Printer Friendly

The business situation.

the BUSINESS SITUATION U.S. economic activity continued at a moderate pace in the fourth quarter of 1988. The pace of production slowed a little, and the pace of demand held steady. Inflation moderated slightly . Real GNP, a measure of U.S. production,

increased at an annual

rate of 2 percent, following an increase

of 2 1/2 percent in the third

quarter. . Real gross domestic purchases,

a measure of U.S. demand, increased

at an annual rate of 2 1/2

percent in both quarters. . Both the GNP price index and

the price index for gross domestic

purchases increased, at an annual

rate of 4 percent, following third-quarter

increases of 5 1/2 percent

and 4 1/2 percent, respectively.(1)

The fourth-quarter increases in real GNP and real gross domestic purchases concluded another year of moderate expansion in the U.S. economy. On a year-to-year basis, real GNP increased 3.8 percent in 1988; on a fourth-quarter-to-fourth-quarter basis, real GNP increased 2.7 percent In 1987, real GNP had increased 3.4 percent on the yearly basis and 5.0 percent on the fourth-quarter basis. (The different patterns are mainly the result of an unusually large inventory accumulation in the fourth quarter of 1987).

Inflation in the prices of goods and services produced by the United States was somewhat higher in 1988 than in 1987; inflation in the prices of goods and services purchased in the United States was roughly the same in both years. On the year-to-year basis, GNP prices increased 4.2 percent in 1988 after increasing 3.6 percent in 1987; on the fourth-quarter-to-fourth-quarter basis, they increased 4.5 percent after increasing 4.0 percent. On the yearly basis, gross domestic purchases prices increased 4.1 percent in 1988, the same increase as in 1987; on the fourth-quarter basis, they increased 4.1 percent after increasing 4.5 percent.

Impact of the drought on real GNP.--BEA estimates that the losses in real farm output--predominately in the corn and soybean crops--resulting from drought conditions in 1988 amounted to $12 billion. These losses reduced the year-to-year increase in real GNP for 1988 by 0.4 percentage point; the fourth-quarter-to-fourth-quarter increase was reduced by 0.6 percentage point. BEA allocated the drought losses to the last three quarters of 1988 as follows: Second quarter, $2.3 billion ($9 billion annual rate): third quarter, $3.6 billion ($14 1/2 billion annual rate); and fourth quarter, $6.3 billion ($25 billion annual rate). These losses reduced the second-quarter increase in real GNP by 0.9 percentage point, the third-quarter increase by 0.5 percentage point, and the fourth-quarter increase by 1.1 percentage points. (In the first quarter of 1989, when farm output returns to a level not affected by the drought, the change in real GNP will be raised by about 2.5 percentage points.)

BEA's estimate of crop losses is based on the difference between the U.S. Department of Agriculture's June 1988 forecast of the physical quantity of output, which represents conditions before the drought, and its January 1989 production report, which reflects the results of surveys conducted after most harvests were completed. BEA allocated the crop losses for the year over the quarters of the growing season, with the harvest periods receiving higher allocations. (See the August 1988 "Business Situation" for a description of this procedure, as well as for additional information about the effects of the drought on farm output.)

Components of Real GNP

ALL the major components of real GNP, except government purchases, did less well in the fourth quarter than in the third: Personal consumption expenditures and fixed investment increased less than in the third quarter, inventory investment decreased after an increase, and net exports decreased more than in the third quarter. Government purchases were up substantially after a sizable decrease.

Personal consumption expenditures

Real personal consumption expenditures (PCE) increased 3 percent in the fourth quarter--less than in the third, but within the 3- to 4 1/2 percent range registered earlier in 1988. The relative stability of PCE growth in 1988, which followed 3 years of uneven deceleration, was associated with pick-ups in both disposable personal income growth and consumer confidence (as measured by the Index of Consumer Sentiment prepared by the University of Michigan's Survey Research Center).

The slowdown in PCE in the fourth quarter was in nondurable goods and in services. Durable goods increased after a small decline.

Expenditures for nondurable goods increased 2 percent, following a 5-percent increase in the third quarter and very small increases in the first half of the year. The fourth-quarter slowdown was primarily due to clothing and shoes, which declined slightly after a large increase. "Other" nondurables, which increased less in the fourth quarter than in the third, also contributed. In contrast, both energy and food increased more than in the third quarter.

Expenditures for services increased 3 1/2 percent after increasing 4 1/2 percent in the third quarter; the increases were in line with those registered in the first half of the year. Increases in household operations and in housing were considerably smaller in the fourth quarter than in the third; in household operations, energy services were flat after a large increase that had reflected higher expenditures for air conditioning due to unusually hot weather in July and August. In contrast, increases in "other" services and in transportation were larger in the fourth quarter than in the third; in "other" services, brokerage fees and net foreign travel both increased after declining, and in transportation, airline travel increased more than in the third quarter.

Expenditures for durable goods increased 2 percent in the fourth quarter, following a small decline in the third; durable goods had increased strongly in the first half of the year. The fourth-quarter upswing was primarily accounted for by furniture and household equipment, which increased after declining in the third quarter. Motor vehicles and parts declined more in the fourth quarter than in the third. Truck purchases declined slightly after increases earlier in the year; new car purchases have changed little in the past three quarters.

Nonresidential fixed investment

Real nonresidential fixed investment declined 3 1/2 percent in the fourth quarter, following a 4-percent increase in the third. Both structures and producers' durable equipment (PDE) registered moderate declines in the fourth quarter after moderate increases in the third .

The fourth-quarter downswing in structures reflected changes in construction by public utilities and in oil well drilling. In the third quarter both these components had increased, off-setting a decline in the construction of nonresidential buildings; in the fourth, both components declined, augmenting another decline in nonresidential buildings.

None of the major categories of structures evidenced much strength during 1988; all registered sizable declines in the first quarter, and only public utilities fully rebounded subsequently. In oil well drilling, substantial additional declines occurred in two of the last three quarters of the year. In nonresidential buildings a partial rebound in the second quarter gave way to a sizable decline in the third and a small decline in the fourth. The quarterly pattern of changes in nonresidential buildings echoed the changes in its largest component, commercial buildings; the continued weakness in commercial buildings in 1988 partly reflected the curtailment of tax incentives by the Tax Reform Act of 1986.

The fourth-quarter downswing in PDE largely reflected changes in purchases of information processing equipment. In the third quarter, this category had accounted for more than one-half of the increase in PDE; in the fourth quarter, it more than accounted for the decline. In the first half of 1988, information processing equipment, industrial equipment, and transportation equipment had all registered above-average growth, contributing to PDE growth of 20 1/2 percent.

Residential investment

Real residential investment increased 12 1/2 percent in the fourth quarter, following a 4 1/2-percent increase in the third. An upswing in single-family construction more than accounted for the acceleration. Multifamily construction declined after an increase; the "other" component of residential investment increased, but only about one-half as much as in the third quarter. (The "other" component includes major replacements, additions and alterations, mobile home sales, and brokers' commissions on house sales.)

The fourth-quarter upswing in single-family construction, which followed several quarters of weakness, mirrored movements in the number of single-family housing starts; changes in the average value of starts--reflecting shifts in the mix of location, size, and amenities--also contributed. Starts increased 64,000 (or 26 1/2 percent) to 1,128,000 in the fourth quarter, after changing little in the third and dropping 34,000 in the second (seasonally adjusted annual rates).

The fourth-quarter drop in multifamily construction reflected the continued influence of high rental vacancy rates and the past tax law changes that sharply curtailed the advantages of multifamily investment. With the exception of a slight increase in the third quarter, multifamily construction has declined for the past 2 1/2 years.

In the "other" component of residential investment, brokers' commissions on house sales declined after increasingly in the third quarter. In the third quarter, the increase in commissions reflected increases in both the average value and the number of houses sold; in the fourth quarter, an increase in the average value was more than offset by a decline in the number of units sold. Sales of new and existing residences declined 17,000 to 4,379,000 in the fourth quarter, after increasing 34,000 in the third (seasonally adjusted annual rates). Although short-term interest rates, which underlie most adjustable-rate mortgages, began to move upward in the spring, long-term rates, including the rate on fixed-rate mortgages, changed little. As a result, the spread between fixed- and adjustable-rate mortgages (usually in the neighborhood of 2 percentage points) virtually disappeared by yearend.

Inventory investment

Real inventory investment--that is, change in business inventories (CBI)--decreased $10 1/2 billion in the fourth quarter, as inventory accumulation fell from $39 1/2 billion in the third quarter to $29 billion in the fourth. In contrast, inventory investment had increased $4 billion in the third quarter.

Nonfarm inventories were up substantially in the fourth quarter, as they had been in each quarter of 1988; accumulation over the four quarters amounted to $40 billion. (This figure, which is the difference between fourth-quarter levels of nonfarm inventories of the "Selected NIPA Tables," can be calculated by averaging the changes in the level of nonfarm CBI for the four quarters of 1988.) All major categories of nonfarm inventories ended the year substantially higher than a year earlier: Manufacturing inventories were up $8 1/2 billion; wholesale inventories, up $9 1/2 billion; retail inventories, up $11 billion; and "other" inventories, up $11 billion.

Manufacturing inventories increased at the same pace in the fourth quarter as in the third; the fourth-quarter accumulation was primarily in electrical machinery and in transportation equipment other than motor vehicles. Although manufacturing inventories have increased strongly for six consecutive quarters, not until the fourth quarter did they regain the peak level reached 4 years ago. Within manufacturing, inventories of durable goods increased steadily throughout the year; the accumulations were concentrated in nonelectrical machinery and in transportation equipment other than motor vehicles. Inventories of nondurable goods decreased in the last three quarters of the year.

Wholesale trade inventories increased at a slower pace in the fourth quarter than in the third. The slowdown was in inventories of durable goods, which had increased sharply in the third quarter and also in the first. These sharp accumulations were largely in inventories held by the motor vehicle industry and by the machinery, equipment, and supplies industry.

Retail trade inventories were up even more in the fourth quarter than they had been in the two preceding quarters. Auto dealers' inventories accounted for most of the three-quarter buildup. Other retail inventories were up in each quarter of the year, especially the first; the accumulations were concentrated in department stores and in durable goods industries other than automotive.

"Other" nonfarm inventories--mainly inventories held by the mining, construction, public utility, transportation, communication, and services industries--registered sizable accumulations throughout the year.

Farm inventories progressively moved from substantial accumulation in the first quarter to sizable decumulation by the fourth; farm inventories ended the year $3 billion higher than a year earlier. The quarterly pattern of inventory change largely reflected the impact of the losses in farm output due to the drought. Table 1.--Change in Real GNP and GNP Prices from 1987 to 1988 Table 2.--Real Personal Consumption Expenditures Table 3.--Real Gross Private Domestic Fixed Investment Table 4.--Change in Real Business Inventories

Reflecting continued growth in inventories and final sales, the constant-dollar ratio of total inventories to total final sales held steady at 3.21 in the fourth quarter. The ratio has remained within the narrow range of 3.18 to 3.21 for the past four quarters. An alternative set of constant-dollar inventory-sales ratios for the manufacturing and trade industries provides a similar picture of stability. (These ratios cover manufacturers', merchant wholesalers', and retailers' inventories and sales--including intermediate sales, that is, sales from one industry to another.) The ratio for the manufacturing and trade total (through November) has remained at 1.52 for the past four quarters; the ratio for manufacturers was down some, that for merchant wholesalers was up some, and that for retailers was steady..

Net exports

Real net exports declined $7 billion in the fourth quarter, following a decline of $1 1/2 billion in the third (table 5). The deterioration was more than accounted for by services; the real merchandise trade balance declined less than in the third quarter.

Merchandise exports increased only $1 1/2 billion (or 2 percent) in the fourth quarter, continuing a yearlong pattern of deceleration. Nonagricultural exports increased about one-half as much as in the third quarter. Industrial materials and supplies declined after increasing in the third quarter; capital goods (except autos) and consumer goods increased considerably less than in the third quarter. Agricultural exports declined $2 1/2 billion after a $2 billion decline. These declines probably reflected, at least in part, the effect of the drought, which both curtailed supplies and raised prices.

Merchandise imports increased $5 billion (or 4 1/2 percent) in the fourth quarter, following a substantial increase in the third. The slowdown was more than accounted for by nonpetroleum imports; after increasing in the third quarter, capital goods (except autos) declined in the fourth, reflecting a drop in imports of computers. Petroleum imports increased $2 1/2 billion after a $1 1/2 billion increase.

Exports of services increased $2 billion, following an unusually large--$10 1/2 billion--increase in the third quarter. Most of the third-quarter increase was in investment income, largely interbank lending and direct investment; the fourth-quarter increase was more than accounted for by investment income.

Imports of services increased $5 1/2 billion, somewhat less than in the third quarter. Investment income accounted for most of the increase in both quarters.

Government purchases

Real government purchases increased $17 1/2 billion (or 9 1/2 percent) in the fourth quarter, following a decline of $10 1/2 billion (or 5 percent) in the third. A sharp turnabout in Federal Government purchases reflected upswings in both defense and nondefense purchases. State and local government purchases increased more than in the third quarter.

Federal national defense purchases increased $3 billion, following declines in the first three quarters of 1988. Over the four quarters, defense purchases were down $8 1/2 billion, the first yearlong decline since 1976; although evident in all categories of defense purchases, the decline was concentrated in purchases of aircraft.

Inventories held by the Commodity Credit Corporation (CCC) declined $8 1/2 billion in the fourth quarter, following decumulations ranging from $16 1/2 billion to $19 1/2 billion in the preceding three quarters. The yearlong decumulations reflected both sales of crops by the CCC to the nonfarm sector and net withdrawals of crops by farmers under the CCC commodity loan program.

Federal nondefense purchases excluding CCC inventory transactions increased $2 billion in the fourth quarter, following a $4 1/2 billion decline in the third. These purchases had registered moderate increases in the first two quarters of the year. Both the third-quarter decline and the fourth-quarter increase were concentrated in purchases of nondurables and of services other than employee compensation.

State and local government purchases increased $4 1/2 billion in the fourth quarter, following smaller increases in the first three quarters of the year. The pickup was due to a rebound in highway and sewer construction.

Prices

GNP prices and gross domestic purchases prices both increased 4 percent in the fourth quarter. In the third quarter, GNP prices had risen 5 1/2 percent, and gross domestic purchases prices had risen 4 1/2 percent. (Differences in the changes of these two price measures are due to differences in the changes of export and import prices). In the third quarter export prices had increased considerably more than import prices.

Increases in export prices exceeded 6 percent in each quarter of 1988 except the fourth. Prices of all major end-use categories except capital goods (except autos) registered sizable increases. Increases in import prices exceeded 5 percent only in the second quarter; in the other quarters, sharp decreases in the price of petroleum largely offset increases in prices of nonpetroleum imports.

The pattern of quarterly changes in gross domestic purchases prices in 1988--a step-up in the second quarter and slight moderation thereafter--reflected the course of PCE prices. Quarterly changes in PCE prices, in turn, reflected a combination of widely disparate changes in food, energy, and "other" PCE prices.

PCE food prices increased 4 percent, following a 9 1/2 percent jump in the third quarter. The third-quarter jump, which at least partly reflected the impact of the drought, was concentrated in prices of fresh fruits and vegetables and of cereals and bakery products. A 6-percent increase in food prices in the second quarter was largely attributable to a surge in meat prices.

PCE energy prices decreased 1 percent, following increases of 3 1/2 percent in the third quarter and 5 1/2 percent in the second. The third-quarter deceleration was traceable to prices of fuel oil and coal and of electricity and gas; the fourth-quarter downswing was traceable to prices of gasoline and oil and of fuel oil and coal.

"Other" PCE prices increased 5 1/2 percent, somewhat more than in the third quarter and about the same as in the second. The pattern partly reflected prices of clothing and shoes; these prices jumped 15 1/2 percent in the second quarter, fell 8 percent in the third, and rebounded 11 percent in the fourth.

Among the components of fixed investment, prices of nonresidential structures continued of increase moderately in the fourth quarter. PDE prices picked up after a small increase in the third quarter. Most PDE components contributed to the pickup; in particular, new auto and truck prices increased more rapidly, and computer prices leveled off after a series of decreases. Prices of residential structures again increased only slightly.

Prices of government purchases were up less in the fourth quarter than in the first three quarters of 1988. The deceleration was evident in prices paid both by the Federal Government and by State and local governments. In particular, prices of Federal nondefense purchases increased much less than in the third quarter, reflecting a sharp downswing in prices of crops in net purchases by the CCC.

Personal Income

Personal income was up even more strongly--$91 billion--in the fourth quarter than it had been in the two preceding quarters. The recent strength in personal income was mainly in wages and salaries and in personal interest income. The fourth-quarter acceleration was accounted for by a sharp turn-about in Federal subsidy payments to farm proprietors.

Wage and salary disbursements increased $56 billion in the fourth quarter, following a $52 billion increase in the third. The step-up, which was primarily in manufacturing, was attributable to increased average hourly earnings. The fourth-quarter gain in manufacturing was boosted $2 billion by bonus payments to employees in the motor vehicle industry.

Farm proprietors' income declined $4 1/2 billion in the fourth quarter, following declines in the three preceding quarters. The fourth-quarter decline occurred despite a jump in Federal subsidy payments. Farm proprietors' income excluding subsidies dropped $19 billion in the fourth quarter, following no change in the third and a small decline in the second. The fourth quarter drop reflected the falloff in output--largely due to the drought--and lower crop prices; in the second and third quarters, price increases had offset most of the falloff in output. Farm subsidies reached a level of $14 billion in the second quarter, fell to $1 1/2 billion in the third, and then jumped to $16 billion in the fourth. In the second quarter, deficiency payments were made to farmers under the 1988 Acreage Reduction Program; in the fourth quarter, deficiency payments (mostly for corn harvested in 1987), Conservation Reserve Program payments, and drought assistance payments were made.

Nonfarm proprietors' income increased more in the fourth quarter than in the third. The pickup largely reflected the upswing in single-family construction, the part of the construction industry in which proprietorships and partnerships are concentrated.

Personal interest income was up $23 1/2 billion, the fourth consecutive quarter of progressively larger increases. These increases reflected upward trends in both short-term interest rates and asset holdings by persons.

Fourth-quarter changes in the other components of personal income--other labor income, rental income of persons, personal dividend income, and transfer payments--differed little from third-quarter changes. Personal contributions for social insurance, which is subtracted in deriving the personal income total, registered another small increase.

Personal tax and nontax payments increased $11 1/2 billion in the fourth quarter, following a $14 1/2 billion decline in the third. The fourth-quarter increase was due to growth in the taxable earnings base. Sharp swings in personal tax and nontax payments in the preceding several quarters largely reflected the indirect effects of the final stages of the Tax Reform Act of 1986. The act led to reduced taxes in 1988, largely through lower withholdings for Federal income taxes. The amounts by which taxes were reduced--$33 billion in the first quarter, $20 1/2 billion in the second, $46 billion in the third, and $47 billion in the fourth--varied because of nonwithheld taxes, mainly net settlements. Net settlements dropped sharply in the third quarter after increasing substantially in the second; the second-quarter increase resulted from payments related to income that had been shifted from 1986 to 1987 to take advantage of the lower tax rates.

Disposable personal income (DPI) was up considerably in 1988; increases were particularly strong in the second half. DPI increased $86 billion (or 10 1/2 percent) in the third quarter and $79 1/2 billion (or 9 1/2 percent) in the fourth; the fourth-quarter deceleration was entirely attributable to the upswing in personal tax and nontax payments. The strength in DPI largely carried through to real DPI, which accelerated to a 3.8-percent increase in 1988; real DPI was up 5 1/2 percent in the third quarter and 4 1/2 percent in the fourth.

In the fourth quarter, personal outlays--mainly PCE--again increased less than DPI; thus, personal saving continued to increase. The personal saving rate rose 0.4 percentage point to 4.6 percent, a rate somewhat higher than in the past 2 1/2 years. Table 5.--Real Net Exports of Goods and Services Table 6.--Real Government Purchases of Goods and Services Table 7.--Price Indexes (Fixed Weights): Change from Preceding Quarter Table 8.--Personal Income and Its Disposition
COPYRIGHT 1989 U.S. Government Printing Office
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1989 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:fourth quarter of 1988
Publication:Survey of Current Business
Date:Jan 1, 1989
Words:3962
Previous Article:Constant-dollar inventories, sales, and inventory-sales ratios for manufacturing and trade.
Next Article:National income and product accounts tables; selected NIPA tables.
Topics:


Related Articles
The business situation.
The business situation.
The business situation.
The business situation.
The business situation.
The business situation.
The business situation.
The business situation.
The business situation.
The business situation.

Terms of use | Copyright © 2016 Farlex, Inc. | Feedback | For webmasters