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The business situation.

the BUSINESS SITUATION

Overall economic conditions, as reflected in the national income and product accounts (NIPA's), showed improvement in the second quarter of 1991.

* Real GNP, a measure of U.S. production,

increased 0.4 percent after

decreasing 2.8 percent in the

first quarter and 1.6 percent in the

fourth quarter of 1990 (chart 1).(1)

* Real gross domestic purchases,

a measure of U.S. demand, increased

2.9 percent after decreasing

in the two preceding

quarters.

* Inflation as measured by the

(fixed-weight) price index for gross

domestic purchases slowed to 2.4

percent.

* Real disposable personal income

increased 1.2 percent after decreasing

in the three preceding

quarters.

The upswing in GNP was concentrated in motor vehicles and construction (table 1). Motor vehicles increased substantially in the second quarter after a large decrease; construction changed little after a decrease. Excluding motor vehicle and construction output, GNP decreased 0.9 percent in the second quarter after increasing in the two previous quarters.(2) [Tabular Data Omitted]

A detailed discussion of the major components of GNP will be presented in the August "Business Situation." In brief, personal consumption expenditures - which had decreased in the two preceding quarters, largely reflecting purchases of motor vehicles - increased substantially in the second quarter. This increase and smaller increases in several other major components were largely offset by a sharp drop in net exports.

Imports are subtracted from exports in the calculation of GNP. It is tempting to suppose that if imports had not increased $31.6 billion, second-quarter GNP would have been that much higher. However, this temptation should be resisted because, conceptually and as a matter of accounting, imports do not affect GNP: The negative entry for imports is offset by positive entries for foreign produced goods and services in other GNP components (such as personal consumption expenditures). As a matter of economics, imports may affect GNP. An analysis of this effect must take into account both direct and indirect effects: Direct effects include impacts on the wholesaling and retailing of imported goods, and indirect effects include impacts on the demand for domestically produced goods and services.

Motor vehicles. - Motor vehicle production and sales both increased but remained weak after decreasing in the two preceding quarters. Inventories remained low.

Motor vehicle output increased 48.0 percent in the second quarter after falling 45.5 percent in the first quarter and 50.7 percent in the fourth. The upswing in production - most of which was in trucks - probably was a response by manufacturers to an upturn in sales during the first quarter and an effort by manufacturers to keep truck inventories from falling further.

Real final sales of motor vehicles (sales to domestic purchasers plus net sales to foreigners) increased 20.3 percent after dropping 34.2 percent in the first quarter and 28.1 percent in the fourth; the turnaround in truck sales occurred earlier and was stronger than the turnaround in car sales. The second-quarter increase in car sales reflected increases both in unit sales and in the average expenditure per car.

Domestic car production increased to 5.3 million units (seasonally adjusted annual rate) in the second quarter from 5.1 million - the lowest level in 8 years - in the first. Currently, manufacturers plan a substantial increase in production, to 6.5 million, in the third quarter. Reflecting a small increase in sales to consumers, domestic car sales edged up to 6.1 million units in the second quarter from 6.0 million in the first. The low production level kept inventories low; domestic car inventories slipped to 1.0 million at the end of the second quarter from 1.1 million at the end of the first. The inventory-sales ratio fell to 1.9 from 2.1.

The small second-quarter increase in car sales to consumers was consistent with (mostly small) improvements in many of the factors usually associated with consumer spending: Real disposable personal income increased after decreasing in three consecutive quarters, initial claims for State unemployment insurance decreased for the first time in five quarters, and the Index of Consumer Sentiment (prepared by the University of Michigan's Survey Research Center) increased for the second consecutive quarter but remained well below its second-quarter 1990 level. In addition to these general factors, manufacturers offered more attractive sales-incentive programs in the second quarter than in the first.

Sales of imported cars increased to 2.4 million units in the second quarter from 2.2 million in the first.

Sales of new trucks jumped to 4.1 million units in the second quarter from 3.8 million in the first. Light domestic truck sales accounted for the increase. Sales of imported light trucks increased slightly, and sales of "other" trucks decreased. Truck inventories increased for the first time in four quarters.

Prices

The fixed-weighted price indexes for both GNP and gross domestic purchases decelerated in the second quarter: The GNP price index slowed to a 3.0-percent increase after increasing 5.2 percent, and the gross domestic purchases price index slowed to a 2.4-percent increase after increasing 3.7 percent (table 2). Prices of gross domestic purchases less food and energy, which may be viewed as measuring the underlying inflation rate in the U.S. economy, slowed to a 3.3-percent increase after increasing 5.7 percent (chart 2).

Table : Table 2. - Price Indexes (Fixed Weights): Change From Preceding Quarter [Percent change at annual rates; based on seasonally adjusted index numbers (1982=100)]
 1990 1991
 III IV I II
GNP 4.2 4.7 5.2 3.0
 Less: Exports 2.6 5.0 3.4 1.1
 Plus: Imports 12.6 24.9 -11.8 -5.9
Equals: Gross domestic purchases 5.1 6.3 3.7 2.4


Less: Change in business

inventories

Equals: Final sales to domestic
 purchasers 5.1 6.3 3.6 2.3
 Personal consumption expenditures 5.7 7.1 3.3 2.6
 Food 4.2 4.9 6.2 5.1
 Energy 21.3 51.2 -23.6 -14.7


Other personal consumption
 expenditures 4.8 4.2 5.6 3.7
 Nonresidential structures 2.9 2.2 2.5 1.3
 Producers' durable equipment 2.2 4.9 5.4 .9
 Residential investment 2.4 -.6 -.3 2.3
 Government purchases 4.6 6.1 4.8 2.0


Addenda:
 Merchandise imports 14.3 34.4 -18.2 -10.5
 Petroleum and products 135.7 346.2 -75.0 -46.3
 Other merchandise 2.4 5.4 4.1 -3.0


Note. - Percent changes in major aggregates are found in table 8.1 of the "Selected NIPA Tables." Most index number levels are found in tables 7.1 and 7.3.

Export prices, which are included in the GNP price index but not in the gross domestic purchases price index, increased at a slower rate in the second quarter than in the first. Import prices, which are subtracted in deriving the GNP price index but not in deriving the gross domestic purchases price index, decreased at a slower rate in the second quarter than in the first. Movements of import prices in recent quarters are largely traceable to imported petroleum. Prices of imported petroleum decreased in the second quarter but at a slower rate than in the first.

Prices of personal consumption expenditures (PCE) increased 2.6 percent after a 3.3-percent increase. Food prices were up less than in the first quarter, although prices of vegetables increased sharply as a result of shortages caused by unusually cold winter weather. In energy, the prices of all major categories decreased less than in the first quarter. Prices of "other" PCE increased less than in the first quarter; the slowdown was largely accounted for by autos and by clothing and shoes.

Among the investment components, prices of nonresidential structures and producers' durable equipment (PDE) increased less than in the first quarter; the deceleration in PDE prices was substantial and widespread. Prices of residential investment registered a modest upswing.

Prices of government purchases moderated in the second quarter. Prices of Federal Government purchases increased much less than in the first quarter, when they had been boosted by a pay raise for civilian and military personnel. Prices of State and local government purchases increased at the same rate as in the first quarter.

Personal income

Real disposable personal income increased 1.2 percent in the second quarter after decreasing in three consecutive quarters (chart 3). The increase reflected both a pickup in current-dollar personal income and the slow-down in the implicit price deflator for PCE.

In current dollars, personal income increased $43.4 billion in the second quarter after increasing $17.3 billion in the first. The acceleration reflected an upswing in wages and salaries in private industries and an upswing in proprietors' income, which were partly offset by a slowdown in the growth of transfer payments (table 3). [Tabular Data Omitted]

Wage and salary disbursements increased $27.7 billion in the second quarter after increasing $3.9 billion in the first. The step-up was in private-industry wages and salaries, and it was due to further gains in average hourly earnings and to an upswing in average weekly hours. (Employment continued to fall; the number of payroll jobs decreased 0.4 million in the second quarter and fell 1.6 million from June 1990 to June 1991.) Government wages and salaries increased less than in the first quarter, when they were boosted by a pay raise for Federal Government civilian and military personnel.

Proprietors' income increased $12.1 billion in the second quarter after decreasing $1.8 billion in the first. Farm proprietors' income increased $3.4 billion after a slight drop. The upswing largely reflected higher crop prices received by farmers. In addition, Federal farm subsidy payments decreased less than in the first quarter. Nonfarm proprietors' income increased $8.8 billion after a decrease. The upswing reflected a pickup in single-family construction (the part of the construction industry in which proprietorships and partnerships are concentrated) and turnarounds in wholesale and retail trade and in real estate.

Transfer payments increased $13.1 billion in the second quarter, considerably less than in the first. In the first quarter, cost-of-living adjustments to benefits under social security and several other Federal retirement and income support programs added $17.8 billion to transfer payments.

Personal interest income decreased more than in the first quarter; in both quarters, the decreases reflected lower interest rates.

Personal contributions for social insurance, which are subtracted in deriving the personal income total, increased considerably less than in the first quarter, when several social insurance program changes added $7.0 billion.

Personal tax and nontax payments increased $6.4 billion in the second quarter after declining $2.0 billion in the first. The second-quarter increase reflected growth in the taxable earnings base.

In the second quarter, personal outlays - mainly PCE - increased substantially more than disposable personal income; thus, personal saving decreased. The personal saving rate fell 0.5 percentage point to 3.7 percent after holding steady at 4.2 percent for three consecutive quarters.

(1.) The regularly featured estimate of real GNP is based on 1982 weights. An alternative estimate of real GNP growth based on more current weights can be calculated using the change in the chain price index, which is published in Table 8.1 of the "Selected NIPA Tables." This alternative measure increased 1.5 percent in the second quarter after decreasing 2.9 percent in the first quarter and 2.6 percent in the fourth. Growth of real GNP in 1987 dollars, another measure based on more current weights, will be published in the "Reconciliation and Other Special Tables" in the August 1991 Survey of Current Business.

(2.) The output of the motor vehicle industry is derived by summing auto output (shown in table 1.18 of the "Selected NIPA Tables") and truck output (shown in table 1.20). The output of the construction industry may be approximated by "structures," shown in NIPA table 1.4. This approximation excludes maintenance and repair construction and includes brokers' commissions on the sale of structures, as well as mining exploration, shafts, and wells; nevertheless, it probably tracks movements in construction output closely. The value of motor vehicle and construction output includes the value of inputs, such as steel, obtained from other domestic industries and from foreign suppliers as imports.

PHOTO : CHART 1 Selected Measures: Change from Preceding Quarter

PHOTO : CHART 2 Gross Domestic Purchases Prices (Fixed Weights): Change From Preceding Quarter

PHOTO : CHART 3 Selected Personal Income and Savings Measures
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Title Annotation:second quarter of 1991
Publication:Survey of Current Business
Date:Jul 1, 1991
Words:2097
Previous Article:U.S. international transactions, first quarter 1991.
Next Article:National income and product accounts: selected NIPA tables, selected annual NIPA tables and NIPA charts.
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