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The business situation (2nd quarter, 1985).

ACCORDING to the "flash" estimates, real GNP increased at an annual rate of 3 percent in the second quarter, compared with 1/2 percent in the first quarter. The GNP fixed-weighted price index increased at an annual rate of 4 percent, compared with 4-1/2 percent (table 1).

It appears likely that business inventories contributed negatively to the change in real GNP in the second quarter, after a small positive contribution in the first. Thus, final sales of GNP more than accounted for the acceleration in GNP. From a small decline in the first quarter, final sales of GNP swung to a substantial increase--an increase shared by all major components except net exports.

As indicated in table 2, final sales of GNP can be viewed as the sum of exports and domestic sales of domestically produced goods and services. It appears that exports changed little in the second quarter after a moderate decline, so that most of the swing in final sales of GNP was accounted for by domestic sales of domestically produced goods and services. In the first quarter, these domestic sales had increased only 1/2 percent, but in the second quarter, they increased substantially.

Second-quarter developments in the components of real GNP, in GNP prices, and in personal income are sketched below on the basis of data available as of mid-June.

* Personal consumption expenditures increased about as much as the 5 percent registered in the first quarter. Durables increased a little less than the first quarter's 9 percent; motor vehicles and household furniture and equipment again registered sizable increases. Nondurables increased substantially more than the first quarter's 3-1/2 percent; larger increases in food and in clothing and shoes contributed to the accleration. A decline in electricity and natural gas, after a large increase due to severe cold weather, held the increase in services below the first quarter's 5 percent.

* Nonresidential fixed investment was up substantially after a small decline. The turnabout was in producers' durable equipment. Equipment other than motor vehicles swung sharply from an 11-percent decline in the first quarter to a large increase; the swing was concentrated in computers, which accounted for much of the decline and for roughly one-half of the subsequent increase. In motor vehicles, a decline in trucks more than offset an increase in autos. Structures continued to increase, reflecting the course of commercial structures; the other large catgeories--industrial structures, public utilities, and oil and natural gas exploration and drilling--changed little. The increase in nonresidential fixed investment over the two quarters is roughly in line with the increase for the year 1985 that is indicated by plans reported by business in BEA's latest quarterly plant and equipment survey. These plans, as well as factors that may be affecting them, are discussed in an article later in this issue.

* Residential investment was up substantially investment was up substantially more than the 5-1/2 percent registered in the first quarter. The acceleration was in single-family construction; increases in 1985 have reflected the lagged effect of the decline in mortgage rates that began last July. As in the first quarter, multifamily construction was weak, and an increase in the "other" component reflected commissions on house sales.

* Business inventories appear to have accumulated at a much slower rate than in the first quarter. This negative contribution to the change in GNP was largely accounted for by motor vehicle inventories. These inventories--the only part of inventories based on more than 1 month of source data for the second quarter--were down, following a substantial increase in the first quarter when automakers were still rebuilding inventories from a low level at the beginning of the 1985 model year. Only fragmentary information is available about farm inventories, but it appears that accumulation continued. Nonfarm inventories other than motor vehicles appear to have increased somewhat more than the $8 billion increase in the first quarter. It is likely that the ratio of business inventories to total final sales moved down slightly from the high end of the 3.01-3.09 range within which it has fluctuated in the last 2 years.

* Net exports appear to have declined, but much less than the $15 billion registered in the first quarter. Imports appear to have increased much less than the first quarter's $11-1/2 billion, and exports, after a $3-1/2 billion decline, appear to have held about even. In merchandise, which accounted for most of the improvement, the major factor was a smaller increase in nonpetroleum imports. In the first quarter, a large increase in nonpetroleum imports, which recouped the drop in the fourth quarter, had been spread across end-use commidity categories; in the second quarter, most categories appear to have increased less. The quarterly changes in imports--although erratic--continued to reflect the cumulative effects of the dollar's appreciation.

* Government purchases increased moderately, after little change in the first quarter. The acceleration was in State and local government purchases, where construction--particularly highways--picked up. In Federal purchases, slightly more than offset a decline in nondefense purchases, as well as the 3-percent increase in the first quarter, were more than accounted for by transactions of the Commodity Credit Corporation.

* The GNP fixed-weighted price index, as noted earlier, increased 4 percent in the second quarter. In the first quarter, almost one-half percentage point of the 4-1/2-percent increase was accounted for by a pay raise for Federal Government employees. Thus, excluding the effect of the pay raise, prices of U.S. production increased at the same rate in both quarters. Prices of gross domestic purchases accelerated slightly from a 3-percent increase in the first quarter, again excluding the effect of the pay raise. The difference in the pattern of these overall measures of inflation--one a measure of inflation in goods and services produced and the other a measure of inflation in goods and services purchased--largely reflected the impact of imported petroleum. Prices of imported petroleum had declined in the first quarter, but changed little in the second.

* Personal income increased about $39 billion, somewhat less than the $47-1/2 billion registered in the first quarter. A number of special factors--a Federal pay raise, large increases in agricultural subsidies, several changes in Social Security and in other Federal retirement and income-support payments, and legislated increases in contributions for Social Security--contributed to substantially different movements in several components of personal income in the components of personal income in the two quarters. On balance, these factors added more to the increase in the first quarter than to that in the second quarter. Without these special factors, personal income would have increased about $36-1/2 billion, compared with $34-1/2 billion in the first quarter.

Private wages and salaries increased less in the second quarter than in the first. The slowing was accounted for by wages and salaries in manufacturing, which changed little after a $5-1/2 billion increase in the first quarter; manufacturing employment and average hours were both down from the first quarter. Wages and salaries in government and government enterprises were affected by the pay raise for Federal Government employees, which added $3 billion in the first quarter, and by a retroactive payment and pay raise for Postal Service employees, which added $1/2 billion in the first quarter and $1 billion in the second.

Proprietors' income, in contrast, increased more in the second quarter than in the first. Nonfarm proprietors' income increased about as much as in the first quarter, and farm proprietors' income declined less than in the first quarter. Beginning in the fourth quarter of 1984, agricultural subsidies registered substantial increases, which, in the first and second quarters, helped offset declines in other sources of farm income. Subsidies increased $5 billion in the fourth quarter, $3 billion in the first, and a smaller amount in the second. The declines in other sources of farm income largely reflected declines in crop and livestock prices.

Personal interest income increased moderately after no change in the first quarter. In both quarters, interest income reflected the lower rates of interest than those prevailing in mid-1984, when increases in interest income had exceeded $20 billion a quarter.

Transfer payments registered only a small increase after an unusually large one in the first quarter. The deceleration occurred largely because the first-quarter increase of $17-1/2 billion had included cost-of-living increases in several Federal retirement and income-support programs, which added $8-1/2 billion, and the effect of a change in the date of payment of military retirement pay, which added $5-1/2 billion.

Personal contributions for social insurance, which are subtracted in deriving personal income, increased much less than in the first quarter, which had included $6-1/2 billion for changes in the Social Security tax rates and taxable earnings bases.

Personal tax and nontax payments of the timing of refund payments on 1984 Federal personal income taxes. Refund payments are netted against tax payments in calculating personal tax and nontax payments, and because refunds were delayed in the first quarter due to computer problems at processing centers, personal tax payments were unusually large in the first quarter--an increase of $37 1/2 billion. In the second quarter, the catchup in refund payments led to a large decline in tax payments. In addition, the first-quarter increase had included the effect of the indexing of Federal income taxes. Excluding these factors, personal taxes increased $16-1/2 billion in the first quarter and about $12-1/2 billion in the second.

The swing personal taxes swamped the deceleration in personal income, so that disposable personal income increased much more in the second quarter--over $80 billion, compared with $10 billion in the first. (Excluding the special factors in personal income and in taxes, the increase in disposable income was about $25-1/2 billion in both quarters.) In real terms, the second-quarter increase was about 10 percent, after a 1-1/2-percent decline. The increase in personal outlays--in which personal consumption expenditures predominate--was close to the $54-1/2 billion registered in the first quarter. Accordingly, after declining sharply in the first quarter, personal saving increased sharply in the second. The personal saving rate, which had fallen to 4-1/2 percent in the first quarter, increased about 1 percentage point.

First-quarter corporate profits

Revised first-quarter estimates show that profits from current production--profits with inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj)--increased $1/2 billion, to $292-1/2 billion. In the fourth quarter, profits had recovered from the third quarter's $8-1/2 billion decline; profits have increased only slightly over the three quarters. In the first quarter, the increase was in domestic profits; were unchanged.

Profits before tax (PBT) differ from profits from current production by the IVA and CCAdj. In the first quarter, the IVA increased $2-1/2 billion, to $1 billion, and the CCAdj increased $4-1/2 billion, to $69 billion. PBT declined $6-1/2 billion, to $222-1/2 billion, following a $4 billion increase. Trade and durable manufacturing profits contributed most to the decline. Within trade, profits of both retailers and wholesalers declined. Within durable manufacturing, declines were widespread, but profits of fabricated metals producers were down the most. Overall, the situation is essentially the same as that described in the May "Business Situation."

First-quarter NIPA revisions

The 75-day revisions of the national income and product accounts estimates for the first quarter of 1985 are shown in table 3.
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Publication:Survey of Current Business
Date:Jun 1, 1985
Previous Article:Regional and state projections of income, employment, and population to the year 2000.
Next Article:Interest rates and aggregate inventory investment.

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