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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)--declined $9 1/2 billion, to $285 1/2 billion, in the fourth quarter of 1989 after declining $12 1/2 billion in the third (table 1).(1)

Profits of domestic nonfinancial corporations declined $14 billion after declining $4 billion. The fourth-quarter decline reflected a drop in profits per unit, which were squeezed by a substantial increase in unit costs (especially labor costs). Profits of domestic financial corporations declined $5 billion after declining $11 billion. In contrast to the declines in profits of domestic corporations, profits from the rest of the world increased $9 1/2 billion after increasing $2 billion.

Profits before tax and related measures.--Profits before tax (PBT) declined $1 1/2 billion, following a $21 billion decline. The difference between the $9 1/2 billion decline in profits from current production and the $1 1/2 billion decline in PBT reflected declines 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 increased, reflecting a pickup in the rate of increase in prices of inventoried goods, especially food and crude oil. The CCAdj is the difference between the predominantly tax-based depreciation measure that underlies PBT, on the one hand, and BEA's approximation of economic depreciation, on the other. CCAdj declined, primarily reflecting the continuing impact of the Tax Reform Act of 1986, which lengthened the service lives used in calculating most depreciation allowances for tax purposes.

Cash flow from current production, a profits-related measure of internally generated funds available to corporations for investment, declined $1 billion, following a $7 1/2 billion increase.

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

Profits of domestic nonfinancial corporations declined $9 billion after a small increase in the third quarter. In the fourth quarter, profit declines in manufacturing and in transportation and public utilities more than off-set increases in trade and in "other" nonmanufacturing industries. Uninsured damage to fixed reproducible assets caused by October's earthquake in northern California reduced profits of domestic nonfinancial corporations by about $4 billion; uninsured damage from Hurricane Hugo had reduced third-quarter profits by about $1 1/2 billion. If neither disaster had occurred, profits of domestic nonfinancial corporations would have declined about $6 1/2 billion in the fourth quarter and would have increased about $3 1/2 billion in the third.

Profits of domestic financial corporations declined $5 1/2 billion, about one-half as much as in the third quarter. Profits of commercial banks dropped sharply in the fourth quarter, reflecting an unusually high level of loan write-offs.(2) Profits of savings and loan associations also dropped sharply, reflecting continued turmoil in the industry. Profits of insurance companies swung up. Earthquake-related payments reduced insurance company profits about $3 1/2 billion in the fourth quarter; hurricane-related payments had reduced them about $9 billion in the third. (As reported in the January "Business Situation," the earthquake and the hurricane caused comparable amounts of damage to privately owned assets, but insurance protection against earthquake damage is much less common than protection against hurricane damage; thus, the earthquake had a smaller impact on insurance company profits). If neither disaster had occurred, profits of domestic financial corporations would have declined about $11 1/2 billion in the fourth quarter and about $1 1/2 billion in the third.

Profits from the rest of the world increased $9 1/2 billion, following a $2 billion increase. 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 jumped sharply. Most of the increase was in profits of non-petroleum affiliates, although profits of petroleum affiliates were also strong. Outflows declined, mirroring the decline in domestic profits. (See the article on U.S. international transactions elsewhere in this issue for a discussion of income, including capital gains and losses, of affiliates.)

Government Sector

The fiscal position of the government sector deteriorated in the fourth quarter of 1989, as the combined deficit of the Federal Government and of State and local governments increased $22 billion to $122 billion (table 2). The deficit of the Federal Government increased $12 billion, and the surplus of State and local governments declined $10 billion.

The Federal sector.--The Federal Government deficit increased to $156 1/2 billion, as expenditures increased more than receipts.

Receipts increased $13 billion, in contrast to a $10 billion decline in the third quarter. Personal tax and non-tax receipts increased $12 billion after declining $6 billion. The third-quarter decline was due to provisions of the Tax Reform Act of 1986, which had boosted final personal income tax settlements received in the second quarter of 1989; the fourth-quarter increase was due to rising incomes. Corporate profits tax accruals declined $4 1/2 billion after declining $10 billion in the third quarter; both declines were due to declining corporate profits. Indirect business tax and nontax accruals were almost unchanged after increasing $1 1/2 billion in the third quarter; the third quarter included a $1/2 billion fine levied on a major securities trader. Contributions for social insurance increased $5 1/2 billion, reflecting continued growth in incomes.

Expenditures increased $24 1/2 billion, in contrast to a $10 1/2 billion decline in the third quarter. Large increases in nondefense purchases and transfer payments to persons were partly offset by a decline in defense purchases. Nondefense purchases increased $9 1/2 billion after declining $10 billion; the changes largely reflected the net purchases of agricultural commodities by the Commodity Credit Corporation. Transfer payments to persons increased $8 1/2 billion, including a cost-of-living adjustment in food stamps ($1 1/2 billion). Transfer payments to foreigners increased $4 billion, reflecting increases in economic assistance programs. Defense purchases declined $7 billion after increasing $6 1/2 billion; the decline was largely in deliveries of military equipment.

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 $184 1/2 billion in the third quarter to $192 1/2 billion in the fourth (see table 3 on page 19). The cyclically adjusted deficit as a percentage of the 6-percent unemployment rate trend GNP increased from 3.6 percent in the third quarter to 3.7 percent in the fourth.

The State and local sector.--The State and local government surplus declined to $34 1/2 billion, as expenditures increased more than receipts.

Receipts increased $10 1/2 billion, compared with a $7 1/2 billion increase in the third quarter. Indirect business tax and nontax accruals increased $4 billion, of which $2 1/2 billion was in property taxes. Grants-in-aid increased $4 billion, and personal tax and nontax receipts increased $3 billion. Contributions for social insurance increased $1 billion, and corporate profits tax accruals declined $1 billion.

Expenditures increased $20 1/2 billion, compared with a $10 1/2 billion increase in the third quarter. The acceleration was primarily in purchases of goods and services. Purchases of structures increased $5 1/2 billion, in contrast to a slight decline in the third quarter; the upswing was largely due to the construction of highways and schools. All other categories of expenditures combined increased $3 1/2 billion, compared with $1 1/2 billion in the third quarter. [Table 1 to 2 Omitted]

(1)Quarterly estimates in the national income and product accounts are expressed at seasonally adjusted annual rates, and quarterly changes are differences between those rates. (2)In the national income and product accounts, loan write-offs are offset by an increase in the income of the defaulter. For additional details, see U.S. Department of Commerce, Bureau of Economic Analysis, Corporate Profits: Profits Before Tax, Profits Tax Liability, and Dividends, Methodology Paper Series MP-2, (Washington, DC: GPO, May 1985, with update), 19-20.
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Title Annotation:fourth quarter of 1989
Publication:Survey of Current Business
Date:Mar 1, 1990
Words:1368
Previous Article:A guide to BEA statistics on foreign direct investment in the United States.
Next Article:National income and product accounts tables: selected NIPA tables and reconciliation and other special tables.
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