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The business situation.

the BUSINESS SITUATION

Final estimates for the first quarter of 1991 show that real GNP decreased at an annual rate of 2.8 percent; the preliminary estimates issued a month ago had shown a 2.6-percent decrease.(1) The first-quarter decrease in real gross domestic purchases was revised from 4.0 percent to 4.3 percent.

The revisions in GNP and gross domestic purchases reflected small downward revisions in personal consumption expenditures, in residential and nonresidential fixed investment, and in the change in business inventories; government purchases were revised up slightly (see table 1 on page 19). Net exports, which is included in GNP but not in gross domestic purchases, was revised up slightly, reflecting a bigger upward revision in exports than in imports.

The increase in the fixed-weighted price index for GNP was revised up 0.1 percentage point, to 5.2 percent; the increase in the fixed-weighted price index for gross domestic purchases was also revised up 0.1 percentage point, to 3.7 percent.

Corporate Profits

Profits from current production--profits before tax plus inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj)--decreased $2.7 billion in the first quarter after decreasing $11.8 billion in the fourth (table 1). Profits of domestic nonfinancial corporations dropped $6.7 billion, reflecting a 6.5-percent (annual rate) decrease in the real gross product of these corporations and a small decrease in profits per unit of product. Profits of domestic financial corporations increased $3.9 billion, and profits from the rest of the world changed little.

Cash flow from current production, a profits-related measure of internally generated funds available to corporations for investment, increased $13.7 billion after increasing $3.5 billion. The first-quarter increase, together with a $20.4 billion drop in current-dollar nonresidential fixed investment, lifted cash flow as a percent of nonresidential investment to 81 percent--midway between its average level for 1989-90 (77 percent) and its average level for 1986-88 (85 percent).

Profits by industry.--Profits before tax (PBT) with IVA is the best available measure of industry profits because estimates of the CCAdj by industry do not exist. For domestic industries, PBT with IVA decreased $0.9 billion, much less than in the fourth quarter. Financial profits increased after a decrease, and nonfinancial profits posted a much smaller decrease.

More than one-half of the increase in financial profits was accounted for by savings and loan associations. The improvement in savings and loan profits reflected the continuing reorganization of the industry through the liquidation of ailing institutions.

The first-quarter decrease in nonfinancial profits was more than accounted for by manufacturing. Profits of most manufacturing industries decreased, but several industries posted substantial increases; in particular, food and petroleum profits increased sharply--food profits to a record level, and petroleum profits to their highest level since 1985. In trade, profits of retailers increased sharply while profits of wholesalers slipped. In transportation and public utilities, utilities rebounded from a fourth-quarter drop.

Profits from the rest of the world changed little after a large increase. This component of profits measures receipts of profits from foreign affiliates of U.S. corporations less payments of profits by U.S. affiliates of foreign corporations. In the first quarter, substantial increases in both receipts and payments largely offset each other.

Profits before tax and related measures.--PBT decreased $22.6 billion in the first quarter. The difference between the $2.7 billion decrease in profits from current production and the $22.6 billion decrease in PBT mainly reflected a $21.9 billion increase in the IVA.

In the source data used to estimate PBT, some inventory withdrawals are valued at replacement cost, but most are valued at historical cost. The IVA is an estimate of the effect on PBT of valuing all inventory withdrawals at replacement cost. (This estimate is then used to calculate "PBT with IVA.") When prices fall, as in the first quarter, the IVA is positive because historical costs exceed replacement costs; when prices rise, as in the fourth quarter, the IVA is negative. The Producer Price Index, a major source of inventory prices, decreased at a (not seasonally adjusted) annual rate of 8.1 percent in the first quarter after increasing at a rate of 12.2 percent in the fourth; widely fluctuating petroleum prices dominated movements in the price index in both quarters. [Tabular Data Omitted] Note.--Daniel Larkins prepared this article.

(1)Quarterly estimates in the national income and product accounts are expressed at seasonally adjusted annual rates, and quarterly changes are differences between these rates. Quarter-to-quarter percent changes are annualized. Real, or constant-dollar, estimates are expressed in 1982 dollars and are based on 1982 weights. BEA publishes an alternative measure of real GNP based on 1987 weights along with the preliminary estimate. The first-quarter decrease in this alternative measure was revised from 2.4 percent to 2.8 percent.
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Title Annotation:first quarter of 1991
Publication:Survey of Current Business
Date:Jun 1, 1991
Words:810
Previous Article:Valuation of the U.S. net international investment position.
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