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The business situation.

the BUSINESS SITUATION

THE pace of U.S. production slowed somewhat in the fourth quarter of 1986. Real GNP increased at an annual rate of 1 1/2 percent, following increases ranging from 1/2 to 4 percent in the first three quarters of the year (chart 1). Inflation remained moderate in the fourth quarter. The GNP price index (fixed weights) increased at an annual rate of 2 1/2 percent, the same rate as in two of the preceding three quarters.1 For the year 1986, production increased 2.5 percent, about the same as in 1985; inflation, at 2.8 percent, was about 1 percentage point less than in 1985 and the lowest in almost two decades.

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 1982 dollars.

The preliminary (15-day) GNP estimates for the fourth quarter, prepared in mid-January, are based on the following major source data: For personal consumption expenditures (PCE), retail sales through December, and unit auto and truck sales through December; for nonresidential fixed investment, the same information for autos and trucks as for PCE, October and November construction put in place, and October and November manufacturers' shipments of machinery and equipment; for residential investment, October and November construction put in place, and housing starts through December; for change in business inventories, October and November book values for manufacturing and trade, and unit auto inventories through December; for net exports of goods and services, October revised statistical month merchandise exports and imports, November statistical month merchandise exports, and fragmentary information on investment income for the quarter; for government purchases of goods and services. Federal unified budget outlays for October and November, State and local construction put in place for October and November, and State and local employment through December; and for GNP prices, the Consumer Price Index for October and November, the Producer Price Index through December, and statistical month unit-value indexes for exports and imports for October and November. Some of the source data are subject to revision.

Sharp quarterly changes in 1986 in the major components of real GNP, of GNP prices, and of personal income reflected, in part, the effects of a number of major economic developments:

Petroleum price declines.--Following OPEC members' formal abandonment of production quotas in late 1985, petroleum prices plunged to their lowest level in more than a decade. Energy prices fell substantially in each quarter of 1986 and led to a slowing in inflation. Domestic investment in petroleum exploration and drilling was sharply curtailed. Imports of petroleum and petroleum products, after dropping in the first quarter, surged to the highest levels since 1980.

Motor vehicle sales incentives.-- Responding to an inventory buildup, domestic motor vehicle manufacturers offered extensive sales-incentive programs in the third quarter. New car and truck sales jumped to record levels, and inventories were liquidated. Sales fell back early in the fourth quarter, when the programs were terminated.

Interest rate declines.--In general, interest rates fell throughout the year, reaching their lowest levels in nearly a decade. Lower interest rates were favorable to investment in 1986. Personal interest income dropped sharply in the second half of the year.

Dollar depreciation.--The U.S. dollar depreciated sharply against the currencies of Japan and most major European trading partners, but depreciated much less or not at all against the currencies of Canada and most of the newly industrialized countries in Asia. U.S. exports strengthened in the second half of the year. Although increases in prices of imported goods other than petroleum picked up in 1986, U.S. imports remained strong throughout the year.

Farm price declines.--Market prices for farm products, particularly crops, fell sharply over the year. Despite boosts from Federal subsidy payments, farm income was down substantially over the year. Farmers placed large amounts of crops with the Commodity Credit Corporation in the fourth quarter.

Federal tax law changes.--The Tax Reform Act of 1986, after lengthy debate, was signed into law in October. The upsurge in consumer spending on motor vehicles in December may have been partly attributable to consumers' response to provisions of the act that affected deductions for sales taxes and loan interest payments. Other major provisions may have affected investment in 1986.

Real GNP

The increases in GNP in 1986 were associated with sharp, and partly off-setting, changes in final sales and in inventory investment (table 1). There were also sharp changes in the major components of final sales. Personal consumption expenditures registered sizable increases through the first three quarters but declined slightly in the fourth quarter. Nonresidential fixed investment declined each quarter, with an especially large drop in the first; residential investment increased each quarter, although the increases tapered in the second half of the year. Net exports registered increases in the first and fourth quarters and decreases in the second and third; on balance, the decreases exceeded the increases by a substantial amount. Government purchases, after a sharp decline in the first quarter, increased in the following three quarters.

Although considerable portions of the third-quarter acceleration and the fourth-quarter deceleration in final sales were attributable to motor vehicles, the corresponding movements in GNP were not. On the contrary, movements in motor vehicle output countered those in GNP: Motor vehicle output declined somewhat more in the third quarter than it had in the second; in the fourth quarter, it swung to an increase.

Motor vehicles.--Real motor vehicle output increased $8 1/2 billion in the fourth quarter, following a $3 billion decline in the third. The swing was accounted for by auto output, which increased after a decline; truck output increased about the same in both quarters. Final sales of both autos and trucks increased sharply in the third quarter and fell sharply in the fourth. Investment in auto and truck inventories decreased sharply in the third quarter and increased sharply in the fourth.

In terms of units, sales of new cars fell to 11.5 million (seasonally adjusted annual rate) from a record 13.2 million in the third quarter; sales had been 11.2 million in the second quarter (chart 2). The movements in sales were largely accounted for by domestic car sales; imported car sales were up slightly in the fourth quarter, following a somewhat larger increase in the third.

The pattern of domestic sales in the third and fourth quarters largely reflected the impact of extensive sales-incentive programs that manufacturers offered beginning in late August. These programs featured financing rates considerably below prevailing market rates and were designed primarily to liquidate inventories of 1986 models, which had built to high levels in the spring and summer. Domestic car sales reached a record in September, and inventories plunged. Following the end of the programs, sales were particularly low in October and November. Sales rebounded in December; the pickup appears to reflect consumers' response to prospective changes in the Federal tax law. Effective January 1, 1987, the Tax Reform Act of 1986 eliminated, for taxpayers who itemize Federal income tax returns, the deduction for State sales tax and began phasing out the deduction for interest payments on consumer loans.

Unit sales of new trucks decreased to 4.9 million in the fourth quarter from a record 5.7 million in the third. The pattern largely reflected sales of light domestic trucks, which were covered by third-quarter incentive programs.

Personal consumption expenditures

Real personal consumption expenditures (PCE) decreased 1/2 percent in the fourth quarter, following a 7-per-cent increase in the third (table 2). The decrease in the fourth quarter-- the first in PCE since the 1981-82 recession --and most of the strength in the third quarter were attributable to motor vehicles and parts.

Expenditures for durable goods, dominated by the fluctuations in motor vehicles, decreased 10 percent in the fourth quarter after an unusually large increase in the third. The nonvehicle categories of durables continued to increase: Furniture and household equipment increased by less in the fourth quarter than in the second and third quarters, and other durables increased even more in the fourth quarter than in the third. The step-up in other durables was largely attributable to purchases of gold coins; the "American Eagle' coin, sold largely through financial institutions, was first offered for sale in the fourth quarter.

Expenditures for nondurable goods changed little for the second consecutive quarter, following strong increases in the first two quarters. Only energy, following the course of expenditures for gasoline and oil, showed any strength in the fourth quarter. In response to declines in gasoline prices, gasoline and oil registered a third large increase that put the fourth-quarter level 14 1/2 percent above that in the first quarter. Food increased modestly after dropping in the third quarter; clothing and shoes, as well as other nondurables, decreased after small increases.

Expenditures for services increased 2 1/2 percent, about the same as earlier in the year. Household operation and transportation changed little in the fourth quarter after increases in the third. The slowing in the former component was due to lower expenditures in the fourth quarter for electricity and gas for home heating, reflecting the mild weather in many parts of the country; the slowing in the latter component was due to air travel expenditures, which declined after a strong increase. Housing and medical care increased about as much in the fourth quarter as in the third, and other services increased after a third-quarter decrease that had included a large drop in brokerage charges.

Nonresidential fixed investment

Real nonresidential fixed investment declined 3 percent in the fourth quarter, following a 2-percent decline in the third. Structures declined less than in the third quarter, and producers' durable equipment (PDE) declined after a small increase (table 3).

In structures, petroleum exploration and drilling increased slightly after a long and, earlier in 1986, steep decline. The increase suggests that most of the industry's retrenchment in response to the sharply lower level of petroleum prices has been completed. Evidence of an end to the free-fall in exploration and drilling include fourth-quarter increases in the number of seismic crews employed and of rotary rigs in operation. The fourth-quarter decline in structures other than petroleum was more than accounted for by commercial structures; high vacancy rates, perhaps combined with changes in the taxaction of income from real estate tax shelters, help explain the weakness.

In PDE, transportation equipment declined, as drops in business purchases of autos and trucks were accompanied by sizable decline in purchases of aircraft. A small increase in information processing and related equipment and a large increase in industrial equipment only partly offset the decline in transportation equipment.

The 3-percent decline in nonresidential fixed investment in the fourth quarter contrasts markedly with the sharp increase reported in BEA's survey of plant and equipment (P&E) expenditures. The two series frequently differ because of coverage and timing, among other things, and because one is an estimate of plans and the other is an estimate of realizations. Nevertheless, the difference between the two series in the fourth quarter is unusually large and presumably reflects, at least in part, the effect on fourth-quarter plans of cancellations and postponements earlier in the year. When actual expenditures fall short of plans early in the year, as they did in 1986, survey respondents apparently do not revise annual P&E targets down by the full amount of the shortfall; instead, plans for subsequent quarters are raised, perhaps to unrealizable levels.

Although most provisions of the Tax Reform Act of 1986 did not become effective before 1987, the expectation, and then the certainty, of major tax changes may have had some effect on the level, composition, and timing of investment activity in 1986. The magnitude, and even the direction, of this effect is difficult to estimate and may well have been dwarfed by considerations such as low levels of capacity utilization, high vacancy rates, declining interest rates, low cash flow, and sharply lower petroleum prices. Nevertheless, a brief review of the ways in which changes in the tax law could have affected investment may be useful.

Reference has already been made to the possibility that the weakness in commercial structures may have been exacerbated by restrictions on the use of real estate tax shelters. Other provisions of the new tax law that might have had direct effects on investment last year include the retroactive repeal of the investment tax credit, the modification of depreciation schedules, and the 1987 reduction in the corporate income tax rate.

Repeal of the investment tax credit effectively increased the cost of PDE; businesses, therefore, had an incentive to reduce purchases of PDE and, perhaps, to substitute some investment in structures for PDE. This effect was mitigated by the existence of credits carried over from earlier years.

The modified depreciation schedules are less liberal than the previous schedules for some types of assets and more liberal for others. For assets (such as autos and structures) that are treated less liberally under the new law, businesses had an incentive to shift purchases from 1987 and subsequent years into 1986 in order to lock in the old depreciation schedules. This incentive was mitigated by the transition rules that are provided in the new law. Assets for which businesses had signed binding contracts on or before March 1, 1986, need not be placed in service during 1986 in order to qualify for the old depreciation schedules. For assets that are treated more liberally under the new law, businesses did not have a comparable incentive to postpone purchases because they had the option of electing either the old or the new schedules for assets placed in service during the last 5 months of the year.

The reduction in the corporate income tax rate provides a clear incentive to shift investments from 1987 into 1986 because the higher the tax rate, the more valuable a given amount of depreciation. If, for example, the tax rate is 46 percent, $100 of depreciation reduces taxes (and increases after-tax profits) by $46; if the tax rate is 34 percent, taxes are reduced only $34.

Residential investment

Real residential investment increased 4 1/2 percent in the fourth quarter, following a 9 1/2-percent increase in the third. The deceleration was in single-family investment, which was unchanged after a substantial increase in the third quarter. Multifamily investment and other residential investment--which includes major additions and alterations, mobile home sales, and brokers' commissions on house sales-- both swung from small third-quarter declines to moderate fourth-quarter increases.

The path of single-family investment in 1986 was markedly different from the path of single-family starts. Single-family starts, after climbing to a high level--1,253,000 units (seasonally adjusted annual rate)--in the first quarter, dropped 15,000 units in the second quarter, 96,000 in the third, and 15,000 in the fourth (chart 3). Single-family investment, in contrast, increased in both the second and third quarters and, as noted above, was flat in the fourth. Divergent movements in starts and investment are not infrequent, and usually arise from lags in the construction process and from changes in the average value of new houses (which is used in valuing starts in the estimation of single-family investment). Both factors were important in 1986.

Changes in average value were affected by two kinds of shifts in the composition of starts. Starts of units for sale (i.e., speculative starts) were an unusually large share of total single-family starts in the first quarter and declined to a more normal share by the third; the converse was true of units started under contract (i.e., custom-built starts). During this period, custom-built starts were valued, on average, about 5 percent higher than speculative starts. The change in the composition of starts during the year, therefore, pushed average values up and tended to offset, in the investment estimates, the effect of decline in the number of starts. A similar effect was produced by changes in the geographical distribution of starts. During the year, an increasing share of starts was located in the Northeast, where prices were $36,000 higher than the national average in the first quarter and $44,000 higher in the third. The shift in activity toward the Northeast, therefore, also tended to offset the decline in the total number of starts.

Multifamily investment changed little over the second half of the year after increasing over the first half. The slowdown is consistent with reported overbuilding in many areas of the country and with changes in taxation of income from real estate tax shelters.

The modest fourth-quarter increase in "other' residential investment was in brokers' fees on sales and in major additions and alterations. Brokers' fees reflected the path of house sales, which were stimulated by declining interest rates. The mortgage commitment rate dropped from 10.68 percent at the end of the second quarter to 10.01 percent at the end of the third, and to 9.31 percent at the end of the fourth (chart 4).

Inventory investment

Real inventory investment decreased $11 billion in the fourth quarter, following even larger drops in the preceding two quarters (table 4). These changes reflected a substantial and progressive movement in inventories from an accumulation of $40 billion in the first quarter to a decumulation of $11 1/2 billion in the fourth.

The progressive movement in total inventories masked sharp changes within the components, particularly auto and farm inventories. As noted earlier in the section on motor vehicles, inventories built up in the spring and plunged in the third quarter; in the fourth quarter, they declined slightly. For retail auto dealers, the large changes amounted to plus $17 billion in the first quarter, and minus $22 billion in the third quarter.2 Farm inventories decumulated $15 1/2 billion in the fourth quarter; accumulation over the first three quarters of the year had totaled about the same amount. The fourth-quarter decumulation occurred as farmers placed large amounts of crops with the Commodity Credit Corporation (CCC) under the commodity loan program.

2. In general, the estimates for inventories of retail auto dealers, which are derived from Census Bureau book value inventory data, cover most auto inventories --including inventories of new and used autos, domestic and foreign--but do not include those held by manufacturers and wholesalers. The data for retail auto dealers cover, in addition to autos, some trucks and other motorized vehicles, and also parts. The change in business inventory estimates for retail auto dealers differ in terms of sources and coverage from the change in inventories of autos and trucks that are part of the motor vehicle output estimates.

Nonfarm inventories other than those held by retail auto dealers registered increases ranging from $13 billion to $20 billion in the first three quarters of the year, before tapering off to a $5 1/2 billion increase in the fourth. Most of the accumulations over the year were in wholesale inventories, mainly in inventories of autos and food, and in retail inventories other than those held by auto dealers, in inventories of both durable and nondurable goods. Manufacturing inventories decreased slightly in the fourth quarter and substantially in two of the preceding three quarters. The decumulations were largely in inventories of durable goods, mainly in primary metals and in nonelectrical machinery.

The constant-dollar ratio of total inventories to total final sales dropped from 3.20 in the third quarter to 3.16 in the fourth. Most of the drop reflected the impact of farmers' stepped-up placements of crops with the CCC, which affected both inventories and final sales. A variant of the ratio that is adjusted for CCC inventory change increased slightly in the fourth quarter --to 3.31 from 3.30 in the third quarter. (See the August 1986 "Business Situation' for a discussion of this variant and a guide as to when it may provide useful perspective on the published ratio.) Both ratios, however, indicate that, from a historical perspective, inventories are low relative to sales.

Net exports

Real net exports of goods and services increased $7 1/2 billion in the fourth quarter, following a decrease of $9 1/2 billion in the third. Most of the improvement was attributable to imports, which increased much less than in the third quarter.

Exports increased $14 billion, or 16 percent, in the fourth quarter, compared with $11 1/2 billion, or 13 1/2 percent, in the third (table 5). Within merchandise, both agricultural and nonagricultural exports increased substantially for the second consecutive quarter. The upturn in agricultural exports, after declines in the first half of the year, appears to be partly due to increased price competitiveness of U.S. farm products following implementation of the Food Security Act of 1985 for the 1986 crops. From April through October, the export price of major crops dropped sharply: For example, cotton, by 37 percent; rice, by 33 percent; wheat, by 17 percent; and corn, by 29 percent.

Among nonagricultural exports, the increase was widespread, lending support to the hypothesis that they have begun to show the effect of the continued depreciation of the dollar against the currencies of some of the major U.S. trading partners. Within exports of services, income on U.S. investment abroad decreased somewhat less than in the third quarter; it had dropped substantially in the second quarter, when profits of foreign petroleum affiliates were cut sharply.

Imports increased $6 1/2 billion, or 4 1/2 percent, in the fourth quarter, compared with $21 billion, or 17 1/2 percent, in the third. The slowing was more than accounted for by merchandise, primarily petroleum and petroleum products.

Imports of petroleum declined $3 1/2 billion, or 14 1/2 percent, in the fourth quarter, following a $13 billion increase in the third and an even larger one in the second. These sharp changes, as well as a drop in the first quarter, were largely responses--after allowance for delivery time and contracting arrangements, and including speculation about future price developments --to the changes in world petroleum prices. In historical perspective, the third- and fourth-quarter levels of petroleum imports were high--the highest since 1980. These levels were roughly midway between the $105 billion level registered in the 3 years just before the runup in petroleum prices initiated in 1979 and the $60 billion level to which imports had fallen in 1982-85.

Imports of nonpetroleum products increased $7 1/2 billion, or 9 percent, compared with $10 billion, or 12 1/2 percent, in the third quarter. Although the increase in the fourth quarter was smaller than that in the third, it was about the same as the average for the first three quarters of 1986. Further, the strength persisted despite several quarters of increasing prices for most categories of nonpetroleum imports and a slowing in U.S. demand--as measured by gross domestic purchases--to an increase of 1 percent in the fourth quarter from increases of 3-3 1/2 percent in earlier quarters. Imports of services increased in the fourth quarter after a decline in the third; the fourth-quarter increase reflected a higher level of income payments on foreign portfolio investment in the United States.

Government purchases

Real government purchases increased 13 percent in the fourth quarter, following a 4 1/2-percent increase in the third (table 6). The sharp changes in government purchases in the past several quarters were largely traceable to Federal national defense purchases and to transactions of the CCC in Federal nondefense purchases.

National defense purchases declined in the fourth quarter, following two quarters of strong increases. The turnaround was due to a slowdown in deliveries of military equipment and to a decline after two quarters of increases in services other than compensation of employees.

The change in inventories of farm products held by the CCC swung sharply in the second half of 1986, following moderate increases in the first half. In the third quarter, CCC inventories declined $2 1/2 billion, as withdrawals of crops exceeded additions. The additions were primarily new loans under the commodity loan program. (Commodity loan transactions are treated in the national income and product accounts as a purchase by the CCC with an offset in farm inventories.) The withdrawals included not only redemptions of crops previously placed under loan but also redemptions using certificates issued by the CCC as deficiency payments in lieu of cash. In the fourth quarter, CCC inventories jumped $22 1/2 billion, mainly because of new loans for corn. Other nondefense purchases were up slightly in the fourth quarter, following several quarters of decline.

State and local government purchases increased at a much slower pace than in the preceding two quarters. The pattern largely reflected that of highway construction, which declined after two quarters of strong increases.

GNP Prices

The GNP price index (fixed weights) increased at a moderate pace throughout 1986, while the price index for gross domestic purchases accelerated in the second half of the year (table 7). The different pattern was largely attributable to prices of imports, which are subtracted out in deriving GNP prices but not in deriving gross domestic purchases prices. The sharp declines in import prices in the first half of the year were mainly due to petroleum prices, which plunged 55 percent in the first quarter and 86 percent in the second. Petroleum prices were down much less in the third quarter and turned up in the fourth following OPEC members' agreement to reinstate production quotas. Prices of nonpetroleum industrial supplies and materials declined in the first half of the year and increased in the second. Prices of the other end-use categories of imported goods increased throughout the year; prices of capital goods, consumer goods, and other goods registered larger increases in the second half of the year than in the first.

PCE prices increased 3 1/2 percent in both the third and fourth quarters, following smaller changes in the first half of the year. Food prices were up less in the fourth quarter than in the third, but considerably more than in the first half of the year. Energy prices declined steeply throughout the year. Prices of gasoline and oil and of fuel oil and coal declined in each quarter, with particularly sharp drops in the second quarter; prices of electricity and gas changed little in the first three quarters and declined in the fourth. Other PCE prices accelerated in the second half of the year. The acceleration was concentrated in several categories of goods, notably motor vehicles, other durables, clothing and shoes, and other nondurables.

Increases in the prices of the investment components were quite similar in the third and fourth quarters. For the most part, these components had registered small to moderate increases in the first half of the year as well. Prices paid by government increased 4 percent in the fourth quarter, considerably higher than in earlier quarters of the year. About 0.7 percentage point of the increase was due to a one-time employer contribution to a pension fund administered by Los Angeles County; such contributions are treated in the national income and product accounts as a temporary increase in the price of employee services purchased by government.

Personal Income

Increases in personal income in the third and fourth quarters of 1986 were weak relative to those in the first half of the year. Personal income increased $34 1/2 billion in the fourth quarter, following a $15 1/2 billion increase in the third; increases in the preceding two quarters had averaged $50 billion (table 8). The weakness in personal income was not traceable to wages and salaries, which strengthened during the second half of the year, but, rather, to the timing of agricultural subsidy payments and to a sharp falloff in interest income.

Wage and salary disbursements increased $30 billion in the fourth quarter, following increases of $22 1/2 billion in the third and $14 1/2 billion in the second. The progressive improvement was primarily accounted for by wages and salaries in the manufacturing and distributive industries, although the other major private industries also contributed. In the fourth quarter, the step-up in private wages and salaries largely reflected stronger increases in employment and average hourly earnings; in the third, employment had picked up and average weekly hours had increased after a decline. Government wages and salaries increased about the same in the fourth quarter as in earlier quarters.

Farm proprietors' income increased $2 1/2 billion in the fourth quarter, following a $20 billion decline in the third. The sharp changes in farm income in the past several quarters largely reflected the pattern of Federal agricultural subsidy payments. These payments amounted to $3 1/2 billion in the first quarter, a record $19 billion in the second, $4 1/2 billion in the third, and $11 1/2 billion in the fourth. A major part of the fourth-quarter payments were deficiency payments--payments made when the market price of a crop is below the target price set by the CCC--on the 1986 wheat crop. Farm income excluding subsidies declined $4 billion, following declines in the preceding three quarters. The weakness in 1986 reflected declines in both farm prices and production. Nonfarm proprietors' income increased somewhat less than in preceding quarters, reflecting slowdowns in construction and retail trade.

Personal interest income dropped sharply in the third and fourth quarters --$6 1/2 billion and $7 billion, respectively --after changing little earlier in the year. The drops reflected continued declines in interest rates in 1986, which reduced returns on financial assets with adjustable rates, such as money market accounts. Moreover, interest rates have fallen to the lowest level in several years; thus, as intermediate-term assets, such as savings certificates, reached maturity, funds were rolled over into assets with considerably lower rates of return.

Transfer payments increased $3 billion in the fourth quarter, following an $8 1/2 billion increase in the third. Changes in transfer payments in the past several quarters largely reflected the impact of special factors. In the first quarter of 1986, cost-of-living adjustments to social security and several other Federal programs amounted to $6 1/2 billion. Such adjustments raise transfer payments to a permanently higher level; thus, the change in payments was boosted $6 1/2 billion in the first quarter and was unaffected thereafter. In the third quarter, retroactive social security payments amounting to $2 billion were made to recent retirees. Such payments are one-time catch-ups; thus, the change in payments was raised $2 billion in the third quarter and reduced $2 billion in the fourth.

Fourth-quarter changes in the remaining components of personal income were, for the most part, small and similar to those in the third quarter. Combined, these components, particularly rental income of persons and personal dividend income, contributed to the slowing in personal income in the second half of the year.

Personal tax and nontax payments were up strongly in the third and fourth quarters--$14 billion and $13 billion, respectively. Reflecting the weakness in personal income and the strong increases in personal tax and nontax payments, disposable personal income (DPI) was considerably weaker in the second half of the year than in the first half. DPI increased $21 1/2 billion in the fourth quarter, following an increase of $1 1/2 billion in the third; increases in the first two quarters of the year had averaged nearly $50 billion. For real DPI, these differences were augmented by the course of PCE prices, which were up somewhat more in the second half of the year than in the first. Real DPI declined 1/2 percent in the fourth quarter, following a 3-percent decline in the third; real DPI had registered increases of 6 1/2 and 7 percent in the first two quarters of the year.

Reflecting changes in current-dollar DPI and personal outlays, personal saving declined slightly in the fourth quarter, following a huge decline in the third; personal saving had increased in the first half of the year. The personal saving rate, which had dropped sharply to 2.8 percent in the third quarter from about 5 percent in the first half of the year, declined a bit further in the fourth. At 2.7 percent, the saving rate was at its lowest level in nearly 40 years.

Table: 1.--Recent GNP Patterns

Table: 2.--Real Personal Consumption Expenditures: Change From Preceding Quarter

Table: 3.--Real Gross Domestic Fixed Investment: Change From Preceding Quarter

Table: 4.--Change in Real Business Inventories

Table: 5.--Real Net Exports of Goods and Services: Change From Preceding Quarter

Table: 6.--Real Government Purchases of Goods and Services: Change From Preceding Quarter

Table: 7.--Price Indexes (Fixed Weights): Change From Preceding Quarter

Table: 8.--Personal Income and Its Disposition: Change From Preceding Quarter

Photo: CHART 1 Selected Measures: Change From Preceding Quarter

Photo: CHART 2 Retail Sales of New Cars

Photo: CHART 3 Housing Starts

Photo: CHART 4 Selected Interest Rates
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Title Annotation:4th quarter, 1986
Publication:Survey of Current Business
Date:Jan 1, 1987
Words:5517
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