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The business situation.


PROFITS from current production--profits before tax with inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj)--increased $10-1/2 billion in the first quarter of 1986, following a $6 billion decline in the fourth quarter of 1985.

Domestic profits of nonfinancial corporations increased $7-1/2 billion in the first quarter, following a decline of $11-1/2 billion in the fourth, reflecting increases both in real gross corporate product and in profits per unit of product. The increase in unit profits resulted from a larger increase in unit price than in unit cost.

Domestic profits of financial corporations increased $4 billion in the first quarter, following an increase of $1 billion, and profits from the rest of the world declined $1 billion, following an increase of $4-1/2 billion.

Profits before tax.--Profits before tax (PBT) declined $17 billion in the first quarter, following an increase of $5-1/2 billion in the fourth. The contrast between the increase in profits from current production and the decline in PBT is due to the CCAdj, which declined $1/2 billion, and to the IVA, which increased $28 billion. Both of these adjustments are reflected in the current production measure but not in PBT.

The CCAdj is the difference between depreciation based largely on tax accounting, on the one hand, and economic depreciation as defined by BEA, on the other. The IVA removes the capital-gains-like element from profits when inventory prices increase; likewise, it removes the capital-loss-like element when inventory prices decline. In the first quarter, inventory prices declined substantially, following increases in the fourth quarter. For example, the Producer Price Index, a major source for estimating the IVA, declined 5-1/2 percent (annual rate) in the first quarter, with petroleum prices accounting for much of the decline; in the fourth quarter, the index had increased 2-1/2 percent. As a result of the drop in inventory prices, the IVA swung to $18 billion from negative $10 billion; most of the first-quarter IVA was in industries with substantial petroleum inventories--mining, petroleum manufacturing, utilities, and trade (which includes gasoline service stations).

Profits with IVA but without CCAdj.--The measure of profits estimated by industry increased $11 billion, following a decline of $9-1/2 billion. A $7-1/2 billion increase in the profits of nonfinancial corporations was more than accounted for by retail trade and communications; manufacturing profits declined.

Retail trade profits increased $6 billion, as sales increased. Communications profits increased sharply, following a steep decline; on average over the two quarters, profits were in line with profits over the preceding year and a half. Cost reductions by telephone companies played a role in the first-quarter increase.

In manufacturing, profits declined $6-1/2 billion, following a $3-1/2 billion decline in the fourth quarter; in both quarters, declines in profits of nondurables manufacturers more than offset increases in profits of durables manufacturers.

Within nondurables, petroleum profits dropped $11-1/2 billion, to $9 billion; $8-1/2 billion of the drop reflected a fine paid to the U.S. Department of Energy by a major corporation in accordance with a Federal court ruling that had found that the corporation overcharged customers for crude oil during 1975-80 in violation of Federal oil price regulations. Profits of petroleum manufacturers were also depressed in the first quarter by the sharp drop in crude oil prices because corporations in this industry also are heavily engaged in the extraction of domestic crude. Elsewhere in nondurables, chemicals profits rebounded $2-1/2 billion after a record $3 billion decline; the industry benefited from the drop in crude oil prices, which lowered the cost of petrochemical feedstocks, and from slightly higher chemicals prices. In paper, profits dropped from an unusually high fourth-quarter level, while in printing and publishing, profits increased from an unusually low fourth-quarter level.

In durables manufacturing, the largest increases were in fabricated metals ($2 billion) and in lumber; the surge in residential construction activity brought on by low interest rates was one factor behind the increases. Profits of motor vehicles manufacturers increased $1 billion, as a sharp increase in auto output more than offset both a decline in truck output and an increase in cost of sales incentive programs. In nonelectric machinery (which includes computer manufacturing), profits declined $1-1/2 billion, reflecting a substantial decline in sales.

Most of the $4 billion increase in profits of financial corporations was accounted for by insurance, especially property and casualty insurance where reduced claims and expenses in the first quarter, in conjunction with rate increases in previous quarters, produced a swing from losses to profits. Current net earnings of Federal Reserve Banks, which are treated as corporate profits in the NIPA's, also increased; an increase in Federal Reserve holdings of Federal debt instruments more than offset a decline in interest rates.

Profits from the rest of the world declined $1 billion. Profits of U.S.-owned corporations abroad were flat, while profits of foreign-owned corporations in the U.S. increased.
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Title Annotation:first-quarter 1986
Publication:Survey of Current Business
Date:Jun 1, 1986
Previous Article:U.S. merchandise trade associated with U.S. multinational companies.
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