 percent in the fourth quarter after declining 0.7 percent in the third. The unemployment rate rose for the second consecutive quarter, to 5.9 percent, and the Index of Consumer Sentiment (prepared by the University of Michigan's Survey Research Center) dropped sharply for the second consecutive quarter--to its lowest level since the second quarter of 1980--after three small declines.

Prices

The price index (fixed weights) for gross domestic purchases increased 6.3 percent in the fourth quarter, 1.2 percentage points more than in the third. For many applications, this index is preferable to the GNP price index as a measure of U.S. inflation because it measures prices of goods and services purchased; the price index for GNP measures prices of goods and services produced. The GNP price index increased 4.1 percent in the fourth quarter, about the same rate as in the third (table 3).

Differences in the movements of the two price measures arise from differences in the movements of export and import prices. (Export prices are included in GNP prices but not in gross domestic purchases prices; import prices are subtracted out in deriving GNP prices but not in deriving gross domestic purchases prices.) Export prices increased modestly in both the third and fourth quarters; import prices surged in both quarters, largely reflecting runups in petroleum prices following the Iraqi invasion of Kuwait in early August.(3)

The fourth-quarter acceleration in gross domestic purchases prices was largely attributable to the huge jump in energy prices (chart 2). Food prices increased at the same rate as in the third quarter. Prices of gross domestic purchases less food and energy--which may be viewed as a measure of underlying inflation in the U.S. economy--increased 3.9 percent, about the same rate as in the second and third quarters.

Among major components, prices of personal consumption expenditures (PCE) increased 7.1 percent after a 5.7-percent increase. The acceleration in PCE prices was largely accounted for by energy prices: Prices of gasoline and oil and of fuel oil and coal were up even more than in the third quarter, and prices of natural gas and electricity increased after a decline. Prices of motor vehicles and parts accelerated; a pickup in new-car prices largely reflected higher prices on new models and the discontinuation of some sales-incentive programs. PCE food prices increased 4.9 percent after a 4.2-percent increase; the step-up partly reflected the impact of below-freezing temperatures in California on the prices of fruits and vegetables. Prices of clothing and shoes and of transportation also contributed to the acceleration in PCE prices. Within transportation, higher air fares reflected sharply higher jet fuel prices.

Prices of fixed investment increased slightly more than in the third quarter, and prices of government purchases increased considerably more than in the third quarter. Among the investment components, a step-up in prices of producers' durable equipment was largely accounted for by transportation equipment; computer prices dropped sharply. Prices of nonresidential structures decelerated, and prices of residential structures registered a downswing. The step-up in prices of government purchases was mainly accounted for by increases in petroleum prices.

Personal income

Real disposable personal income (DPI) declined 3.6 percent in the fourth quarter after declining 0.7 percent in the third (chart 3). Back-to-back declines in real DPI last occurred during the 1981-82 recession. The fourth-quarter drop in real DPI reflected a slowdown in current-dollar DPI, as well as the pickup in PCE prices.

Personal income, which is only available in current dollars, increased $40.5 billion in the fourth quarter after increasing $56.3 billion in the third. A sharp slowdown in wages and salaries was partly offset by an upswing in farm proprietors' income and a pickup in transfer payments (table 4).

Wage and salary disbursements increased $4.9 billion in the fourth quarter, $33.0 billion less than in the third. Private-sector wages and salaries declined $1.9 billion in the fourth quarter, the first decline since the end of the 1973-75 recession. The decline was traceable to sharp downswings in employment and average weekly hours. All the major private industry components except services declined in the fourth quarter; construction and motor vehicles were especially weak--declining $4.0 billion and $2.6 billion, respectively. Services increased, but considerably less than in the third quarter. Government wages and salaries increased somewhat more than in the third quarter; military compensation, reflecting Operation Desert Shield, accounted for about one-half of the acceleration.

Farm proprietors' income increased $6.5 billion in the fourth quarter after declining $8.6 billion in the third. The upswing was entirely due to Federal farm subsidy payments: Subsidies increased $10.7 billion in the fourth quarter after declining $6.3 billion in the third. The fourth-quarter increase reflected increases in Conservation Reserve Program payments and in deficiency payments (that is, payments made because the market price of a crop is, or is projected to be, below the Federal target price). Farm income excluding subsidies declined in the third and fourth quarters--$2.3 billion and $4.2 billion, respectively. In both quarters, declines largely reflected lower prices for farm output. Nonfarm proprietors' income was up less than in the third quarter.

Transfer payments increased $17.9 billion in the fourth quarter after increasing $9.7 billion in the third. Fourth-quarter payments were boosted by several special factors: Reparation payments to Japanese-Americans interned during World War II, cost-of-living adjustments to benefits under the Federal Food Stamps program, and retroactive social security payments to recent retirees, which resulted mainly from the recalculation of the earnings base underlying social security benefits.

Among the remaining components of personal income, personal interest income increased somewhat less than in the third quarter; the slowdown largely reflected recent declines in interest rates. Increases in other labor income and personal dividend income were similar to those in the third quarter; rental income changed little after an increase. Personal contributions for social insurance, which are subtracted in deriving personal income, increased $0.4 billion in the fourth quarter after increasing $4.5 billion in the third. (The repeal of the major provisions of the Medicare Catastrophic Act of 1988 had added $3.7 billion to the third-quarter increase.)

Personal tax and nontax payments increased $8.6 billion in the fourth quarter after increasing $13.0 billion in the third. The slowdown reflected slower growth in the taxable earnings base.

In the fourth quarter, personal outlays--mainly PCE--increased more than DPI; thus, personal saving declined. In the third quarter, personal saving had dropped much more sharply. The personal saving rate declined 0.1 percentage point, to 4.1 percent, in the fourth quarter after declining 0.8 percentage point in the third. [Chart 1 to 3 Omitted] [Tabular Data 1 to 4 Omitted]

(1)The regularly featured estimate of real GNP is based on 1982 weights. An alternative estimate of real GNP growth based on more current weights can be calculated using the change in the chain price index, which is published in table 8.1 of the "Selected NIPA Tables." This alternative measure declined 2.6 percent in the fourth quarter after increasing 1.5 percent in the third. Growth of real GNP in 1987 dollars, another measure based on more current weights, will be published in the "Reconciliation and Other Special Tables" in the February Survey of Current Business. (2)The output of the motor vehicle industry is derived by summing auto output (table 1.18) and truck output (table 1.20). The output of the construction industry may be roughly approximated by "structures," shown in table 1.4 of the "Selected NIPA Tables." This approximation excludes maintenance and repair construction and includes brokers' commissions as well as mining exploration, shafts, and wells; nevertheless, it probably tracks movements in construction output in 1990 quite closely. The value of the output of these industries includes the value of inputs, such as steel, provided by other sectors of the economy. (3)In the fourth quarter, the difference between the increases in the price index for gross domestic purchases and in the price index for GNP was 2.2 percentage points. This difference has exceeded 2 percentage points only twice before--in the second quarter of 1974 and in the first quarter of 1980. In all three cases, the difference was accounted for by soaring prices of petroleum imports.
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Title Annotation:fourth quarter of 1990
Publication:Survey of Current Business
Date:Jan 1, 1991
Words:2385
Previous Article:U.S. international transactions, third quarter 1990.
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