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The business situation.

According to the "preliminary" estimates for the second quarter, real gross domestic product (GDP), a measure of goods and services produced in the United States, increased 1.4 percent; the "advance" second-quarter estimate, issued a month ago, had shown the same increase.(1) Real gross domestic purchases, a measure of goods and services purchased by U.S. residents, increased 3.3 percent, 0.7 percentage point higher than the increase shown a month ago. The price index for gross domestic purchases increased 2.9 percent, about the same as shown previously; the GDP price index increased 2.6 percent, 1.0 percentage point higher than shown previously. (See the "Revisions" section of this article for a discussion of the sources of revisions in the second-quarter estimates.)

The 1.4 percent increase in real GDP in the second quarter was similar to the average rate of increase in the previous four quarters, but it was only about one-half the size of the increase in the first quarter of 1992 (chart 1 and table 1). The slowdown from the first to the second quarter reflected decelerations in the production of structures and of services; the production of goods increased somewhat more in the second quarter than in the first. [TABULAR DATA 1 OMITTED]

The 3.3-percent increase in real gross domestic purchases in the second quarter was slightly larger than the increase in the first quarter. However, the composition of purchases changed markedly. A sharp increase in inventory investment accounted for more than one-half of the second-quarter increase; a sharp increase in final sales to domestic purchasers had more than

V accounted for the first-quarter increase. Within final sales, most of the 1.5-percent increase in the second quarter was accounted for by nonresidential fixed investment; most of the 4.7-percent increase in the first quarter had been accounted for by personal consumption expenditures.

Personal consumption expenditures

Real personal consumption expenditures (PCE) decreased 0.2 percent in the second quarter after posting a first-quarter increase of 5.1 percent, its largest increase in more than 5 years (table 2). The small second-quarter change reflected lower spending on both durable and nondurable goods and higher spending on services. [TABULAR DATA 2 OMITTED]

The second-quarter weakness in PCE is consistent with the weakness shown by factors that are frequently examined in analyzing consumer spending. Real disposable personal income slowed to a 1.4-percent increase in the second quarter from a 4.0-percent increase in the first. The unemployment rate rose to 7.5 percent in the second quarter from 7.2 percent in the first. The Index of Consumer Sentiment (prepared by the University of Michigan's Survey Research Center) rose only slightly during the quarter and remained below its year-earlier level.

Expenditures for durable goods decreased 3.0 percent in the second quarter after jumping 16.5 percent in the first. Motor vehicles and parts (mainly new domestic cars) and "other" durable goods turned down in the second quarter; furniture and household equipment changed little after a substantial increase.

Expenditures for nondurable goods decreased 1.6 percent in the second quarter after increasing 5.5 percent in the first. In the second quarter, food decreased sharply (to its lowest level in almost 3 years); most of the decrease was in purchased meals (that is, restaurant meals). Energy, mainly fuel oil and coal, increased sharply in both quarters.

Expenditures for services increased 1.3 percent in the second quarter after increasing 2.2 percent in the first. The largest second-quarter increases were in household operation, largely electricity and gas, and medical care. "Other" services decreased, reflecting a drop in brokerage commissions.

Nonresidential fixed investment

Real nonresidential fixed investment jumped 15.3 percent in the second quarter after increasing 3.0 percent in the first (table 3). Purchases of transportation equipment accounted for more than two-thirds of the second-quarter increase.

Factors that are frequently examined in analyzing business investment have sent mixed signals in recent quarters. The yield on new high-grade corporate bonds has fallen about one and one-half percentage points since mid-1989, but it held steady in the second quarter. Corporate profits, cash flow, and real final sales to domestic purchasers jumped in the first quarter of this year but increased much less in the second quarter. The capacity utilization rate in manufacturing has been fluctuating in a narrow range about 6 to 8 percentage points below its high point in early 1989. The results of the latest Census Bureau survey of plans for plant and equipment expenditures, released in early June, indicate that real spending in 1992 is expected to be 6.0 percent higher in 1992 than in 1991.

Structures decreased 4.0 percent in the second quarter after increasing 2.7 percent in the first. Nonresidential buildings decreased for the seventh consecutive quarter, but the decreases in

V the last two quarters were considerably smaller than those in the previous five. Industrial buildings decreased after a small increase. Commercial buildings, now at their lowest level since 1979, posted their tenth consecutive quarterly decrease.

Producers' durable equipment increased 24.4 percent in the second quarter after increasing 3.2 percent in the first. Much of the second-quarter increase was in transportation equipment, mainly in purchases of civilian aircraft. Information processing and related equipment increased a little more in the second quarter than in the first.

Residential investment

Real residential investment increased 8.9 percent in the second quarter (table 3). The increase was the fifth consecutive quarterly gain, and it followed a 20.1-percent increase in the first quarter. The second-quarter increased reflected increases in both single-family and multifamily construction; the "other" component of residential investment was unchanged.(2) [TABULAR DATA 3 OMITTED]

Single-family construction increased much less in the second quarter than in the first. The slowdown reflected a drop in single-family housing starts from 1.05 million (seasonally adjusted annual rate) in the first quarter to 0.99 million in the second (chart 2). Multifamily construction increased for the first time in 3 years.

In the "other" component, a small increase in improvements offset a small drop in brokers' commissions on house sales. House sales were slightly lower in the second quarter than in the first, despite a continued slide in mortgage interest rates (chart 3).

Inventory investment

Real inventory investment--that is, the change in business inventories--increased $21.8 billion in the second quarter, as businesses added $9.2 billion to inventories after reducing them $12.6 billion in the first quarter (table 4). Inventory investment had decreased $20.1 billion in the first quarter. The sharp upswing in inventory investment was accounted for by nonfarm inventories. [TABULAR DATA 4 OMITTED]

Nonfarm inventories increased $8.4 billion in the second quarter after decreasing $10.7 billion in the first. The turnaround was accounted for by wholesale and retail trade inventories.

Wholesale trade inventories increased $6.2 billion in the second quarter after decreasing $5.6 billion in the first. The upswing was mainly accounted for by merchant wholesalers of durable goods--particularly machinery, equipment, and supplies, motor vehicles and parts, and electrical goods. Inventories of merchant wholesalers of nondurable goods decreased in the second quarter after increasing in the first.

Retail trade inventories increased $11.4 billion in the second quarter after increasing $0.5 billion in the first. Inventories of nondurable goods increased after a decrease; most of the turnaround was in inventories of food stores and department stores. Inventories of durable goods increased more in the second quarter than in the first. Inventories held by retail auto dealers increased at about the same rate in the second quarter as in the first.

Manufacturing inventories decreased $7.1 billion in the second quarter, the fifth consecutive quarter of inventory reduction. Inventories of durable goods continued to decrease; the decreases in the past several quarters have been concentrated in inventories of transportation equipment (mainly aircraft), primary metals, and industrial equipment. Inventories of nondurable goods increased less in the second quarter than in the first.

Other nonfarm inventories decreased $2.1 billion in the second quarter. The decrease was another in a long series of reductions that was interrupted by a modest increase in the first quarter.

Farm inventories increased $0.7 billion in the second quarter after decreasing $1.9 billion in the first. Inventories of crops increased after a decrease; the upswing reflected both a pickup in crop output and a slowdown in open-market sales. Inventories of livestock decreased in both quarters; the second-quarter decrease reflected weakness in livestock output.

Reflecting the second-quarter increases in nonfarm inventories and in final sales of domestic businesses, the constant-dollar ratio of nonfarm inventories to final sales was unchanged at 2.58, the low end of the range of 2.58 to 2.64 of the last 3 years.

Net exports of goods and services

Real net exports decreased sharply in the second quarter after decreasing slightly in the first (table 5). The second-quarter decrease reflected a 0.9-percent decrease in exports and a 15.9-percent increase in imports. [TABULAR DATA 5 OMITTED]

The decrease in exports in the second quarter was due to services, which dropped 4.7 percent after increasing 8.9 percent. Merchandise exports increased 0.6 percent after increasing 0.8 percent. Agricultural exports decreased after increasing in the previous three quarters. Nonagricultural exports increased 1.7 percent, its seventh consecutive quarterly increase; exports of autos, capital goods (mainly computers), and nonautomotive consumer goods were up in the second quarter.

The sharp increase in imports in the second quarter was mainly due to merchandise, which increased 19.9 percent after increasing 4.9 percent. Imports of petroleum products jumped 43.4 percent after a small increase. Imports of nonpetroleum products increased 17.5 percent, up from a 5.2-percent increase; about two-thirds of the second-quarter increase was in nonautomotive capital goods. Imports of services decreased 2.8 percent after decreasing 3.2 percent.

Government purchases

Real government purchases decreased 0.6 percent in the second quarter after increasing 1.7 percent in the first (table 6). Federal Government purchases decreased for the fifth consecutive quarter; the decreases were more than accounted for by reductions in national defense purchases. State and local government purchases changed little in the second quarter after a substantial increase in the first. [TABULAR DATA 6 OMITTED]

Federal defense purchases decreased 3.7 percent in the second quarter after decreasing 7.7 percent in the first. The second-quarter decrease was spread across all types of purchases other than structures, but more than one-half of it was accounted for by a decrease in purchases of military hardware.

Federal nondefense purchases increased 3.3 percent in the second quarter after increasing 9.7 percent in the first. The slowdown was accounted for by both Commodity Credit Corporation inventory change and "other" nondefense purchases. "Other" nondefense purchases increased 2.6 percent in the second quarter, one-half as much as in the first; the slowdown was accounted for by structures, which decreased after a small increase.

State and local government purchases increased 0.1 percent in the second quarter after increasing 5.1 percent in the first. The slowdown was attributable to structures, which decreased after an unusually large increase.

Revisions

The preliminary second-quarter estimate of a 1.4-percent increase in real GDP is the same as last month's advance estimate (table 7). Substantial revisions in inventory investment and net exports were largely offsetting. An $8.2 billion upward revision in inventory investment primarily reflected the incorporation of newly available data for June on inventories of merchant wholesalers and of retailers. A downward revision of $8.8 billion in net exports was more than accounted for by a $12.9 billion upward revision in imports. About two-thirds of the upward revision in imports was accounted for by the incorporation of newly available data for June on merchandise trade; the remainder reflected corrections to import prices that are described below. [TABULAR DATA 7 OMITTED]

For real gross domestic purchases, the preliminary estimate of a 3.3-percent increase is 0.7 percentage point higher than the advance estimate. (Revisions in gross domestic purchase are generally not affected by revisions in exports and imports.)

The increase in the fixed-weighted price index for gross domestic purchases was revised up 0.1 percentage point. The increase in the fixed-weighted price index for GDP was revised up considerably more--1.0 percentage point. The large revision was mainly due to corrections to the prices of imported industrial materials and supplies and imported capital goods.

Corporate Profits

According to preliminary estimates, profits from current production--profits before tax plus inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj)--increased $6.6 billion in the second quarter after increasing $36.9 billion in the first (table 8). Profits from the domestic operations of nonfinancial corporations increased $16.6 billion after increasing $20.4 billion; both increases mainly reflected increases in unit profits. Profits from the domestic operations of financial corporations decreased $3.8 billion after increasing $10.7 billion, and profits from the rest of the world decreased $6.3 billion after increasing $5.8 billion. [TABULAR DATA 8 OMITTED]

Cash flow from current production, a profits-related measure of internally generated funds available to corporations for investment, increased $0.3 billion after increasing $25.5 billion. Cash flow as a percentage of nonresidential fixed investment decreased to 89.3 percent from 92.3 percent.

Profits by industry.--Profits before tax with IVA is the best measure of industry profits because estimates of the ccadj by industry are not available. According to this measure, profits arising from domestic operations of nonfinancial corporations increased $13.0 billion after increasing $11.4 billion. Manufacturing profits were up substantially after a similar gain in the first quarter. Trade profits were up substantially after decreasing. Both transportation and public utilities profits and "other" profits decreased after first-quarter increases.

Profits arising from domestic operations of financial corporations decreased $4.3 billion after increasing $10.4 billion. Decreases were widespread.

Profits from the rest of the world decreased $6.3 billion after increasing $5.8 billion. 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 second quarter, receipts decreased slightly and payments increased substantially.

Profits before tax (PBT) and related measures.--PBT increased $13.0 billion in the second quarter. The difference between this increase and the $6.6 billion increase in profits from current production reflects changes in the IVA and in the CCadj. The IVA is an estimate of inventory profits with the sign reversed. Inventory profits increased $10.5 billion, reflecting an upswing in prices of inventoried goods. The Producer Price Index, a major source for inventory prices, increased at an annual rate of 4.2 percent (not seasonally adjusted) in the second quarter after decreasing 1.0 percent in the first. CCadj is the difference between the predominantly tax-based depreciation measure that underlies PBT, on the one hand, and BEA's estimate of the consumption of fixed capital, on the other; the CCadj increased $4.1 billion in the second quarter.

Government Sector

The fiscal position of the government sector continued to deteriorate in the second quarter of 1992, but by less than in the preceding two quarters. The combined deficit of the Federal Government and of State and local governments increased $8.7 billion, to $281.3 billion, after a first-quarter increase of $36.0 billion (table 9). In the second quarter, the Federal Government deficit increased $10.4 billion, and the State and local surplus increased $1.7 billion. [TABULAR DATA 9 OMITTED]

Federal

The Federal Government deficit increased to $299.6 billion, as expenditures increased more than receipts.

Receipts increased $5.8 billion in the second quarter after increasing $13.9 billion in the first. The deceleration was attributable largely to a slowdown in contributions for social insurance.

Contributions for social insurance increased $4.0 billion after increasing $10.3 billion; the first-quarter increase was boosted by increases due to changes in four programs on January 1, 1992; Maximum taxable wages for social security, maximum taxable earnings for social security contributions by the self-employed, monthly medicare insurance premiums, and contributions for military retirement.

Corporate profits tax accruals increased $6.4 billion after increasing $8.9 billion; the deceleration reflected the pattern of corporate profits. Personal tax and nontax receipts declined $5.2 billion after declining $3.8 billion; the declines were due largely to a revision to the income-tax-withholding tables in March. Indirect business tax and nontax payments increased $0.6 billion after decreasing $1.6 billion; the turnaround was primarily attributable to customs duties, which increased $0.7 billion after decreasing $1.8 billion.

Expenditures increased $16.2 billion after increasing $44.4 billion. The deceleration was attributable largely to a sharp slowdown in transfer payments.

Transfer payments increased $5.4 billion after increasing $43.9 billion. Transfer payments to persons increased $8.0 billion after increasing $33.2 billion. The first-quarter increase was boosted significantly by cost-of-living increases in social security and other programs and by increases in benefits under the Emergency Unemployment Compensation Program enacted in November 1991. Transfer payments to the rest of the world decreased $2.6 billion after increasing $10.7 billion. Foreign transfers continued to reflect the flow of contributions from U.S. coalition partners for Operation Desert Storm, increasing $1.4 billion after decreasing $12.8 billion. These contributions, which peaked in the first quarter of 1991, are treated in the NIPA government sector as negative transfer payments. Other transfer payments to the rest of the world declined $1.2 billion in the second quarter after declining $2.1 billion in the first.

Purchases increased $0.4 billion after increasing $4.2 billion. The deceleration was in nondefense purchases; defense purchases decreased $1.3 billion after decreasing $1.1 billion. Nondefense purchases increased $1.7 billion after increasing $5.3 billion. The deceleration in nondefense purchases was largely attributable to the following: The Commodity Credit Corporation inventory change, which increased $0.6 billion after increasing $1.3 billion; compensation paid to Federal employees, which increased $0.1 billion after increasing $1.8 billion; and purchase by the National Aeronautics and Space Administration, which declined $0.4 billion after increasing $1.1 billion.

Among the other expenditures categories, grants-in-aid to State and local governments increased $9.0 billion after increasing $1.5 billion; the acceleration was largely attributable to medicaid grants, which increased $6.2 billion after decreasing $2.1 billion. Net interest paid increased $0.3 billion after decreasing $3.2 billion. Subsidies less the current surplus of government enterprises increased $1.1 billion after decreasing $2.0 billion; the upswing was attributable to agricultural subsidies.

State and local

The State and local government surplus increased to $18.3 billion, as receipts increased more than expenditures.

Receipts increased $16.7 billion in the second quarter after increasing $13.2 billion in the first. The acceleration was attributable to Federal grants-in-aid, which increased $9.0 billion after increasing $1.5 billion. Personal tax and nontax receipts increased $1.7 billion after increasing $1.0 billion. Indirect business tax and nontax accruals increased $3.6 billion after increasing $7.5 billion; must of the deceleration was in sales taxes, which reflected a sharp deceleration in retail sales. Corporate profits tax accruals increased $1.7 billion after increasing $2.5 billion; the slowdown reflected the pattern of corporate profits. Contributions for social insurance increased $0.7 billion in both quarters.

Expenditures increased $15.0 billion after increasing $18.6 billion. Purchases increased $6.0 billion after increasing $8.5 billion. The deceleration was more than accounted for by a downswing in purchases of structures, which decreased $1.0 billion after increasing $5.1 billion. The downswing in structures was partly offset by an acceleration in compensation of employees, which increased $7.3 billion after increasing $4.6 billion. All other expenditure categories combined increased $9.0 billion after increasing $10.1 billion. (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 1987 dollars and are based on 1987 weights. (2)The "other" component includes additions and alterations, major replacements, mobile home sales, broker's commissions on house sales, and residential equipment.
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Title Annotation:second quarter 1992
Author:Larkins, Daniel; Morris, Ralph W.; Webb, Michael W.
Publication:Survey of Current Business
Date:Aug 1, 1992
Words:3409
Previous Article:Personal income by state and region, first quarter 1992.
Next Article:National income and product accounts.
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