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The business situation.

the BUSINESS SITUATION

Final estimates for the fourth quarter of 1990 show that real GNP decreased at an annual rate of 1.6 percent; the preliminary estimates issued a month ago had shown a 2.0-percent decrease.(1) This upward revision in the growth of real GNP--a measure of U.S. production--contrasts with a downward revision in the growth of real gross domestic purchases--a measure of U.S. demand. The final fourth-quarter estimates show that real gross domestic purchases decreased 5.1 percent rather than 4.5 percent.

The revisions in GNP and gross domestic purchases differed because of a $9.7 billion upward revision in net exports, which is included in GNP but not in gross domestic purchases. Exports was revised up $5.8 billion; the revision was accounted for by investment income and by services other than investment income. Imports was revised down $3.9 billion; the revision was accounted for by investment income. (See table 1.)

Among the components that are included in both GNP and gross domestic purchases, change in business inventories was revised down $4.2 billion, and personal consumption expenditures was revised down $3.3 billion.

The fourth-quarter increase in the GNP price index (fixed weights) was unrevised at 4.7 percent, and the increase in the gross domestic purchases price index (fixed weights) was revised down 0.1 percentage point to 6.3 percent.

Corporate Profits

Profits from current production--profits before tax plus inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj)--declined $5.0 billion in the fourth quarter of 1990 (table 1). Profits have fallen in six of the last eight quarters and are now 15.4 percent lower than in the fourth quarter of 1988.

Cash flow from current production, a profits-related measure of internally generated funds available to corporations for investment, increased $6.9 billion in the fourth quarter. This increase, together with a drop in current-dollar nonresidential fixed investment, has returned cash flow as a percent of nonresidential investment nearly to its average level (77 percent) over the preceding seven quarters; however, this level is still well below the average (about 85 percent) for 1986-88.

Profits by industry.--Because profits from current production is not available by industry, profits before tax with IVA is the best available measure of industry profits. This measure of the profits of domestic nonfinancial corporations declined $8.0 billion in the fourth quarter. Drops in manufacturing and in transportation and public utilities were only partly offset by increases in trade and in "other" nonfinancial industries.

In manufacturing, declines were widespread; increases were registered only in petroleum and in electric and electronic equipment. In the transportation and public utilities group, higher fuel costs contributed to lowered profits, particularly in airlines and in electric utilities. In trade, wholesaling accounted for most of the increase in profits.

Profits of domestic financial corporations declined $3.9 billion; commercial banks accounted for roughly one-half of the decline.

Profits from the rest of the world increased $10.4 billion. This component of profits measures receipts of profits from foreign affiliates of U.S. corporations less payments of profits by U.S. affiliates of foreign corporations. In the fourth quarter, receipts increased and payments declined. Most of the underlying detail on receipts and payments is not available on a seasonally adjusted basis. From the unadjusted detail, however, it appears that much of the increase in receipts came from manufacturing affiliates in Europe and from petroleum affiliates in the United Kingdom, Norway, and Indonesia; the decline in payments mirrored the decline in domestic profits.

Profits before tax and related measures.--Profits before tax (PBT) declined $7.7 billion in the fourth quarter. The similarity between the $5.0 billion decline in profits from current production and the $7.7 billion decline in PBT reflected changes in the IVA and in the CCAdj that were partly offsetting.

The IVA is an estimate of inventory profits with the sign reversed. Inventory profits declined $6.0 billion, reflecting a slowing in the rate of increase in prices of inventoried goods, especially petroleum and petroleum products. The CCAdj declined $3.4 billion; it is the difference between the predominantly tax-based depreciation measure that underlies PBT, on the one hand, and BEA's estimate of economic depreciation, on the other.

Government Sector

The fiscal position of the government sector deteriorated in the fourth quarter of 1990, as the combined deficit of the Federal Government and State and local governments increased $48.9 billion, to $155.3 billion (table 2). The Federal Government deficit increased $36.0 billion, and the State and local government surplus decreased $12.9 billion.

Federal

The Federal Government deficit increased $36.0 billion, to $181.7 billion, as expenditures increased considerably more than receipts.

Receipts increased $3.2 billion in the fourth quarter after increasing $20.1 billion in the third. Personal tax and nontax receipts increased $5.4 billion after increasing $8.0 billion. The deceleration was more than accounted for by income tax receipts, which increased $6.2 billion after increasing $12.6 billion. Estate and gift taxes decreased $0.8 billion after decreasing $4.7 billion; the large third-quarter decline reflected a return to a more normal level after unusually large gift tax payments in the second quarter. Indirect business tax and nontax accruals increased $3.6 billion after increasing $0.5 billion; the acceleration was caused by excise tax increases enacted in the Omnibus Budget Reconciliation Act of 1990. Contributions for social insurance increased $1.6 billion after increasing $6.6 billion. The deceleration largely reflected a slowdown in wages and salaries; in addition, the third-quarter increase had included $2.0 billion that reflected a return to normal levels following second-quarter refunds of catastrophic medical insurance premiums. Corporate profits tax accruals declined $7.5 billion after increasing $5.0 billion, reflecting the pattern of corporate profits.

Expenditures increased $39.2 billion in the fourth quarter after declining slightly in the third. All expenditure categories except net interest contributed to the upswing.

Subsidies less the current surplus of government enterprises increased $12.8 billion after decreasing $10.7 billion. The upswing was attributable to government payments to farmers, which increased $14.7 billion after decreasing $8.6 billion.

Purchases of goods and services increased $11.8 billion after increasing $3.9 billion. Defense purchases increased $12.4 billion after increasing $3.0 billion; purchases for Operation Desert Storm accounted for much of the acceleration. Nondefense purchases decreased $0.6 billion after increasing $0.9 billion; a deceleration in purchases of agricultural commodities by the Commodity Credit Corporation was partly offset by accelerations in other programs.

Transfer payments increased $5.4 billion after increasing $2.8 billion. Transfer payments to persons increased $13.2 billion after increasing $4.7 billion. The fourth-quarter increase included $1.8 billion for payments to Japanese-Americans interned during World War II, $1.1 billion for a cost-of-living adjustment in food stamps, and $1.6 billion for retroactive social security benefits. Transfer payments to foreigners declined $7.8 billion after declining $1.9 billion. Fourth-quarter payments include a negative $17.0 billion for payments to the Federal Government by U.S. coalition partners for Operation Desert Storm expenses; these payments were partly offset by unusually large foreign assistance payments by the United States.

Among other expenditures, grants-in-aid to State and local governments increased $6.0 billion after decreasing $1.7 billion; the turnaround was largely in grants for education and highways. Net interest paid increased $3.1 billion after an increase of $5.5 billion.

Cyclically adjusted surplus or deficit.--When measured using cyclical adjustments based on a 6-percent unemployment rate trend GNP, the Federal deficit on the national income and product accounts basis increased from $157.6 billion in the third quarter to $176.4 billion in the fourth (see table 3). The cyclically adjusted deficit as a percentage of the 6-percent unemployment rate trend GNP increased from 2.9 percent in the third quarter to 3.2 percent in the fourth.

State and local

The State and local government surplus decreased $12.9 billion, to $26.4 billion, as expenditures increased more than receipts.

Receipts increased $9.5 billion in the fourth quarter after increasing $16.4 billion in the third. Grants-in-aid increased $6.0 billion after declining $1.7 billion. Indirect business tax and nontax accruals increased $2.9 billion after increasing $11.3 billion. The third-quarter increase was boosted $4.3 billion by an unusual number of law changes and $1.1 billion by a payment from a major petroleum company to Alaska to settle a royalty lawsuit. The fourt-quarter deceleration reflected a return to normal growth in indirect business taxes and the absence of the $1.1 billion nontax payment. Personal tax and nontax receipts increased $1.7 billion after increasing $5.0 billion; the third-quarter increase reflected a rebound from usually large tax refunds paid in the second quarter. Contributions for social insurance increased $0.7 billion after increasing $0.8 billion. Corporate profits tax accruals declined $1.8 billion after increasing $0.9 billion, reflecting the pattern of profits.

Expenditures increased $22.4 billion in the fourth quarter after increasing $15.8 billion in the third. The acceleration was primarily in purchases of goods and services, which increased $18.2 billion after increasing $12.5 billion. Purchases of structures increased $5.2 billion after increasing $0.9 billion; the acceleration was accounted for by highway construction. All other categories of expenditures combined increased $4.2 billion, slightly more than in the third quarter. [Tabular Data 1 to 2 Omitted]

Note.--Daniel Larkins prepared the section on corporate profits, and David T. Dobbs prepared the section on the government sector.

(1)Quarterly estimates in the national income and product accounts are expressed at seasonally adjusted annual rates, and quarterly changes are differences between these rates. Quarter-to-quarter percent changes are annualized. Real, or constant-dollar, estimates are expressed in 1982 dollars and are based on 1982 weights.
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Title Annotation:fourth quarter of 1990
Publication:Survey of Current Business
Date:Mar 1, 1991
Words:1664
Previous Article:Annual input-output accounts of the U.S. economy, 1986.
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