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The business situation.

The "final" estimate of growth in real gross domestic product (GDP) for the second quarter Of 1992 was 1.5 percent, 0.1 percentage point higher than the "preliminary" estimate reported in last month's Survey (table 1).(1) Small upward revisions were made in personal consumption expenditures, residential and nonresidential fixed investment, and net exports of goods and services; small downward revisions were made in government purchases and in the change in business inventories.

[TABULAR DATA OMITTED]

For real gross domestic purchases, the "Final" estimate to a 3.4-percent increase is also 0.1 percentage point higher than the "preliminary" estimate.

The "final" estimates of a 3.2-percent increase in the fixed-weighted price index for gross domestic purchases and of a 2.9-percent increase in the fixed-weighted price index for GDP reflect upward revisions of 0.3 percentage point in both indexes.

Gross national product (GNP). - Real GNP increased 0.7 percent in the second quarter (table 2). GNP equals plus receipts of factor income from the rest of the world less payments of factor income to the rest of the word. In the second quarter, receipts decreased and payments increased. About two-thirds of the increase in payments represented profits by U.S. affiliates of foreign corporations.

[TABULAR DATA OMITTED]

In the estimation of real GNP, the current-dollar value of exports of goods and services is deflated by export prices, the current-dollar value of imports of goods and services is deflated by import prices, and the current-dollar value of most factor income is deflated by the deflator for net domestic product. An alternative measure, command-basis GNP, reflects different deflation procedures. In the estimation of command-basis GNP, the current-dollar value of exports of goods and services and receipts of factor income is deflated by the implicit price deflator for imports of goods and services and payments of factor income. Thus, command-basis GNP measures U.S. production in terms of its purchasing power. In the second quarter, command-basis GNP increased less than GNP - 0.3 percent compared with 0.7 percent - reflecting a deterioration in the terms of trade; in the first quarter, command-basis GNP increased more than GNP - 4.3 percent compared with 3.6 percent - reflecting an improvement in the terms of trade.

Corporate Profits

Profits from current production - profits before tax plus inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj) - increased $4.4 billion in the second quarter after increasing $36.9 billion in the first (table 3). Profits from the domestic operations of nonfinancial corporations increased $20.5 billion, about the same amount as in the first quarter; in both quarters, unit profits increased, reflecting higher unit prices and lower unit labor and nonlabor costs. Profits from the domestic operations of financial corporations. decreased $8.4 billion after increasing $10.7 billion, and profits from the rest of the world decreased $7.7 billion after increasing $5.8 billion.

[TABULAR DATA OMITTED]

Cash flow from current production, a profits-related measure of internally generated funds available to corporations for investment, decreased $1.2 billion after increasing $25.5 billion. Cash flow as a percentage of nonresidential fixed investment decreased to 88.8 percent from 92.3 percent but remained high by historical standards; during the 1982-90 business cycle expansion, the ratio never rose above 83 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 $17.1 billion after increasing $11.4 billion.

Manufacturing profits increased $17.7 billion after increasing $10.0 billion. The largest increases were in motor vehicles, food, and "other nondurables," which largely reflected higher profits in printing and publishing and in apparel. Only electronic equipment and chemicals posted lower profits in the second quarter than in the first.

Profits in trade increased in the second quarter after decreasing in the first; most of the increase was at the wholesale level. Profits in transportation and public utilities decreased after an increase; much of the decrease was accounted for by railroads.

Profits arising from domestic operations of financial corporations decreased $8.8 billion after increasing $10.4 billion. Most of the decrease was accounted for by savings and loan associations and insurance companies.

Profits from the rest of the world decreased $7.7 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 were unchanged, and payments increased substantially. The increase in payments largely reflected higher payments by banking and trade affiliates.

Profits before tax (PBT) and related measures. - PBT increased $10.7 billion in the second quarter. The difference between this increase and the $4.4 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 $10.1 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 4.1 percent (not seasonally adjusted) in the second quarter after decreasing 1.1 percent in the first.

The CCAdj is the difference between the predominantly tax-based depreciation measure that underlies PBT and BEA'S estimate of the consumption of fixed capital. The CCAdj increased $3.7 billion in the second quarter after increasing $9.2 billion in the first.

(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.

Looking Ahead...

* Historical NIPA Estimates. National Income and Product Accounts of the United States: Volume 2, 1959-88 is now available from the U.S. Government Printing Office. This volume contains the complete set of NIPA estimates for 1959-88 resulting from the comprehensive revision released in December 1991. Volume 1, containing the complete set of NIPA estimates for 1929-58, will be available within the next few months. (For information on ordering volume 2, see the inside back cover of this issue.)

* Composite Indexes Revision. The annual revision of the composite indexes of leading, coincident, and lagging indicators will be presented in the October Survey. The indexes will be revised from 1987 forward to incorporate revised data for the component series.

Hurricanes Andrew and Iniki

The national income and product accounts (NIPA'S) are designed to fully reflect the impact of disasters such as Hurricane Andrew, which hit Florida and Louisiana in late August, and Hurricane Iniki, which hit Hawaii in mid-September. Most of the effects of these hurricanes are reflected in the source data for the NIPA'S, and BEA prepares adjustments to certain components to account for the rest of the hurricanes' effects. The effects of these adjustments on personal income and outlays, gross domestic product (GDP), and other NIPA aggregates are described in the following paragraphs; however, BEA Will not attempt to quantify the total impact of the hurricanes on these aggregates.(1)

Personal income and outlays. - The third-quarter estimates of personal income and outlays will reflect adjustments that were made to the monthly estimates for August and adjustments that will be made to the September estimates.(2) (These adjustments are based primarily on preliminary information from an insurance industry trade association and are subject to revision as more complete information becomes available.)

For August, three adjustments were made to personal income and two to personal outlays. In personal income, the largest adjustment was to account for the destruction of residential dwellings and of structures and equipment owned by unincorporated businesses. This destruction of property reduces the rental income of persons and the proprietors' income components to the extent that the property was not insured. BEA has estimated that these uninsured losses reduced rental income of persons by about $46 billion at an annual rate and proprietors' income by about $7 billion at an annual rate.(3) The second adjustment was to account for the destruction of crops, which reduced farm proprietors' income by about $2 billion. The third adjustment was to account for work interruptions, which reduced wages and salaries by about $5 billion. This adjustment was necessary because the regular source data on employment, hours, and earnings are from the Bureau of Labor Statistics monthly establishment survey, which covers the mid-month pay period; thus, for August, these data did not reflect the work interruptions that resulted from Hurricane Andrew. In personal outlays, the property insurance component of personal consumption expenditures (PCE) was adjusted downward by about $15 billion. This component is defined as premiums less benefit payments, and payments were adjusted upward to reflect insured losses of personal property and motor vehicles. There was also a slight downward adjustmentto PCE to reflect lost rental payments due to the destruction of rental and owner-occupied housing units.

For September, further adjustments will be made to personal income and to personal outlays, mainly to account for the effects of Hurricane Iniki. In personal income, rental income of persons and proprietors' income will be reduced to reflect uninsured losses, and farm proprietors' income will be reduced to the extent that the destruction of crops will lower sales in September. In personal outlays, PCE will be adjusted downward to reflect lost rental payments due to the destruction of rental and owner-occupied housing, units by both hurricanes. Adjustments for payments of property insurance benefits will be made only for damages due to Hurricane Iniki; further adjustments for Hurricane Andrew will not be necessary because such benefits are recorded only in the period in which the loss occurs, regardless of when the payments are actually made.

GDP. - The third-quarter estimate of GDP will be affected by the adjustments to PCE described above. In addition, imports of services will be adjusted downward to the extent that domestic insurers have reinsurance policies with foreign insurers. As in PCE, imports of insurance services are defined as premiums less benefit payments. (The adjustments to the insurance services components of PCE and imports are made only to current-dollar estimates; no adjustments are made to the corresponding constant-dollar estimates because these estimates are based only on premiums paid.)

Other NIPA aggregates. - The third-quarter estimates of national income, gross national income, and net national product will also reflect adjustments for the two hurricanes.(4) National income will be reduced by the adjustments, described above, to proprietors' income, rental income of persons, and wages and salaries. In addition, corporate profits will be adjusted downward to account for uninsured property losses and to reflect the payments of all benefits related to hurricane damage, except those reinsured with foreign carriers.(5) For gross national income, the reductions in business incomes (except for the payments to persons for losses to personal property and motor vehicles and for the amount reinsured abroad) will be offset by an upward adjustment in consumption of fixed capital; this adjustment reflects the writing off of the depreciated (or net) value of plant and equipment destroyed by the hurricanes. Net national product will be reduced by the adjustment to the consumption of fixed capital.

(1.) For several reasons, it would be very difficult to determine the total impact of hurricanes Andrew and Iniki on the NIPA aggregates. First, most of the effects are embedded in the source data and cannot easily be separated. Second, as in previous disasters, reductions in production and incomes in the areas hit by the two hurricanes may be at least partly offset by increases in production and incomes elsewhere in the United States. Third, production and incomes in the damaged areas may be boosted by subsequent rebuilding efforts.

(2.) The monthly estimates of personal income and outlays are found on page S-1 of the "Current Business Statistics" section of this issue.

(3.) All subsequent dollar amount are also expressed at annual rate.

(4.) See table 1.9 of the "Selected NIPA Tables" for the relationship between GDP, net domestic product, gross national income, national income, and personal income.

(5.) As usual, the initial third-quarter estimates of corporate profits - and thus of gross national income and national income - will be released in late November as part of the "preliminary" NIPA estimates.
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Title Annotation:includes related article on effects of Hurricanes Andrew and Iniki; second quarter 1992
Author:Larkins, David
Publication:Survey of Current Business
Date:Sep 1, 1992
Words:2062
Previous Article:U.S. direct investment abroad: detail for historical-cost position and balance of payments flows, 1991.
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