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The business situation.

the BUSINESS SITUATION

Corporate Profits

PROFITS from current production--profits before tax with inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj)--increased $10 billion, to $340 billion, in the fourth quarter of 1988, following a $3 1/2 billion increase in the third.1 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 those rates.

Profits of domestic financial corporations and profits from the rest of the world registered moderate, nearly offsetting, changes; profits of domestic nonfinancial corporations increased $10 1/2 billion. The increase reflected increases both in the product of nonfinancial corporations and in profits per unit of product; the increase in profits per unit was responsible for most of the profit increase. Real product increased 4 1/2 percent, up from 2 1/2 percent in the third quarter. Unit prices increased 5 1/2 percent, while unit costs increased 4 1/2 percent; unit labor costs again accounted for most of the increase in unit costs. (Percentages are at seasonally adjusted annual rates.)

Domestic profits of financial corporations declined $2 billion, following an increase of $2 1/2 billion, and profits from the rest of the world increased $1 1/2 billion, following an increase of $5 1/2 billion.

Profits before tax and related measures.--Profits before tax (PBT) increased $5 1/2 billion, following an $8 billion increase. The difference between the $10 billion increase in profits from current production and the $5 1/2 billion increase in PBT reflected partially offsetting changes in the IVA and in the CCAdj. (Both adjustments are added to PBT to obtain the current-production measure.)

The IVA is an estimate of inventory profits with sign reversed. Inventory profits declined $10 1/2 billion, reflecting a slowing in the rate of increase in prices of inventoried goods, especially inventories of food. Almost one-half of the increase in the IVA is traceable to food manufacturing and retail food stores; a sharp increase in the IVA of wholesale trade also reflected food prices to some extent. The slowing in the rate of increase in food prices is illustrated by the foods component of the Producer Price Index, which increased 4 1/2 percent in the fourth quarter after increasing 9 percent in the third (seasonally adjusted annual rates).

The CCAdj, which is an estimate of the amount by which the predominantly tax-based depreciation measure that underlies PBT differs from BEA's approximation of economic depreciation, declined from $45 1/2 billion to $39 1/2 billion. The decline reflected the cumulating impact of the Tax Reform Act of 1986, which lengthened the service lives that may be used in calculating most depreciation allowances for tax purposes. In the absence of changes in tax law and in the level and rate of price increase of business fixed investment, tax-based depreciation is expected to fall below economic depreciation--i.e., the CCAdj is expected to turn negative--in the early 1990's. (Higher levels of investment or lower rates of price increase would tend to postpone the date at which this crossover occurs.)

Cash flow from current production, a profits-related measure of internally generated funds available to corporations for investment, increased $13 billion after three quarters in which increases had ranged from $3 billion to $5 1/2 billion.

PBT with IVA but without CCAdj.--Profits from current production is not available by industry; PBT with IVA alone is the best available measure of industry profits.

Domestic profits of nonfinancial corporations increased $15 1/2 billion; sizable increases were registered in manufacturing (with chemicals recording the largest gain), transportation and public utilities, and trade.

Domestic profits of financial corporations declined $1 billion. A $1 billion increase in Federal Reserve profits was more than offset by declines in profits of other financial institutions. Savings and loan associations registered the largest decline as losses, which had narrowed in the third quarter, became larger.

Profits from the rest of the world increased $1 1/2 billion. This component of profits measures inflows of profits from foreign affiliates of U.S. corporations less outflows of profits from U.S. affiliates of foreign corporations. In the fourth quarter, inflows were unchanged while outflows, mainly from petroleum affiliates, declined.

Government Sector

The fiscal position of the government sector deteriorated in the fourth quarter of 1988, as the combined deficit of the Federal Government and of State and local governments increased $38 billion (table 1). The deficit of the Federal Government increased $34 1/2 billion, and the surplus of State and local governments declined $3 1/2 billion.

The Federal sector.--The Federal Government deficit increased to $158 billion, as expenditures increased more than receipts.

Receipts increased $15 1/2 billion, in contrast to a $7 1/2 billion decline in the third quarter. The third-quarter decline was more than accounted for by personal taxes, which were boosted in the first half of the year by the reaction of taxpayers to certain features of the Tax Reform Act of 1986. In the fourth quarter, personal tax and nontax receipts increased $7 1/2 billion and contributions for social insurance increased $7 billion; both increases reflected a strong increase in incomes. Indirect business tax and nontax accruals increased $1 billion, of which one-half was in customs duties. Corporate profits tax accruals increased $1/2 billion.

Expenditures increased $50 billion, in contrast to a $17 1/2 billion decline in the third quarter. Much of the swing was accounted for by three kinds of expenditures--purchases of national defense goods and services, purchases of agricultural commodities by the Commodity Credit Corporation (CCC), and subsidies to farmers. Combined, they declined $26 billion in the third quarter and increased $43 1/2 billion in the fourth. The large fourth-quarter increase in defense purchases was for most types of military equipment and for research and development; in CCC purchases, it was for corn and cotton; in subsidies to farmers, it was for deficiency payments, conservation payments, and drought assistance payments. All other expenditures combined increased $6 1/2 billion in the fourth quarter, compared with $9 billion in the third.

Cyclically adjusted surplus or deficit.--When measured using cyclical adjustments based on middle-expansion trend GNP, the Federal deficit on the national income and product accounts basis increased from $164 1/2 billion in the third quarter to $200 1/2 billion in the fourth (see table 3 on page 18). The cyclically adjusted deficit as a percentage of middle-expansion trend GNP increased from 3.5 percent in the third quarter to 4.1 percent in the fourth.

The State and local sector.--The State and local government surplus declined to $52 1/2 billion, as expenditures increased more than receipts.

Receipts increased $12 billion, compared with $9 1/2 billion in the third quarter. Indirect business tax and nontax accruals increased $5 1/2 billion, of which $3 billion was in sales taxes. Personal tax and nontax receipts increased $4 billion; corporate profits tax accruals and contributions for social insurance increased $1/2 billion each.

Expenditures increased $15 billion, compared with $10 billion in the third quarter. The acceleration was in purchases of goods and services, which increased $13 1/2 billion in the fourth quarter, compared with $8 billion in the third. Purchases of structures increased $4 billion, in contrast to a $1 1/2 billion decline in the third quarter; the swing was due to the construction of highways and sewage treatment plans. All other categories of expenditures combined increased $2 1/2 billion, compared with $1 1/2 billion in the third quarter.

Table : Table 1.--Government Sector Receipts and Expenditures
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Title Annotation:fourth quarter of 1988
Publication:Survey of Current Business
Date:Mar 1, 1989
Words:1281
Previous Article:State and local government fiscal position in 1988.
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