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The U.S. national income and product accounts: revised estimates.

* Annual 1985-87 * Quarterly 1985:I-1988:I IN this issue of the SURVEY OF CURRENT BUSINESS, the Bureau of Economic Analysis presents the revised estimates of the national income and product accounts (NIPA's) for the years 1985-87 and the quarters from the first quarter of 1985 through the first quarter of 1988. As is usual in July, source data that are more complete, more detailed, or otherwise more appropriate than data previously available have been incorporated, and seasonal factors have been updated. As well, several methodological changes have been made.

The first section of this article discusses the impact of the revisions on several aspects of economic activity, the second section provides a summary of the revisions and the major source data underlying them, and the third section describes the changes in methodology made this July and summarizes the source data and methods used to prepare the NIPA estimates. An appendix to this article contains the current-dollar annual previously published estimates, revised estimates, and revisions for the five summary accounts of the NIPA's.

The complete set of NIPA tables follows this article. An index to the NIPA tables begins on page 108. A guide to when the estimates are released, where they are available, and how they are presented begins on page 125.

Impact of the Revisions

On the whole, the July 1988 NIPA revisions did not significantly alter the picture of the U.S. economy. By either the previously published or the revised estimates, the economy continued to grow at a moderate pace over the 3-year period covered by the revisions. However, the economy was stronger in 1987 than had been indicated previously. By either set of estimates, inflation was moderate during the past 3 years. On the revised basis, personal income and outlays were both stronger in recent quarters.

Economic growth and inflation

Growth in Production and in demand was somewhat stronger in the revised estimates than in the previously published estimates. Over the period from the fourth quarter of 1984 to the first quarter of 1988, the growth rate (average annual rate of increase) for real GNP was revised up 0.3 percentage point-from 3.2 percent to 3.5 percent. Similarly, the growth rate for real gross domestic purchases was revised up 0.2 percentage point-from 3.3 to 3.5 percent.

As shown in table 1, average annual rates of change from the fourth quarter of 1984 to the first quarter of 1988 for most major components were not much different than previously estimated. Consume r spending was stronger, increasing 3.6 percent instead of 3.2 percent; investment was weaker, increasing 3.3 percent instead of 3.9 percent. Exports and government purchases were both somewhat stronger on the revised basis.

On the revised basis, the string of consecutive quarterly increases in real GNP during the current expansion was interrupted by a small decline in the second quarter of 1986. Revised estimates show a 0.8-percent decline in that quarter; previous estimates had shown a 0.6-percent increase.(1)

Real GNP increased 4.8 percent from the first quarter of 1987 to the first quarter of 1988; previously, the increase had been 3.8 percent. With a large upward revision in the second quarter, the increases in real GNP were 4.5 percent or more in each quarter of 1987. During the past four quarters, personal consumption expenditures (PCE) was not as weak as previously estimated; nonresidential fixed investment was only slightly less robust; nonfarm inventory accumulation was substantially higher; and exports surged even more.

Inflation.-The rate of inflation was essentially unrevised from previous estimates. Over the period from the fourth quarter of 1984 to the first quarter of 1988, the average annual rate of increase in the GNP price index (fixed weights) was unrevised at 3.3 percent; the rate for the gross domestic purchases price index (fixed weights) was revised up 0.1 percentage point to 3.4 percent. As shown in table 2, price increases for most major components were not much different than previously estimated. In general, fixed investment prices increased somewhat more than previously estimated, and prices paid by government increased somewhat less.

Personal income, outlays, and saving

In recent quarters, personal income, disposable personal income (DPI), and personal outlays all were stronger in the revised estimates than in the previously published estimates. From the first quarter of 1987 to the first quarter of 1988, personal income increased 7.5 percent and DPI increased 7.4 percent, both about 1.0 percentage point more than previously estimated. Changes in both income measures were revised up in each quarter of 1987 and in the first quarter of 1988. During the past four quarters, wages and salaries, in particular, was stronger on the revised basis; nonfarm proprietors' income was weaker.

Because personal outlays-largely PCE-was revised up about the same as DPI in recent quarters, the path of personal saving was about the same as previously indicated. By either set of estimates, the personal saving rate was quite low: The revised rate, which reached a 40-year low of 2.2 percent in the second quarter of 1987, was back up to 4.4 percent by the first quarter of 1988.

Real DPI was not as weak as previously indicated. The revised estimates showed an increase of 3.1 percent from the first quarter of 1987 to the first quarter of 1988; previously, the increase had been 2.3 percent.

Summary of the Revisions

The incorporation of newly available source data and changes in methodology causes revisions in the current-dollar estimates. In general, revisions in these estimates, as well as revisions in estimates of prices, lead to revisions in the constant-dollar estimates. This section describes the revisions in the current-dollar, price, and constant-dollar NIPA estimates for the years 1985, 1986, and 1987 and for the quarters through the first quarter of 1988.

Annual revisions in current dollars

The level of current-dollar GNP was revised up $4.6 billion, or 0.1 percent, in 1985; $5.3 billion, or 0.1 percent, in 1986; and $38.2 billion, or 0.9 percent, in 1987. The revisions in the first 2 years were small by the standard of recent July NIPA revisions; the revision in 1987, however, marked the second consecutive July with a large upward revision in current-dollar GNP in the most recent year. In July 1987, current-dollar GNP had been revised up 1.0 percent in the most recent year (1986); in the four preceding July revisions, the revisions in the most recent year had ranged from -0.2 percent to 0.4 percent. As in July 1987, the upward revision in GNP this July was largely traceable to revisions in PCE for both goods and services.

The level of charges against GNP-that is, gross national income-was revised up $3.7 billion, or 0.1 percent, in 1985; $14.0 billion, or 0.4 percent, in 1986; and $41.7 billion, or 0.9 percent, in 1987. The upward revisions were largely traceable to wages and salaries and to net interest; downward revisions in proprietors' income-both farm and nonfarm-were partial offsets.

Largely reflecting revisions in several of the components of charges against GNP, personal income was revised down $1.7 billion in 1985, down $3.2 billion in 1986, and up $33.5 billion in 1987. Most of the difference between the revisions in national income and in personal income was traceable to corporate profits. (Personal income includes only the portion of corporate profits that is paid to persons as dividends.)

The following is a list of the principal source data underlying the current-dollar NIPA revisions and the years into which these data were directly incorporated: Annual data from four Census Bureau surveys-Annual Retail Trade Survey for 1986, Service Annual Survey for 1985-87, Annual Survey of Manufactures for 1985-86, and surveys of State and local government finances for 1985-86; Internal Revenue Service (IRS) tabulations of tax return data for corporations for 1985 and for sole proprietors and partnerships for 1986; Bureau of Labor Statistics (BLS) tabulations of wages and salaries for 1985-87; and U.S. Department of Agriculture (USDA) farm statistics for 1985-87. Other newly available source data that were principal contributors to the revisions in 1987 were the following: Revised Census Bureau monthly retail sales; revised Census Bureau monthly shipments of office, computing, and accounting machinery; revised Census Bureau monthly retail inventories; and Federal agency reports on assets and liabilities of financial institutions.

Table 3 provides a guide to the annual NIPA revisions by identifying the subcomponent series in which revisions were concentrated and by listing the major source data and methodological changes that underlie the revised estimates. Referring to the information in table 3, the following sections discuss the major revisions in NIPA components.

PCE goods.--The upward revision in PCE goods in 1986 largely reflected the incorporation of data from the 1986 Annual Retail Trade Survey. This revision carried through to 1987; the substantial upward revision in that year also reflected large revisions in the Census Bureau monthly retail trade data. Revised BEA estimates of retail sales taxes in all 3 years also contributed to upward revisions in PCE goods. In addition, the revisions reflected a change in the treatment of sales of nonfuel items by gasoline service stations, which raised PCE goods in all 3 years. (See the methodological section of this article for a description of this change.) Revisions from these sources raised the spending estimates for nearly all categories of durable and nondurable goods; in 1987, the upward revision in PCE for food was notably large. Reflecting the incorporation of newly available source data, PCE for gasoline and oil was revised down in all 3 years.

PCE services. -PCE services was revised up substantially in 1987. The upward revision, which continued the pattern of recent July revisions, largely reflected the substitution of newly available data from a number of regular sources, particularly preliminary data from the 1987 Service Annual Survey, for current quarterly estimates based on limited data or on judgmental trends. The largest revisions were in medical care, recreation, household operation, and personal business. About two-thirds of the revision in medical care was accounted for by physician services. Within personal business, an upward revision in services furnished without payment by banks, credit agencies, and investment companies was partly offset by a downward revision in brokerage charges and investment counseling.

Downward revisions in housing services in 1986 and 1987 largely stemmed from the incorporation of data on housing units based on the Current Population Survey, Data on housing units from the 1985 American Housing Survey were also incorporated; however, data on average rental value consistent with earlier estimates were not yet available.

Nonresidential structures.-The upward revision in nonresidential structures in 1987 largely reflected the incorporation of revised Census Bureau data on construction put in place into the estimates of nonfarm structures other than public utilities and mining exploration, shafts, and wells. About one-half of the revision was in commercial buildings. The downward revision in the other nonfarm structures component in 1985 reflected the incorporation of information about the sale of a coal gasification plant to the Federal Government (offset in Federal Government purchases).

Nonresidential PDE.-On balance, the incorporation of shipments data from the 1986 Annual Survey of Manufactures led to downward revisions in nonresidential PDE. In particular, the survey data lowered the estimates for trucks, special industry machinery, and electrical equipment.

Residential investment.-The downward revision in residential investment in 1986 largely reflected the incorporation of newly available data on the value of properties held by the Federal Housing Administration into estimates of government purchases of used structures and the incorporation of revised USDA data into estimates of farm structures. The downward revision in 1987 largely reflected revised Census Bureau data on multifamily construction put in place.

Change in business inventories.-The sharp downward revision in the change in farm inventories in 1987 partly reflected the incorporation of revised data from the USDA. A modification in BEA's quarterly estimating procedure to more closely match open market prices with crop CBI also contributed to the downward revision.

The upward revision in the change in nonfarm business inventories in 1987, which was concentrated in retail trade, reflected revisions in monthly inventory data from the Census Bureau. The largest revision was in inventories held by retail auto dealers, In 1986, a downward revision in retail trade was largely offset by upward revisions in manufacturing and merchant wholesale trade.

Net exports. -In general, the revisions in net exports of goods and services reflected the revisions to the BEA balance of payments accounts released in June 1988. (See the technical notes in "U.S. International Transactions, First Quarter 1988" in the June 1988 SURVEY for detail on the balance of payments accounts revisions.) In addition, the "geographic adjustment"-that is, the adjustment that excludes U.S. territories and the Commonwealth of Puerto Rico from NIPA estimates of net exports-was revised to reflect the incorporation of new data for 1987 from Puerto Rico's balance of payments accounts.

The downward revision in merchandise exports in 1987 was largely in capital goods except autos; the upward revision in merchandise imports was largely in consumer goods. The upward revisions in exports of services were in both factor income and other services; the upward revisions in imports of services were in other services.

Government purchases.-The upward revision in Federal Government purchases in 1985 largely reflected the purchase of the coal gasification plant (offset in nonresidential structures); the upward revision in 1987 reflected the incorporation of newly available data from the USDA on the Commodity Credit Corporation (CCC).

The revisions in State and local government purchases stemmed from the incorporation of data from a variety of regular sources. Purchases of structures was revised down in 1986 and 1987; employee compensation was revised down in 1987; and other State and local government purchases was revised up in all 3 years.

Compensation of employees.--The large upward revision in wages and salaries in 1987 was due to the incorporation of BLS tabulations of unemployment insurance wage and salary data. About one-half of the revision was in wages and salaries in the services industries. Part of this revision reflected accelerated bonus payments made by personal service corporations to their employee-owners (usually doctors, lawyers, etc.); these payments, which normally would have been made in 1988, were made earlier in response to changes in Federal tax laws. Wages and salaries in manufacturing and the distributive industries were also revised up considerably in 1987.

In supplements to wages and salaries, other labor income-primarily employer contributions to pension and profit-sharing plans and to group health and life insurance-was revised down in all 3 years; employer contributions for social insurance was revised up in all 3 years.

Proprietors' income with inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj). -The downward revision in farm proprietors' income in 1987 reflected the incorporation of revised data from the USDA and the modification in the quarterly estimating procedu re that was noted under change in farm inventories.

Largely reflecting the incorporation of regular source data, nonfarm proprietors' income was revised down in all 3 years. In addition, the downward revision in 1986 reflected an adjustment for interest expenses passed through to partners. (See the methodological section of this article for a description of this change, which was offset in both net interest and personal interest income.) The CCAdj for nonfarm proprietors' income was revised up in 1986 and down in 1987. (See capital consumption allowances with CCAdj for a list of the major source data incorporated into this estimate.)

Rental income of Persons with CCAdj.--The downward revisions in rental income of persons in 1986 and 1987 largely stemmed from the incorporation of data on housing units based on the Current Population Survey. Data on housing units from the 1985 American Housing Survey were also incorporated; however, data on the average rental value consistent with earlier estimates were not yet available. In addition, data from the Federal Reserve Board on the proportion of outstanding loans refinanced was introduced; this information raised BEA's estimates of effective mortgage interest rates, which, in turn, raised estimated expenses and lowered rental income (offset in both net interest and personal interest income).

Corporate profits with IVA and CCAdj.-The revisions in corporate profits reflected upward revisions in profits before tax in 1986 and 1987 and upward revisions in the CCAdj in all 3 years. Upward revisions in profits before tax were concentrated in the manufacturing, communication, and financial industries; downward revisions were concentrated in trade and public utilities. To a large extent, the revisions in manufacturing and trade profits were offsets that reflected the impact of Federal tax law changes in 1985 on the way many manufacturing corporations handled export sales operations. As a result of these tax law changes, Domestic International Sales Corporations (DISC's), which many corporations had set up as wholesale subsidiaries, were to be replaced by Foreign Sales Corporations (FSC's); IRS corporate tax return data show that most manufacturers folded their DISC's back into the parent corporation rather than continuing to operate them as FSC's. The CCAdj was revised up in all 3 years. (See capital consumption allowances with CCAdj for a list of the major source data incorporated into this estimate.)

Net interest. -As has been the case in recent July revisions, net interest was revised up in all 3 years, substantially in the most recent year. Because of the timing with which source data become available, these estimates are particularly subject to revision. For instance, direct information on interest paid and received by business is available only on an annual basis-for nonfinancial business with a 2-year lag; estimates for the 2 most recent years for these businesses are based on assets/liabilities and effective interest rates. The current quarterly estimates depend upon sketchy information on interest received by persons, government interest paid and received, and interest paid by consumers to business.

The estimates of net interest were also raised by two previously mentioned methodological changes: The interest expense item in nonfarm proprietors' income (see the methodological section of this article for a description of this change); and the introduction of data from the Federal Reserve Board on the proportion of outstanding loans refinanced, which raised BEA's estimates of effective interest rates (offset in rental income of persons).

National income.--National income was revised up in 1985, up somewhat more in 1986, and up even more in 1987. These revisions reflected the aforementioned revisions in compensation of employee s, proprietors' income, rental income of persons, corporate profits, and net interest.

Capital consumption allowances with CCAdj. -Revisions in these estimates reflected the incorporation of IRS tax return information and of BEA estimates of fixed investment. Capital consumption allowances (taxreturn-based depreciation) was revised up considerably in 1985 and 1986 and up only a small amount in 1987; capital consumption allowances with CCAdj (economic depreciation) was revised by small amounts in all 3 years. Thus, the CCAdj (the difference between the two measures of depreciation) was revised up considerably in 1985 and 1986 and was revised only a small amount in 1987. The corporate CCAdj was revised up in all 3 years; the noncorporate CCAdj was revised up in 1986 and down in 1987.

Nonfactor charges. -Revisions in nonfactor charges-indirect business tax and nontax liability, business transfer payments, and current surplus of government enterprises less subsidies-were largely traceable to the last two components. The upward revisions in business transfer payments were largely due to higher estimates of consumer bad debt and of the business part of auto liability for personal injury. The downward revisions in current surplus of government enterprises less subsidies were partly attributable to higher estimates of the deficit of the CCC.

Personal income. -Reflecting the revisions in other labor income and nonfarm proprietors' income, personal income was revised down in 1985 and 1986. A substantial upward revision in 1987 largely reflected the revision in wages and salaries. In addition, the revisions in the interest estimates led to an upward revision in personal interest income in 1987. Transfer payments were also revised up, reflecting the upward revision in business transfer payments to persons. The downward revision in farm proprietors' income in 1987 was a partial offset in personal income.

Personal tax and nontax payments were revised up in 1987; about twothirds of the revision was in State and local taxes. The revisions in personal taxes were much smaller than those in personal income; consequently, the pattern of the revisions in DPI mirrored that of personal income.

Reflecting the revisions in PCE, personal outlays was revised up somewhat in 1986 and up sharply in 1987. Personal saving-DPI less personal outlays-was revised down in all 3 years.

Annual revisions in prices

In general, revisions in prices tend to be small, mainly because much of the source data used to derive GNP price indexes is not routinely revised. specifically, the BLS Consumer Price Index does not undergo routine revisions after its initial release, and the Producer Price Index is revised only slightly; these indexes are used for components that account for over three-fourths of GNP.

The revisions that were made this July reflected the incorporation of newly available data and several methodological changes. The newly available data consisted not only of price information but also currentdollar estimates or quantity data that resulted in price revisions when used for components for which the constant-dollar estimates were prepared by quantity extrapolation (see the updated summary methodology in the last section of this article). Newly available price information for 198587 included the following: Revised BEA computer price index, revised BLS export and import price indexes, and newly available price data for national defense goods and services. Newly available current-dollar estimates or quantity data for 1985-87 that resulted in revised prices included the following: Current-dollar services furnished without payment by banks, credit agencies, and investment companies (in PCE), quantity data for petroleum and natural gas exploration (in nonresidential structures), and quantity data for State and local government compensation (in government purchases).

Revisions in the GNP price index (fixed weights) were small in all 3 years. The level of the index was revised down by 0.2 percent and 0.1 percent in 1985 and 1986, respectively, and was unrevised in 1987. The size of the revisions was about in line with those in the two most recent July revisions. As a result of these revisions, the annual percent change in the GNP price index was revised only slightly in all 3 years-down by 0.2 percentage point to a 3.4-percent increase in 1985, and up by 0.1 point to a 2.8-percent increase and by 0.2 point to a 3.6-percent increase in 1986 and 1987, respectively (table 4).

Revisions in annual percent changes in PCE prices were small-down in 1985 and up in 1986 and 1987. Most of these revisions were attributable to prices of services furnished without payment by banks, credit agencies, and investment companies.

Upward revisions in nonresidential fixed investment prices in 1986 and 1987 were traceable to both structures and PDE. In structures, revised data on petroleum drilling footage became available for 1986 and 1987. In PDE, the upward revisions reflected the substitution of import price indexes for domestic price indexes in the deflation of most categories of imported equipment. (See the methodological section of this article for a description of this change.) Upward revisions in 1985 and 1986 in the BEA computer price index also contributed to the upward revisions in PDE prices; a downward revision in 1987 partly offset the other revision in that year.

The revisions in export and import prices were small, except for an upward revision in import prices in 1986. The revisions in 1985-87 reflected the incorporation of revised BLS export and import price indexes, for which weights had been updated to 1985 from 1980, and the use of new BEA end-use com modity detail. Import prices were especially affected in 1986 by the introduction of more detailed categories for what had been grouped together as "business and office machines, computers, etc."; the new categories made it possible to use more appropriate price indexes for components other than computers. (See the methodological section of this article for a description of these changes.)

Prices of government purchases were revised down in all 3 years. Downward revisions in Federal nation al defense purchases reflected newly available price data from Department of Defense reports. Downward revisions in State and local compensation reflected revised information on full-time equivalent employment.

Annual revisions in constant dollars

In general, revisions in constantdollar, or real, GNP and its components reflect (1) current-dollar revisions, (2) price revisions, and (3) other revisions, caused by shifts in composition, which result either from redistributions of current-dollar levels within components or from deflation at a finer level of detail. The following tabulation provides a breakdown of the percent revisions in the level and of the revisions in the annual percent change of real GNP into these three types:

The level of real GNP was revised up in all 3years-0.3 percent in 1985, 0.2 percent in 1986, and 0.7 percent in 1987. The size of the revisions was similar to those in recent July revisions, and, as is typical, the largest revision was in the most recent year. The upward revision in 1987 was more than accounted for by revisions in current-dollar GNP. Downward revisions in prices contributed to the upward revisions in 1985 and 1986. Shifts in the composition of currentdollar GNP reduced the revision in 1987. As a result of these revisions, the annual percent change for constant-dollar GNP was revised up 0.4 percentage point to a 3.4-percent increase in 1985, down 0.1 point to a 2.8-percent increase in 1986, and up 0.5 point to a 3.4-percent increase in 1987.

For the major components of GNP, the direction of revisions in annual percent changes varied in 1985, was generally downward in 1986, and was upward in 1987. The largest revisions were in PCE in 1987, in nonresidential fixed investment in 1986 and 1987, in imports in 1986, and in government purchases of nondefense goods and services in all 3 years.

The annual percent change for PCE was revised up in 1987, reflecting current-dollar revisions in both goods and services.

Among nonresidential investment components, structures was revised up in 1987, due to revisions in current dollars, PDE was revised down in 1986 and up in 1987, attributable to a combination of current-dollar revisions and price revisions, mainly the substitution of import prices for domestic prices in the deflation of imported equipment and, in 1986, the revision in the BEA computer price index.

Imports was revised down in 1986. The use of more appropriate price indexes made possible by the more detailed end-use categories, revised BLS export and import prices, and the revised BEA computer price index accounted for most of the revision.

In government purchases, Federal nondefense purchases was revised up in 1985, down in 1986, and up in 1987. In all 3 years, the revisions were primarily attributable to current-dollar revisions.

Quarterly revisions

July revisions in quarterly NIPA estimates come about in two major ways: The adjustment of the estimates to reflect the annual revisions, and the incorporation of new and revised source data (including the updating of seasonal factors) that are used to indicate quarterly patterns. Also, July revisions provide an occasion when changes may be made in the methodology used to prepare quarterly estimates.

The quarterly NIPA revisions this July largely reflected the revisions in the annual estimates that were previously described. In general, the quarter-to-quarter pattern of changes in GNP, real GNP, and GNP prices were not sharply different on the revised basis (table 5).

For real GNP, the revisions in the 13 quarterly percent changes (annual rates) averaged 0.7 percentage point (without regard to sign), about in line with the two preceding July revisions. Changes in five quarters were revised by 1.0 percentage point or more-four up and one down. Two of the upward revisions were in 1987: In the second quarter, the revision was concentrated in PCE and in nonfarm inventory investment; the fourth-quarter revision was concentrated in farm and nonfarm inventory investment. The downward revision in real GNP was in the second quarter of 1986; almost all of the revision was in farm and nonfarm inventory investment.

For GNP prices, the revisions in the 13 quarterly percent changes (annual rates) averaged 0.2 percentage point (without regard to sign), also about in line with recent July revisions. None of the quarterly changes were revised by more than 0.5 percentage point; the revisions were downward in the quarters of 1985 and tended to be upward thereafter,

Methodology

The revised NIPA estimates incorporate several changes either in the source data or in the methods used to prepare the estimates. This section of the article describes the major changes and updates previously published tables showing summary methodologies for current-dollar and constant-dollar estimates of GNP.2

Changes in methodology

Changes in methodology are made for several reasons. First, source data emerge and disappear, and BEA adapts the estimating methods accordingly. Second, often independently of circumstances that lead to these adaptations, BEA improves the estimating methods. Finally, the economy changes, and BEA updates the methodology to ensure that the estimates continue to provide a reliable picture of the transactions and transactors in the economy.

The changes made this July represent a typical mix of reasons. The following are the major methodological changes that affected the currentdollar estimates of GNP: In PCE, introduction of an adjustment for nonfuel sales by gasoline service stations, introduction of receipts data from the service annual survey into the estimates of clubs and fraternal organizations and of employment agency fees, introduction of estimates of hotel and motel receipts to replace a judgmental trend in the preparation of current estimates and to provide a quarterly interpolator, and use of a judgmental trend to prepare current estimates of the portion of the "brokerage charges and investment counseling" category that is not stock brokerage charges instead of extrapolating the entire category by stock brokerage charges; in CBI, use of the Census Bureau current cost inventory series for manufacturing and trade; and in net exports, introduction of BEA's new end-use commodity classification system for merchandise.

The following are the major changes that affected the currentdollar estimates of charges against GNP: In private wages and salaries, introduction of a trend adjustment to the extrapolator used to prepare the current estimates; in prop rietors' income, accounting for an interest expense that is not treated as such in the source data; in rental income of persons, introduction of data on expenses relating to dealers' commissions and condominium fees instead of extrapolating them as part of total miscellaneous expenses, and introduction of Federal Reserve Board data on the portion of outstanding mortgages that are refinanced as part of the mortgage interest expense calculation; and in net interest, introduction of the Federal Reserve Board data just mentioned, the change corresponding to the interest expense mentioned for proprietors' income, and explicit exclusion of net realized capital gains from interest received by State and local government retiremen t funds.

In addition, several changes were made in deflation procedures: In PCE, expansion of the coverage of personal computers (PC's) in the sample underlying the PC price index, and introduction of an average of foreign consumer price indexes (adjusted by exchange rates) to replace a unit-value index for finished manufactured imports in the deflation of nondurable goods purchased abroad; in PDE, introduction of producer price indexes for boats and for civilian aircraft to replace weighted averages of prices of materials and related equipment, and introduction of import prices for most imported equipment to replace domestic prices; and in net exports, deflation at the more detailed level made possible by the new end-use classification system, and introduction of the same price indexes for exports and imports of boats and civilian aircraft as mentioned for PDE.

A number of these methodological changes were mentioned in the first part of this article in conjunction with revisions in the NIPA components. Several of them are described more fully in the following paragraphs.

PCE for goods. -The revised estimates reflect a change in procedure for the sales of goods other than automotive fuels by gasoline service stations. Under the new procedure, these sales-mainly snacks, groceries, and cigarettes-are (1) estimated as total sales of gasoline service stations less automotive repair receipts and sales of automotive fuels and (2) added to what is referred to as the "retail control"-total sales of the group of establishments mainly selling consumer-type products. (For a step-bystep explanation of the retail-control method, see pages 116-117 of the July 1987 SURVEY.) By being added to the retail control, these sales are distributed to the PCE type-of-good categories as part of the retail control. Previously, the retail control had not been supplemented in this way on the assumption that sales of nonfuel goods by gasoline service stations, one of the kinds of establishments not included in the retail control group, were a constant proportion of the sales of those goods by establishments that are. It appears this assumption has not held in recent years; instead, sales of these goods by service stations increased faster. The new procedure raised PCE for goods $3.2 billion in 1985, $7.9 billion in 1986, and $6.7 billion in 1987. Change in business inventories (CBI). -BEA now uses the series referred to by the Census Bureau as "current cost inventories" to prepare the CBI for manufacturing, merchant wholesale, and retail trade and has modified its methods accordingly. Since early 1987, when the Census Bureau introduced this series, BEA had been using an unpublished series consistent with what the Census Bureau had previously referred to as "book value inventories." The two Census Bureau series differ in the treatment of inventories reported on a last-in, first-out (LIFO) basis: The old series had included them as reported and thus was a mix of LIFO and non-LIFO inventories; the new series is entirely on a non-LIFO basis. For the new series, firms that report on a LIFO basis also report both nonLIFO inventories and the LIFO reserve.

The method for estimating the IVA was modified. For annual estimates, the total IVA is estimated in two parts: The reported change in LIFO reserve, and the IVA as previously defined. For current monthly and quarterly estimates, for which the reported LIFO reserve data are unreliable, the total IVA is estimated by BEA. The revised CBI for manufacturing and trade includes this change as well as newly available data, as indicated in table 3, and updated seasonal factors. These sources of revision interacted, and it is not possible to quantify the parts of the revision attributable to them separately.

In NIPA table 5.8, the change in source data affects the coverage of the lines labeled "change in book value" and "inventory valuation adjustment" for manufacturing, merchant wholesale, and retail trade inventories. The change in book value now reflects the change in the new Census Bureau inventory series. The IVA now reflects the difference between the change in the new Census Bureau inventory series and the CBI's current replacement cost basis. Because such a difference may arise for all non-LIFO inventories, the IVA is now applicable to all manufacturing and trade inventories; previously it had not been applicable to the LIFO portion of these inventories (except when LIFO inventories decumulated).

Net exports of goods.-The revised estimates of net exports incorporate the June 1988 revisions to the U.S. balance of payments accounts, notably the introduction of BEA's new end-use commodity classification system for merchandise trade. The new system provides more detail than the old and reclassifies a few commodities. A detailed explanation of the new system was presented in the technical notes in "U.S. International Transactions, First Quarter 1988" in the June 1988SURVEY.

For the current-dollar estimates, the introduction of the new classification system led only to reclassification among commodity categories; total merchandise exports and imports were not affected. For the constantdollar estimates, the system's introduction also led to revisions in total merchandise exports and imports. These revisions occurred because deflation is now carried out in more detail and is based on more appropriate prices. These changes in deflation had a substantial effect on capital goods exports and imports, especially on the old category "business and office machines, computers, etc." In the previously published estimates, exports and imports of all commodities in this category were deflated with the PDE implicit price deflator for office, computing, and accounting machinery. In the revised estimates, a new computer category ("computers, peripherals, and parts") was deflated with BEA's computer price index (a part of the previously used deflator), and the other commodities from the old category were deflated with corresponding BLS export and import price indexes. The latter change had a substantial effect because (1) the old deflator decreased and the new deflators increased in all 3 years, and (2) the level of the old deflator was substantially lower than the new deflators.

Until the new classification system is introduced for years prior to 1985, the exports and imports series shown in NIPA tables 4.3 and 4.4 will have small discontinuities. For the constant-dollar estimates, 1984 exports would have been about $0.5 billion higher and 1984 imports about $1.0 billion lower if the reclassification and new deflation procedures had been incorporated. Consequently, the incorporation of these changes into the NIPA's in the next comprehensive revision would lower the change in real GNP for 1985 about 0.1 percentage point.

Wages and salaries.-The revised estimates of wages and salaries beginning in January 1988 reflect an upward adjustment to the extrapolator used to prepare the current monthly and quarterly estimates. As described in table 6, the extrapolator for most private industries is a measure derived as employment times average hourly earnings times average weekly hours from BLS data. At the time of the first July revision, these estimates are replaced by estimates of wages and salaries based on tabulations of employees covered by State unemployment insurance (UI), also from BLS. In recent years, the incorporation of the UI data led to a substantial upward revision in wages and salaries. Preliminary work indicated that the shortfalls are related to the average hourly earnings part, because the coverage of earnings is limited to production of nonsupervisory workers and to regular earnings. Consequently, the average hourly earnings part of the extrapolator was adjusted to raise the annual total of these wages and salaries by 1 percent above what it otherwise would have been. In the first quarter of 1988, the upward adjustment was $6.0 billion.

Nonfarm proprietors' income.-The revised proprietors' income estimates reflect a deduction for an interest expense that is not counted as such in the source data. The interest is on debt incurred after December 1969 on property held for investment. Under Federal tax law, this interest can be passed through to the partners, who treat it as an expense on their own tax returns; it is not treated as an expense of the partnership and accordingly is not deducted in deriving the net income shown in IRS tabulations of business tax returns, which are the source data for estimates of proprietors' income. Newly available IRS tabulations indicated that the change in nonfarm proprietors' income should be revised down $2.9 billion in 1986 to take this interest into account. The adjustment appears as an additional element of line 2 of NIPA table 8.11, which shows the relation of nonfarm proprietors' income in the NIPA's to corresponding totals as published by IRS. (Because the estimates of proprietors' income for 1987 are not based on IRS tabulations, they were not affected.) A corresponding upward revision was made in monetary interest paid by partnerships; the proprietors' income and net interest revisions are offsetting in personal income and in national income. The adjustment will be carried back to 1969 in the next comprehensive revision of the NIPA's.

Net interest. -In addition to the change described for nonfarm proprietors' income, the revised estimates reflect explicit exclusion of net realized capital gains from interest received by State and local government retirement systems. Previously, this interest received had been estimated as the difference between total investment earnings of the retirement systems and dividends received. Thus, to the extent that capital gains existed, they had been treated as interest. A breakdown of investment earnings was first available for fiscal year 1984-85 in the reports underlying the Census Bureau Finances of Employee Retirement Systems of State and Local Governments. The reports indicated net capital gains of $5.5 billion in 1985 and $9.0 billion in 1986; BEA estimated gains of $12.0 billion in 1987. The exclusions will be carried back in the next comprehensive revision of the NIPA's.

The explicit exclusion of these gains is recognized as an additional element o"financial transactions" (line 4) in NIPA table 3.18, which shows the relation of State and local government receipts and expenditures in the NIPA's to Census Bureau Governmental Finances data on a fiscal year basis.

Deflation of PDE. -Several changes were made in price indexes used to prepare constant-dollar PDE and associated measures of price change. First, BLS producer price indexes (PPI's) for boats and for civilian aircraft were introduced. Previously, a weighted average of PPI's for boatbuilding materials and internal combustion engines was used for boats. A similar weighted average of PPI's was used for civilian aircraft following the discontinuation after 1985 of the annual price index for aircraft compiled by the Department of Transportation.

Second, imported equipment in PDE is now deflated using the same price indexes-mainly BLS import price indexes-as used to deflate imported equipment in net exports. Previously, domestic PPI's were used. The introduction of the import price indexes is the second stage in a reworking of the PDE quarterly and annual methodology; the first stage, the separation of domestic and imported equipment in current dollars at a detailed level, was introduced last July. The improved methodology will capture more adequately shortterm differences in the movement of the volume and prices of domestic and imported equipment.

Updated summary methodologies

Table 6 identifies the principal source data and estimating methods used to prepare the current-dollar estimates of the income- and productside components of GNP, and table 7 identifies the principal source data and estimating methods used to prepare constant-dollar estimates of the product-side components. In addition to reflecting the changes made in this July revision, the tables provide more detail than presented last year for a few components, especially for Federal Government transactions. The additional detail for the Federal transactions will make it easier to relate these summaries to the full information that will be available in the forthcoming methodology paper on government transactions.

The change to the entries for current-dollar Federal Government purchases of goods and services requires some further explanation. The table presented last year described the estimates of Federal purchases in terms of their derivation from outlays as presented in the Budget of the United States, the United States Government Annual Report: Appendix, and selected agencies' annual reports. The derivation, part of what BEA calls a fiscal year analysis, has two major steps. (1) To derive NIPA expenditures from budget outlays, outlays are adjusted for coverage (for example, to exclude financial transactions and transactions in land and to include imputations), for netting and grossing differences (for example, to treat certain items as expenditures rather than as offsets to receipts), and for timing (to move from a payments basis to a delivery basis). (2) To derive purchases from expenditures, expenditures are adjusted to exclude interest, subsidies, net expenditures of government enterprises, transfer payments, and grants-in-aid to State and local governments. The fiscal year analysis is carried out in substantial detail for the July revision. It Provides control totals for national defense and nondefense purchases separately and provides relationships between total outlays and types of expenditures that are used to prepare estimates from the more aggregative data available for time periods other than the fiscal year. Table 6 now refers to fiscal year analysis as providing the control total and then describes the source data and methods used to prepare type-ofpurchase detail and the estimates that are summed to obtain calendar year estimates. Table 7 on methodology for the constant-dollar estimates has been modified to correspond to the current-dollar presentation.

Current-dollar estimates of GNP.-The components in table 6 are as shown in the national income and product account, starting on the income side and proceeding to the, product side. The subcomponents in table 6, with their 1987 dollar values, are grouped according to the methodology used to prepare them.

The column in table 6 for annual estimates covers the several annual estimates in the estimating cycle; major differences in methodology as the estimates move through the annual revisions to a comprehensive revision are few enough to condense into the table. For example, for most goods in PCE (the first item on the product side), the table indicates one methodology for benchmark years and another for all other years.

The column for the quarterly estimates is a condensation in several respects. First, it refers to the advance estimates for the current quarterthat is, the estimate prepared in the first month following the end of the quarter. That one estimate, rather than all of the current quarterly estimates, is described because more attention focuses on the "first look" at the quarter. Second, even for the advance estimate, the column does not detail how many months of data are available nor whether the data are subject to revision by the source agency. Thus, the benefit of condensation is at the cost of not detailing the tradeoff between the timeliness of the advance estimate and the improved quantity and quality of source data available in the 2 following months and incorporated in the final current estimates.3

The information in the column for the quarterly estimates is generic; it fits any advance estimate for the current quarter. For users who want to track the actual data and resulting estimates, BEA prepares "Key Source Data and Assumptions for the Advance Estimates of GNP." This table shows the monthly figure for key source data that are available for the advance estim ates (and indicates whether the data are subject to revision by the source agency) and BEA's assumptions for data that are not available. BEA has redesigned this table and it is shown with information about the advance estimates for the second quarter of 1988 on page 129 of this issue of the SURVEY.

Table 6 lists source data referring to a variety of different economic measures-wages and salaries, premiums, expenses, interest rates, mortgage debt, tax collections, unit sales, housing stock, employment, and average price, to name a few. For most components, the source data are "value data"; that is, they embody both the quantity and price dimensions that are required for currentdollar estimates. In these cases, the methodology indicated in table 6 is the adjustment of the value data to derive estimates consistent with NIPA definitions and coverage. The brief descriptions of the adjustments to derive domestic corporate profits and change in business inventories are examples. Three other methodscommodity flow, retail control, and perpetual inventory-were described in the July 1987 SURVEY.

When value data are not used in preparing an estimate, the table indicates the combination of data with separate quantity and price dimensions that is used to derive the required value estimate (as well as indicating any major adjustments needed to derive estimates consistent with NIPA definitions and coverage). On the product side, a "physical quantity times price" method is used for several components. For example, the estimate for new autos is prepared as unit sales times average list price. An "employment times earnings times hours" method and forms of a "stock of assets/liabilities times an interest rate" method also are used for several components.

Some of the source data shown in table 6 for the annual estimate are used to interpolate and extrapolate the levels established by source data that are viewed as final, and all of the source data shown for the advance quarterly estimates are used to extrapolate the level of the preceding quarter.4 In addition to using indicator series, as is the case when source data are listed in the table, extrapolation and interpolation may be based on trends, as is the case when "judgmental trend" is listed in the table.

Constant-dollar estimates of GNP.-Table 7 shows which of three methods is used to prepare constant-dollar estimates and indicates the source data with which it is implemented.5 The method used for by far the largest part of GNP is deflation. In fact, deflation is so widely used that the term is often used to describe the preparation of all constant-dollar estimates. In deflation, constant-dollar estimates are obtained by dividing the most detailed current-dollar components by appropriate price indexes with the base period-at present, the year 1982-equal to 100.

The other methods, quantity extrapolation and direct base-year valuation, are similar in that they both use quantity data. For quantity extrapolation, constant-dollar estimates are obtained by extrapolating the current-dollar estimates from the base year by quantity data. For direct valuation, constant-dollar estimates are obtained by multiplying base-year prices by quantity data for each period.

The subcomponents are as shown in table 6, except where more detail is needed to highlight differences in methodology for constant-dollar estimates. For this table, the distinction between annual and quarterly methodology is far less important than it was for the current-dollar methodology, and major differences between the annual and quarterly source data are noted within the individual entries.

3. The methodology for PCE illustrates the sequential introduction of source data in the current estimates. For the advance estimates, the key data available are the following: 3 months of retail sales (of which 2 months are subject to revision by the source agency); 3 months of unit sales of new motor vehicles, 1 month of information with which to allocate the unit sales among consumers and other purchasers, and 2 or 3 months of average list prices (which are subject to modification as more detailed information on models of cars sold, and thus actual retail prices, becomes available); and 1 to 3 months of data for services amounting to three-fifths of total services. The estimates for most of the remainder of PCE are extrapolations based either on related indicator series or on judgmental trends. For the preliminary estimates, revised retail sales for 2 months become available. For the final estimates, information on sales of used cars and more data on several services-hospitals, electricity, natural gas, hotels and motels, airline transportation, foreign travel, and insurance other than life insurance-become available.

4. Extrapolation is a method of extending estimates from one period forward (or backward) in time to other periods. In simple terms, extrapolation applies a percent change-either the percent change in the indicator series or the percent change in the trend-to the level of the preceding period. Interpolation is a method of filling in estimates between two periods. Interpolation applies a more complex mathematical formula-there are several in use-to preserve the pattern of the indicator series consistent with the level of the source data viewed as final.

5. With few exceptions, BEA does not prepare constant-dollar estimates of income measures because price indexes cannot be associated with them, as they can with product measures. Three exceptions are disposable personal income and, as presented in BEA's Business Conditions Digest, personal income and profits. In these cases, the estimates are adjusted for price change by reference to prices of the goods and services on which the income is spent. BEA prepares constantdollar net national product and national income by preparing constant-dollar estimates of capital consumption allowances with capital consumption adjustment and of the nonfactor charges and then subtracting them from constant-dollar GNP.

NIPA Table Changes

* Two new lines have been added to the tables presenting change in business inventories and inventory levels (tables 5.8 through 5.11). The new lines show retail trade inventories of durable goods separately for automotive and other durable goods. The automotive estimates cover most motor vehicle inventories-including inventories of new and used autos (domestic and foreign), parts, some trucks, and other motorized vehicles-held by retailers. The change in business inventories for retail auto dealers differs in coverage from the change in inventories of autos and trucks in the motor vehicle output estimates shown in tables 1.17 through 1.20.

Two new tables-5.12 and 5.13-have been added. They show fixed investment by major subcomponent in current and constant dollars.

The current estimates for the new lines and tables have been shown in the "Reconciliation and Other Special Tables" section of the SURVEY for the past few months. Estimates are available annually back to 1929 and quarterly back to 1946 (1947 for constant-dollar estimates); please write to the address listed in the "Data Availability" box on page 8.

Footnotes have been added to tables 3.18, 4.3, and 4.4 noting changes in coverage and definitions beginning in 1985.

See also "Errata and Revisions in NIPA Tables" on page 127.
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Date:Jul 1, 1988
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