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The business situation.

According to the "preliminary" estimates for the first quarter of 1993, real gross domestic product (GDP), a measure of goods and services produced in the United States, increased 0.9 percent; the "advance" first-quarter estimate, issued in April, had shown a 1.8-percent increase.(1) Real gross domestic purchases, a measure of goods and services purchased by U.S. residents, increased 2.7 percent, 0.5 percentage point more than April's estimate. The fixed-weighted price index for gross domestic purchases increased 3.5 percent, 0.1 percentage point more than April's estimate. (The "Revisions" section of this article discusses the sources of these revisions.) The 0.9-percent increase in real GDP in the first quarter represented a sharp deceleration from a 4.7-percent increase in the fourth quarter of 1992 (chart 1). The deceleration reflected slower growth in the production of goods and a down-turn in the production of structures; in contrast, the production of services increased a little more in the first quarter than in the fourth (table 1).

[TABULAR DATA OMITTED]

The 2.7-percent increase in real gross domestic purchases also represented a deceleration, from a 4.4-percent increase in the fourth quarter. (Unlike GDP, gross domestic purchases excludes exports of goods and services and includes imports of goods and services.) Growth in final sales to domestic purchasers slowed to 0.5 percent from 4.8 percent; inventory investment (that is, change in business inventories) increased sharply after a modest decrease.

The following are highlights of the final sales estimates:

* Personal consumption expenditures increased modestly after a substantial increase.

* Nonresidential fixed investment increased a little more in the first quarter than in the fourth, but residential investment edged down after a sharp increase.

* Government purchases decreased very sharply after a small decrease, as national defense purchases fell 25.9 percent, its biggest drop in the 21 years that constant-dollar defense purchases have been separately estimated in the national income and product accounts (NIPA'S).

Personal consumption expenditures

Real personal consumption expenditures (PCE) increased 1.2 percent in the first quarter after increasing 5.1 percent in the fourth (table 2). The slowdown was more than accounted for by goods (both durable and nondurable); in contrast, services increased more in the first quarter than in the fourth.

Factors usually associated with changes in consumer spending sent mixed signals in the first quarter (chart 2). Real disposable personal income increased, but substantially less than in the fourth quarter. The Index of Consumer Sentiment (prepared by the University of Michigan's Survey Research Center) reached its highest level in 11 quarters, but it increased only about half as much as in the fourth quarter. The unemployment rate gave an unambiguous signal, falling from 7.3 percent to 7.0 percent.

Expenditures for durable goods edged up 0.6 percent after increasing 14.0 percent. Purchases of new cars and trucks decreased after increasing sharply; the downturn at least partly reflected the expiration of sales-incentive programs. Furniture and household equipment increased much less than in the fourth quarter; consumer electronics accounted for more than one-half of the slowdown in household equipment. "Other" durable goods (such as jewelry, books, and sporting goods) increased after decreasing.

Expenditures for nondurable goods decreased 2.4 percent after increasing 6.8 percent. The downturn reflected downturns in food and in clothing and shoes and a deceleration in "other" nondurable goods. In contrast, energy increased slightly after decreasing.

Expenditures for services increased 3.4 percent after increasing 2.1 percent. The acceleration was widespread. In transportation services, air travel rebounded from a fourth-quarter drop that was associated with sharp fare hikes. In "other" services, brokerage and investment services increased sharply, reflecting record stock market activity and heavy investment in mutual funds. In contrast to the acceleration in many components, recreation turned down, reflecting a drop in motion picture admissions after a record fourth quarter.

Nonresidential fixed investment

Real nonresidential fixed investment increased 11.4 percent in the first quarter after increasing 9.7 percent in the fourth (table 3). Structures decreased about the same amount in the first quarter as in the fourth; producers' durable equipment increased more in the first quarter than in the fourth.

[TABULAR DATA OMITTED]

Factors that underlie investment spending, like those underlying PCE, have sent mixed signals in recent quarters. On the positive side, the yield on new high-grade corporate bonds decreased 50 basis points, continuing a downtrend that began more than 2 years ago. In addition, the capacity utilization rate in manufacturing increased almost 1 percentage point in the first quarter after fluctuating in a narrow range over the preceding four quarters. On the negative side, real final sales of domestic product decreased in the first quarter after increasing only slightly over the 2 preceding years. Additionally, corporate profits (in current dollars), which has been quite erratic in recent quarters, increased only a little in the first quarter after a large increase in the fourth.

Structures decreased 1.7 percent after decreasing 1.9 percent. The decrease was more than accounted for by nonresidential buildings and by mining exploration, shafts, and wells; utilities incregised. The decrease in nonresidential buildings - the tenth consecutive drop - was accounted for by commercial structures; industrial structures increased slightly.

Producers' durable equipment (PDE) increased 16.5 percent after increasing 14.5 percent. Information processing equipment and "other" PDE increased more than in the fourth quarter. The step-up in information processing equipment was more than accounted for by computers; communications equipment, instruments, and photocopy equipment decreased. The step-up in "other" PDE was more than accounted for by tractors and by agricultural equipment. Industrial equipment and transportation equipment both increased much less than in the fourth quarter. The deceleration in industrial equipment followed an unusually large increase in the fourth quarter - the largest increase in almost 9 years. The deceleration in transportation equipment was accounted for by trucks, which decelerated after a large increase, and by autos, which turned down; purchases of civilian aircraft turned up very sharply.

Residential investment

Real residential investment slipped 0.2 percent in the first quarter after increasing 25.1 percent in the fourth. Single-family construction decelerated, multifamily construction decreased more than in the fourth quarter, and "other" residential investment turned down.

Single-family construction increased 10.5 percent after increasing 30.8 percent. In any quarter, single-family construction is largely determined by housing starts in that quarter and in the preceding quarter. In the fourth quarter of 1992 and the first quarter of 1993, starts averaged 1.07 million (annual rate), up slightly from a third-fourth quarter average of 1.06 million; the second-third quarter average had been 1.00 million (chart 3).

Multifamily construction decreased for the third consecutive quarter and for the fourteenth time in fifteen quarters. The rental vacancy rate increased sharply in the first quarter, to 7.9 percent, its highest level in 6 years, after two quarterly decreases.

"Other" residential investment turned down, reflecting lower brokers' commissions.(2) Sales of existing houses decreased almost 9 percent (not an annual rate) in the first quarter, and sales of new houses decreased about 4 percent. The weakness in sales is consistent with an upturn in prices of existing houses and a deceleration in income growth. However, mortgage interest rates continued to decrease (chart 4). The Housing Affordability Index, prepared by the National Association of Realtors, combines the effects of prices, incomes, and interest rates; the index, which has been trending upward for several years, increased again in the first quarter, indicating that housing continued to become more "affordable."

Inventory investment

Real inventory investment - that is, the change in business inventories - increased $27.0 billion in the first quarter, as inventory accumulation picked up to $36.8 billion from $9.8 billion in the fourth quarter (table 4). In contrast, inventory investment had decreased $5.2 billion in the fourth quarter. The sharp upturn in inventory investment was accounted for by nonfarm inventories.

[TABULAR DATA OMITTED]

Nonfarm inventories increased $33.8 billion in the first quarter after increasing $5-6 billion in the fourth. The step-up was attributable to an upturn in manufacturing inventories and to faster accumulation of automotive inventories at the retail level.

Manufacturing inventories increased $1.4 billion after decreasing $14.5 billion. The turnaround reflected a slower reduction of durable goods inventories. (Inventories of durables have decreased for ten consecutive quarters). Inventories of nondurable goods increased about the same amount as in the fourth quarter.

Retail trade inventories increased $23.9 billion after increasing $12.0 billion. The step-up in automotive inventories reflected weakness in motor vehicle sales to consumers. Other retail inventories increased a little less than in the fourth quarter.

Wholesale trade inventories increased $1.9 billion after increasing $8.0 billion. Inventories of durable goods decreased - particularly machinery, equipment and supplies, electrical goods, and scrap and waste materials - after increasing. Inventories of nondurable goods increased less than in the fourth quarter.

"Other" nonfarm inventories increased $6.5 billion after increasing $0.2 billion. (The "other" component consists mainly of inventories held by the mining, construction, public utility, transportation, communication, and service industries.)

Farm inventories increased $3.0 billion after increasing $4.2 billion. Inventories of crops increased less than in the fourth quarter; inventories of livestock increased after a slight decrease.

The constant-dollar ratio of nonfarm inventories to all final sales of domestic businesses moved up to 2.56 in the first quarter from 2.53 in the fourth. A different ratio, in which final sales are limited to goods and structures, moved up to 4.50 from 4.42. In the fourth quarter, each ratio had been at its lowest point in several years; the first-quarter increases brought each ratio back to or near its level in the third quarter of 1992.(3)

Net exports of goods and services

Real exports decreased 2.6 percent in the first quarter after increasing 8.9 percent in the fourth; real imports increased 12.0 percent after increasing 5.7 percent (table 5).

[TABULAR DATA OMITTED]

Merchandise exports fell 6.3 percent after increasing 13.7 percent; all major end-use categories weakened. Nonautomotive capital goods, nonautomotive consumer goods, and "other" merchandise exports decreased after increasing. Foods, feeds, and beverages decreased more than in the fourth quarter, as did industrial supplies and materials. Autos increased much less than in the fourth quarter. Exports of services increased after decreasing.

Merchandise imports increased 12.0 percent after increasing 6.8 percent; much of the step-up was accounted for by an upturn in imports of nonautomotive consumer goods. Imports of foods, feed, and beverages and of petroleum and products also turned up. Auto imports increased more than in the fourth quarter. Imports of services increased substantiafly after no change.

Government purchases

Real government purchases decreased 7.3 percent in the first quarter after decreasing 2.6 percent in the fourth (table 6). Federal Government purchases decreased substantially more in the first quarter than in the fourth; the first-quarter decrease was more than accounted for by reductions in national defense purchases. State and local government purchases changed little after decreasing.

Federal defense purchases decreased 25.9 percent after decreasing 3.5 percent. Although the decrease was spread across all types of defense purchases, more than half of it was in purchases of services; within services, the largest decreases were in contractual research and development, installation support, and weapons support. Military equipment also dropped sharply; the largest decreases were in aircraft and missiles.

Federal nondefense purchases increased 5.2 percent after decreasing 7.6 percent. The increase was accounted for by purchases of durables and of services excluding compensation of employees. Compensation was unchanged for the third consecutive quarter.

State and local government purchases increased 0.2 percent after decreasing 1.1 percent. Purchases other than structures continued to increase slightly; structures continued to decrease.

Revisions

The preliminary first-quarter estimate of a 0.9-percent increase in real GDP is 0.9 percentage point less than the advance estimate issued in April (table 7). This revision is larger than usual; over the past 10 years, the average absolute revision from the advance estimate to the preliminary estimate has been 0.6 percentage point.

[TABULAR DATA OMITTED]

By far, the largest revision in any of the components of real GDP was in imports, at 23.4 billion; the revision primarily reflected the incorporation of newly available data that showed an unexpectedly large increase in merchandise imports in March. Downward revisions in government purchases and in residential investment also helped to lower the estimate Of GDP. The effect of these three revisions on GDP was only partly offset by upward revisions in nonresidential fixed investment, in exports, and in change in business inventories.

For real gross domestic purchases, the preliminary estimate of a 2.7-percent increase is 0.5 percentage point higher than the advance estimate. Revisions in gross domestic purchases are not affected by revisions in imports and exports.

For the fixed-weighted price index for gross domestic purchases, the preliminary estimate of a 3.5-percent increase is slightly higher than the advance estimate. For the fixed-weighted price index for GDP, the preliminary estimate of a 4.2-percent increase is the same as the advance estimate.

Corporate Profits

Profits from current production - profits before tax plus inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj) - increased $3.7 billion in the first quarter after increasing $54.4 billion in the fourth (table 8).

[TABULAR DATA OMITTED]

Profits from the domestic operations of nonfinancial corporations decreased $14.3 billion after increasing $43.0 billion; the decrease reflected a drop in unit profits that resulted when unit costs (labor and nonlabor) increased more than unit prices. In contrast to the drop in nonfinancial profits, profits from the domestic operations of financial corporations increased $3.3 billion after increasing $15.3 billion, and profits from the rest of the world increased $14.8 billion after decreasing $4.0 billion.

Cash flow from current production, a profits-related measure of internally generated funds available to corporations for investment, increased $6.1 billion after increasing $20.5 billion. In recent quarters, the ratio of cash flow to nonresidential fixed investment has been more than 90 percent, about 20 percentage points higher than its average level in the 1980's. This high level, which partly reflects relatively weak investment spending, suggests that investment could increase substantially before cash flow became a binding constraint.

Profits by industry. - Profits before tax (PBT) with IVA is the best measure of industry profits because estimates of the CCAdj by industry are not available. This measure presents much the same picture as does profits from current production. For the domestic operations of nonfinancial corporations, PBT With IVA decreased $17.3 billion after increasing $35.0 billion; for the domestic operations of financial corporations, it increased $3.5 billion after increasing $15.0 billion.

Detailed estimates by industry will not be available until next month. On the basis of preliminary and incomplete information, it appears that all major groups of nonfinancial industries were weak in the first quarter. Among financial corporations, profits of insurance carriers were reduced substantially by benefit payments in the wake of the storm on the East Coast in March.

Profits from the rest of the world increased $14.8 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. Preliminary and incomplete information for the first quarter shows receipts jumping $16.6 billion and payments increasing $1.9 billion. Much of the increase in receipts appears to have been accounted for by manufacturing and banking affiliates in the United Kingdom and by manufacturing affiliates in Canada.

PBT and related measures. - PBT increased $11.2 billion. The difference between the $3.7 billion increase in profits from current production and the $11.2 billion increase in PBT mainly reflected a decrease in the IVA.

The IVA is an estimate of inventory profits with the sign reversed. Inventory profits increased $10.3 billion, reflecting a step-up in the rate of increase in prices of inventoried goods. The Producer Price Index, a major source for inventory prices, increased at an annual rate of 1.7 percent (not seasonally adjusted) in the first quarter after no change in the fourth.

Government Sector

The fiscal position of the government sector improved for the second consecutive quarter, as the combined deficit of the Federal Government and of State and local governments decreased $14.7 billion, to $262.5 billion in the first quarter of 1993 (table 9). A $22.0 billion dollar decrease in the Federal Government deficit was partly offset by a $7.3 billion decrease in the State and local government surplus.

[TABULAR DATA OMITTED]

Federal

The Federal Government deficit decreased to $273.5 billion, as receipts increased and as expenditures decreased slightly.

Receipts. - Receipts increased $20.4 billion in the first quarter after increasing $37.7 billion in the fourth. The first-quarter increase was accounted for by personal tax and nontax receipts and by contributions for social insurance.

Personal tax and nontax receipts increased $11.1 billion after increasing $12.7 billion.(4) The first-quarter increase was mainly attributable to a large increase in declarations and net settlements of personal income taxes; the fourth-quarter increase reflected strong growth in wages and salaries. In the first quarter, declarations and net settlements increased $11.4 billion, largely as a result of an Executive Order effective in March 1992 that reduced withholding but not liability. This increase was partly offset by a decrease resulting from the annual indexing of withholding tables for inflation.

Contributions for social insurance increased $9.3 billion after increasing $7.3 billion. In the first quarter, contributions were boosted $2.0 billion by the annual indexing of the taxable wage base for social security and $1.9 billion by a rate increase for supplemental medical insurance.

Indirect business tax and nontax accruals increased $1.3 billion after increasing $4.5 billion. Business nontax payments decreased, following two extraordinary payments to the Federal Government in the fourth quarter: $1.7 billion (annual rate) for civil damage recovery settlements related to the savings and loan bailout and $0.3 billion (annual rate) for settlements for the Valdez oil spill. Excise taxes on tobacco increased $1.1 billion following no change in the fourth quarter; the increase reflected a 25-cents-per-pack increase due to a provision in the Omnibus Budget Reconciliation Act of 1990 that became effective January 1, 1993.

Corporate profits tax accruals decreased $1.4 billion after an increase of $13.2 billion. The decrease was attributable to a decrease in corporate profits from domestic operations.

Expenditures. - Expenditures decreased $1.6 billion in the first quarter after increasing $28.8 billion in the fourth. The downswing was more than accounted for by defense purchases.

Defense purchases decreased $13.9 billion after decreasing $1.4 billion. The first-quarter decrease was the largest in current-dollar defense purchases since 1965. The largest declines were in deliveries of aircraft and aircraft components and in purchases of services, primarily in research and development and in installation support.

Transfer payments increased $4.0 billion after increasing $18.8 billion. The deceleration was more than accounted for by transfer payments to the rest of the world, which decreased $9.3 billion after increasing S11.9 billion. The downturn followed unusually high disbursements to Israel in the fourth quarter. Transfer payments to the rest of the world continued to include disbursements by the U.S. Department of Defense for relief efforts in Somalia. Transfer payments to persons increased $13.2 billion after increasing $7.0 billion. Social security benefits (old-age, survivors, and disability insurance) increased 10.7 billion after increasing $2.2 billion; the acceleration was due to a cost-of-living adjustment that became effective January 1, 1993.

Subsidies less the current surplus of government enterprises increased $8.2 billion after increasing $12.0 billion. The deceleration was largely attributable to agricultural subsidies, which increased $8.0 billion after increasing $10.4 billion.

Grants-in-aid to State and local governments decreased $0.5 billion after increasing $4.7 billion. This downturn was mainly attributable to decreases in programs for social services and for food and nutrition, but it was also attributable to decelerations in many other programs.

Net interest paid decreased $3.0 billion for the second consecutive quarter. The first-quarter decrease was mostly attributable to gross interest paid for public debt, which decreased $2.3 billion as a result of lower interest rates.

State and local

The State and local government surplus decreased to $11.0 billion, as expenditures increased more than receipts.

Receipts increased $4.4 billion in the first quarter after increasing $19.2 billion in the fourth. Indirect business tax and nontax accruals increased $3.1 billion after increasing $8.1 billion; the deceleration was attributable mainly to sales tax collections, which reflected a slowing of retail sales. Federal grants-in-aid decreased $0.5 billion after increasing $4.7 billion (see the section on Federal Government expenditures). Corporate profits tax accruals decreased $0.2 billion after increasing $3.4 billion; the downturn reflected the decrease in corporate profits from domestic operations.

Expenditures increased $11.8 billion in the first quarter after increasing $10.0 billion in the fourth. In both quarters, most of the increase was accounted for by transfer payments to persons, which increased $7.9 billion after increasing $6.8 billion. The other expenditure categories combined increased $3.9 billion after increasing $3.2 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, new mobile home sales, brokers' commissions on house sales, and residential equipment. (3.) The first ratio, in which the denominator consists of all final sales of domestic businesses, implies that the production of services results in demand for inventories that is similar to the demand for inventories generated by thc production of goods and structures. The second ratio, in which the denominator consists of final sales of goods and structures, implies that the production of services does not generate any demand for inventories. Both implications are extreme. (4.) The increase in personal tax payments reflects BEA'S best estimate of quarterly change in withheld income taxes. The level of total personal tax and nontax receipts in table 9 includes a shortfall resulting from the 1992 revision of withholding tables. For further discussion, see "Federal Budget Estimates, Fiscal Year 1994," Survey of Current Business 73 (April 1991): 51.

Looking Ahead...

* Regional, and State Employment Projections. A comparison of BEA'S projections of regional and State employment growth for 1988-91 with the actual estimates will appear in the June Survey.

Recruitment...

* Associate Director for International Economics. BEA is recruiting for the position of Associate Director for International Economics. This is a career reserved position in tbe Senior Executive Service, salary range: $92,900-$115,700. The application deadline is June 30, 1993. Applicants must meet all requirements of the Senior Executive Service. To obtain the required application and qualification information, please contact the BEA Administrative Office, (202) 523-0508. BEA is an Equal Opportunity Employer.

Changes in BEA Release Schedules

BEA'S move this summer to a new location necessitates some changes in the release dates for the national income and product accounts (NIPA) estimates, the State personal income estimates, and the composite indexes of leading, coincident, and lagging indicators.

NIPA estimates

In June, the following changes are made to the NIPA release dates:

From To

Gross domestic product, first quarter

1993 (final) June 30 June 23

Corporate profits, first quarter 1993
 (revised) June 30 June 23
Personal income and outlays, May 1993 July 1 June 24


In July, the advance NIPA estimates for the second quarter will be released as scheduled; however, the annual revision of the NIPA'S, usually released in July, will not be released until August when the preliminary estimates are released.

In August, the following changes are made to the NIPA release dates:

From To

Gross domestic product, second

quarter 1993 (preliminary) Sept. 1 Aug. 31

Corporate profits, second quarter 1993
 (preliminary) Sept. 1 Aug. 31
Personal income and outlays, July 1993 Sept. 2 Sept. 1


Regional estimates

Because BEA'S regional estimates depend upon its national estimates, the rescheduling of the annual NIPA revision to August will cause the following changes in the scheduled dates for State personal income:

From To

State per capita personal income,

1992 (revised) Aug. 24 Oct. 7

State personal income, second quarter

1993 Oct. 21 Nov. 18

Composite indexes

As a result of the earlier release dates for the NIPA estimates and to accomodate users by avoiding a Friday release, the following change is made to the scheduled release dates for the composite indexes of leading, coincident, and lagging indicators:

From To

Composite indexes of leading,

coincident, and lagging

indicators, May 1993. July 2 June 29
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Title Annotation:first-quarter 1993
Author:Larkins, Daniel; Moran, Larry R.; Morris, Ralph W.; Webb, Michael W.
Publication:Survey of Current Business
Date:May 1, 1993
Words:4177
Previous Article:Total and per capita personal income by state and region.
Next Article:Gross product by industry, 1977-90.
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