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The business situation.

According to the "preliminary" estimates for the fourth quarter Of 1992, real gross domestic product (GDP), a measure of goods and services produced in the United States, increased 4.8 percent; the "advance" fourth-quarter estimate, issued in January, had shown a 3.8 percent increase (chart 1).(1) Real gross domestic purchases, a measure of goods and services purchased by U.S. residents, increased 4.3 percent, 0.4 percentage point more than january's estimate. The fixed-weighted price index for gross domestic purchases increased 2.8 percent, the same as January's estimate. (The "Revisions" section of this article discusses the sources of these revisions.)

The fourth-quarter increase in real GDP followed a smaller third-quarter increase (table 1). The step-up reflected upturns in the output of motor vehicles and of structures; the output of goods other than motor vehicles increased about the same amount in the fourth quarter as in the third, and the output of services increased less in the fourth quarter than in the third. The upturn in motor vehicle output was mostly accounted for by trucks. The upturn in the output of structures was mostly accounted for by residential construction. GDP excluding motor vehicles and structures increased 3.7 percent in the fourth quarter after increasing 4.6 percent in the third. [TABULAR DATA 1 OMITTED]

As noted in last month's "Business Situation," the effect on fourth-quarter GDP of rebuilding in the aftermath of Hurricanes Andrew and Iniki cannot be precisely determined, because the effects are largely embedded in the source data. However, the effects are likely to be very small.

The 4.8-percent increase in real GDP in the fourth quarter is the largest increase in the seven quarters of the current business cycle recovery--indeed, it is the largest increase since the fourth quarter of 1987--but it is not large in comparison with increases in other business cycle recoveries. In the six other recoveries since 1950 that lasted at least as long as the current recovery, the average annual rate of growth in the first seven quarters was 5.0 percent. Not only is this average higher than the increase in the fourth quarter, it is more than twice the 2.3-percent average rate in the current recovery.

In gross domestic purchases, the 4.3-percent increase in the fourth quarter was about the same as the increase in the third quarter. (Unlike GDP, gross domestic purchases excludes exports of goods and services and includes imports of goods and services.) Inventory investment--that is, the change in business inventories--decreased moderately in the fourth quarter after increasing moderately in the third. Personal consumption expenditures and fixed investment increased more in the fourth quarter than in the third; government purchases turned down.

Personal consumption expenditures

Real personal consumption expenditures (PCE) increased 4.8 percent in the fourth quarter after increasing 3.7 percent in the third (table 2). Expenditures for both durable and nondurable [TABULAR DATA 2 OMITTED]

The increase in fourth-quarter PCE was consistent with improvement in several of the determinants of consumer spending (chart 2). Real disposable personal income increased 4.4 percent in the fourth quarter, the largest increase in nearly 5 years. The unemployment rate fell to 7.3 percent, the lowest rate in three quarters. The Index of Consumer Sentiment (prepared by the University of Michigan's Survey Research Center) jumped to its highest level in 2 1/2 years.

Expenditures for durable goods increased 14.0 percent in the fourth quarter after increasing 9.4 percent in the third. The step-up reflected an upturn in motor vehicles and parts that was largely accounted for by new domestic cars and new trucks. Furniture and household equipment increased somewhat less in the fourth quarter than in the third, though in both quarters the increases were substantial and widespread. "Other" durable goods turned down in the fourth quarter after a sharp increase in the third.

Expenditures for nondurable goods increased 6.7 percent in the fourth quarter after increasing 2.5 percent in the third. Food (especially purchased meals and beverages) and "other" nondurable goods more than accounted for the step-up. Clothing and shoes increased one-half as much in the fourth quarter as in the third, and energy decreased somewhat more in the fourth quarter than in the third.

Expenditures for services increased 1.6 percent in the fourth quarter after increasing 3.1 percent in the third. The slowdown was widespread, with transportation contributing the most. Transportation decreased in the fourth quarter after increasing in the third; purchases of airline services decreased as large fare discounts that had been offered in the third quarter ended. Housing, household operation, and medical care all slowed by about equal amounts. "Other" services increased more in the fourth quarter than in the third; a sharp increase in brokerage commissions reflected heavy stock market activity in November and December.

Nonresidential fixed investment

Real nonresidential fixed investment increased 9.9 percent in the fourth quarter after increasing 3.1 percent in the third (table 3). Structures decreased substantially less in the fourth quarter than in the third; producers' durable equipment increased more in the fourth quarter than in the third. [TABULAR DATA 3 OMITTED]

Factors that underlie investment spending have sent mixed signals in recent quarters. The yield on new high-grade corporate bonds increased in the fourth quarter but was, nevertheless, about 75 basis points lower than a year earlier. Real final sales of domestic product increased sharply in the fourth quarter after having increased little over the preceding five quarters. The capacity utilization rate in manufacturing increased in the fourth quarter, but it remained somewhat below its cyclical peak.

Structures decreased 1.1 percent in the fourth quarter after decreasing 11.3 percent in the third. Decreases in nonresidential buildings and in "other" structures were partly offset by increases in utilities and in mining exploration, shafts, and wells. The small decrease in nonresidential buildings was the ninth consecutive drop; the fourth-quarter level was 31.0 percent below the level of the third quarter of 1990. The decrease in "other" structures followed relatively large increases in the preceding three quarters.

Producers' durable equipment increased 14.4 percent in the fourth quarter after increasing 9.5 percent in the third. Transportation equipment

Producers' durable equipment increased 14.4 percent in the fourth quarter after increasing 9.5 percent in the third. Transportation equipment rebounded from a sharp third-quarter drop; purchases of trucks increased more in the fourth quarter than in the third, purchases of autos turned up, and purchases of aircraft steadied after a sharp drop. Industrial equipment posted its biggest increase in almost 9 years. Information processing equipment increased much less in the fourth quarter than in the third.

Residential investment

Real residential investment increased 26.1 percent in the fourth quarter after changing little in the third. Single-family construction and the "other" component of residential investment accounted for the acceleration.

Single-family construction increased sharply in the fourth quarter after increasing modestly in the third. The fourth-quarter increase reflected an increase in housing starts in the second half of 1992; single-family starts increased 8.4 percent (not annual rate) in the fourth quarter after increasing 3.2 percent in the third (chart 3). A shift to larger units and to units with more amenities also contributed to the increase in single-family construction in the fourth quarter.

Multifamily construction decreased for the second consecutive quarter and for the thirteenth time in fourteen quarters. Vacancy rates remained high.

The "other" component of residential investment increased sharply, partly reflecting increased brokers' fees.(2) Sales of existing houses jumped about 14 percent (not an annual rate) in the fourth quarter; sales of new houses, which posted a similar jump in the third quarter, changed little in the fourth. The relatively high level of house sales reflected increased incomes and modest inflation in house prices; it also reflected mortgage interest rates that were at, or near, their lowest levels in years (chart 4). In the Housing Affordability Index prepared by the National Association of Realtors, these three factors are combined.(3) The index has increased steadily for 3 years; in the fourth quarter Of 1992, housing was "more affordable" than at any time in 15 years.

Inventory investment

Real inventory investment--that is, the change in business inventories--decreased $5.1 billion in the fourth quarter, as inventory accumulation slowed to $(9.9 billion from $15.0 billion in the third quarter (table 4). In contrast, inventory investment had increased $7.2 billion in the third quarter. [TABULAR DATA 4 OMITTED]

Nonfarm inventories increased $5.7 billion in the fourth quarter after increasing $9.6 billion in the third. The slowdown was more than accounted for by a sharp downswing in manufacturing inventories. Manufacturing inventories decreased $16.7 billion in the fourth quarter after increasing $ 3.9 billion in the third. (The third-quarter increase had interrupted a long series of decreases.) Inventories of durable goods decreased for the ninth consecutive quarter; the fourth-quarter decrease was substantial. All categories of durable goods inventories decreased; the largest decreases were in motor vehicles, other transportation equipment, and instruments. Inventories of nondurable goods increased less in the fourth quarter than in the third.

Wholesale trade inventories increased $10.6 billion in the fourth quarter after decreasing $2.3 billion in the third. Inventories of nondurable goods increased after a decrease; most of the turnaround was in inventories of farm products and of petroleum and products. Inventories of durable goods increased more in the fourth quarter than in the third.

Retail trade inventories increased $11.5 billion in the fourth quarter after increasing $9.7 billion in the third. Retail inventories other than those held by auto dealers increased somewhat more in the fourth quarter than in the third, largely reflecting stepped-up accumulations in apparel stores and in furniture and appliance stores. Inventories held by auto dealers increased about the same amount in the fourth quarter as in the third.

Farm inventories increased $4.2 billion in the fourth quarter after increasing $5.3 billion in the third. Inventories of crops increased the same amount in both quarters. Inventories of livestock decreased slightly after an increase; the downswing reflected a pickup in open-market sales.

Despite the fourth-quarter increase in nonfarm inventories, the ratio of nonfarm inventories to final sales of domestic business fell from 2.57 in the third quarter to 2.53 in the fourth. An alternative measure, the ratio of nonfarm inventories to final sales of goods and structures, fell from 4.51 to 4.41. Both fourth-quarter levels are somewhat below the range in which the ratios have fluctuated in the past few years.

Net exports of goods and services

Real exports increased 9.8 percent in the fourth quarter after increasing 9.2 percent in the third; real imports increased 5.7 percent after increasing 14.8 percent (table 5). [TABULAR DATA 5 OMITTED]

The small step-up in exports in the fourth quarter was more than accounted for by nonautomotive capital goods--especially civilian aircraft, engines, and parts. Autos and nonautomotive consumer goods increased, but somewhat less than in the third quarter. Agricultural products decreased in the fourth quarter after a strong third-quarter increase that reflected a record high level of soybean exports. Exports of services edged down in the fourth quarter after little change in the third.

The slowdown in imports was mainly accounted for by nonpetroleum products. Nonautomotive consumer goods decreased in the fourth quarter after a sharp increase in the third, and nonautomotive capital goods (especially computers, peripherals, and parts) increased substantially less in the fourth quarter than in the third. Imports of services, which also contributed to the slowdown in imports, increased less in the fourth quarter than in the third.

Government purchases

Real government purchases decreased 2.1 percent in the fourth quarter after increasing 3.8 percent in the third (table 6). Both Federal Government purchases and State and local government purchases contributed to the downswing. [TABULAR DATA 6 OMITTED]

Federal defense purchases decreased 2.1 percent in the fourth quarter after increasing 8.3 percent in the third. The decrease was accounted for by purchases of nondurable goods, mainly petroleum products, and by purchases of services. Within services, compensation of employees decreased again, reflecting reductions in the number of military personnel.

Federal nondefense purchases decreased 8.6 percent in the fourth quarter after increasing 5.5 percent in the third. Federal nondefense purchases excluding Commodity Credit Corporation (CCC) inventory transactions decreased 9.7 percent after increasing 2.6 percent. The decrease was accounted for by purchases of structures and of services. The level of CCC inventories increased $1.2 billion after increasing $0.9 billion.

State and local government purchases decreased 0.8 percent in the fourth quarter after increasing 1.4 percent in the third. The downswing was attributable to structures, mainly construction of school buildings and highways.

Revisions

The preliminary fourth-quarter estimate of a 4.8 percent increase in real GDP is 1.0 percentage point higher than the advance estimate issued in January (table 7). This revision is larger than usual; in 32 of the past 40 quarters, revisions from the advance estimate to the preliminary estimate were less than 1.0 percentage point. (The average revision was about 0.5 percentage point.) [TABULAR DATA 7 OMITTED]

Among the components of real GDP, the largest revision was in exports $8.3 billion) and primarily reflected the incorporation of newly available data on merchandise trade in December. A 4.1 billion upward revision in personal consumption expenditures primarily reflected revised data on retail sales of nondurable goods in November and December. Change in business inventories was revised up $2.7 billion. For motor vehicle inventories, an upward revision mainly reflected revised data for December; for manufacturing and trade inventories other than motor vehicles, an upward revision reflected revised data for November and the incorporation of newly available data for December.

Partly offsetting these upward revisions in GDP, imports was revised up $1.6 billion, mainly reflecting the incorporation of newly available data on merchandise trade in December. Residential investment was revised down $1.2 billion on the basis of revised data on construction put in place in November and the incorporation of newly available data on construction in December. Government purchases was revised down $0.9 billion, mainly reflecting the incorporation of newly available data on Federal outlays in December.

For real gross domestic purchases, the preliminary estimate of a 4.3-percent increase is 0.4 percentage point higher than the advance estimate. This revision is smaller than the revision in GDP because revisions in gross domestic purchases are not affected by revisions in net exports.

For the fixed-weighted price index for gross domestic purchases, the preliminary estimate of a 2.8-percent increase is the same as the advance estimate. For the fixed-weighted price index for GDP, the preliminary estimate of a 2.9-percent increase is 0.3 percentage point lower than the advance estimate. (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, new mobile home sales, brokers' commissions on house sales, and residential equipment. (3.) This index is calculated by dividing median family income by the level of income needed to qualify for a mortgage loan to purchase a median-priced existing single-family house at current mortgage interest rates. ("Qualifying" income is estimated on the basis of lending requirements of the Federal National Mortgage Association using a 20-percent downpayment.)
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Title Annotation:economic indicators for fourth quarter 1992
Author:Larkins, Daniel; Moran, Larry R.; Morris, Ralph W.
Publication:Survey of Current Business
Date:Feb 1, 1993
Words:2613
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