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The business situation.

Real gross domestic product (GDP), a measure of goods and services produced in the United States, increased 1.8 percent in the second quarter of 1993, up from a 0.8-percent increase in the first quarter (chart 1).(1) Real gross domestic purchases, a measure of goods and services purchased by U.S. residents, increased 2.8 percent, up slightly from a 2.5-percent increase in the first quarter. The fixed-weighted price index for gross domestic purchases increased 3.0 percent after increasing 3.5 percent.

National income and product account (NIPA) estimates for the first quarter of 1990 through the second quarter of 1993 have been revised as part of the annual revision that incorporates new and revised source data and methodologies. The revised estimates show somewhat stronger growth and slightly more inflation in the U.S. economy than was indicated by the previously published estimates. See "Annual Revision of the U.S. National Income and Product Accounts" in this issue.

The step-up in real GDP growth in the second quarter, though relatively modest, was broadly based. Production of goods other than motor vehicles and of structures turned up, and production of services increased more than in the first quarter; motor vehicle production, in contrast, turned down (table 1).

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The slight step-up in real gross domestic purchases reflected a sharp acceleration in final sales to domestic purchasers that was largely offset by a sharp slowdown in the rate of inventory accumulation (table 2). The following are highlights of the estimates of final sales.

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* Personal consumption expenditures increased much more than in the first quarter.

* Nonresidential fixed investment increased as much as in the first quarter, but residential investment decreased after a small increase.

* Government purchases rebounded from a sharp first-quarter decrease.

Personal consumption expenditures

Real personal consumption expenditures increased 3.2 percent in the second quarter after edging up 0.8 percent in the first (table 3). Expenditures for goods more than accounted for the step-up; expenditures for services increased less than in the first quarter.

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For the second consecutive quarter, the factors that are usually associated with changes in consumer spending sent mixed signals (chart 2).

Real disposable personal income increased 5.9 percent after falling 7.8 percent.(2) In contrast, the Index of Consumer Sentiment (prepared by the University of Michigan's Survey Research Center) fell sharply after increasing. The unemployment rate was 7.0 percent in both quarters.

Expenditures for durable goods jumped 10.8 percent after decreasing 1.3 percent. All major types of durable goods contributed to the upturn. Motor vehicles and parts jumped sharply after decreasing. Furniture and household equipment increased more than in the first quarter; the largest second-quarter increase was in consumer electronics, such as computers and televisions. "Other" durable goods (such as jewelry, books, sporting goods, and boats) turned up.

Expenditures for nondurable goods increased 2.6 percent after decreasing 2.1 percent. Food increased after a decrease; the increase was more than accounted for by purchased meals, as food purchased for off-premises consumption decreased. Clothing and shoes also increased after a decrease. "Other" nondurable goods increased more, and energy increased less, than in the first quarter.

Expenditures for services increased 1.7 percent after increasing 3.1 percent; the second-quarter increase was the smallest since the fourth quarter of 1991. The slowdown was accounted for by household operation, which decreased after increasing, and by medical care and "other" services, both of which increased less than in the first quarter. The decrease in household operation was accounted for by electricity and natural gas and reflected milder-than-normal spring weather. The slowdown in "other" services was accounted for by brokerage and investment counseling, which decreased after increasing sharply, this downturn was partly offset by upturns in recreation (largely in casino gambling and in motion picture admissions), in education and research, and in religious and welfare services. Transportation increased twice as much as in the first quarter, and housing increased about the same in both quarters.

Nonresidential fixed investment

Real nonresidential fixed investment increased 14.4 percent in the second quarter, the same rate as in the first (table 4). Structures increased more than in the first quarter, but producers' durable equipment increased less.

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Many of the factors that underlie investment spending were moderately favorable in the second quarter. The yield on new high-grade corporate bonds continued its downtrend, and the capacity utilization rate in manufacturing continued its uptrend. (However, the changes in both series were smaller than in the first quarter.) Real final sales of domestic product increased moderately, as it has in two of the three preceding quarters. Corporate profits (in current dollars) increased modestly, and cash flow relative to fixed investment remained high.

Structures increased 6.4 percent after edging up 0.5 percent. The second-quarter increase was the largest in more than 3 years. Most of the increase was in utilities and in mining exploration, shafts, and wells. Nonresidential buildings increased, but considerably less than in the first quarter; the second-quarter increase was accounted for by religious, educational, hospital, institutional, and miscellaneous structures. Commercial structures changed little; a slight slippage in office construction offset a small increase in other commercial construction. Industrial structures decreased.

Producers' durable equipment (PDE) increased 17.4 percent after increasing 19.9 percent. Information processing equipment and "other" PDE increased less than in the first quarter. The slowdown in information processing equipment was more than accounted for by computers; communications equipment, the second largest component of information processing equipment, rebounded from a first-quarter drop. The slowdown in "other" PDE was widespread. Both transportation equipment and industrial equipment increased more than in the first quarter. The step-up in transportation equipment was more than accounted for by autos, which increased after a slight decrease; purchases of trucks and of civilian aircraft increased less than in the first quarter.

Residential investment

Real residential investment decreased 8.4 percent in the second quarter after increasing 1.5 percent in the first. The downturn was accounted for by single-family construction. Multifamily construction decreased less than in the first quarter, and "other" residential investment was unchanged.

Single-family construction decreased 14.3 percent after increasing 24.2 percent. Single-family construction in a quarter is largely determined by housing starts in that quarter and in the preceding quarter. In the first two quarters of 1993, starts averaged 1.053 million units (annual rate), down from a combined average of 1.063 million for the fourth quarter of 1992 and the first quarter of 1993 (chart 3).

The second-quarter decrease in multifamily construction was relatively small. Weakness in the multifamily market continues to reflect very high rental vacancy rates.

"Other" residential investment was unchanged after decreasing, as a decrease in mobile home sales was offset by an increase in brokers' commissions.(3) The increase in brokers' commissions reflected somewhat stronger house sales. Sales of existing houses increased 1.4 percent (not an annual rate), and sales of new houses increased 10.5 percent. These increases in sales partly reflected a continued downtrend in mortgage interest rates (chart 4). The Housing Affordability Index, prepared by the National Association of Realtors, reflects the combined effects of median house prices, median family incomes, and mortgage rates; the index's upward trend continued in the second quarter, as the effects of higher incomes and lower mortgage rates more than offset the effect of higher prices.

Inventory investment

Real inventory investment - that is, the change in business inventories - decreased 15.4 billion in the second quarter, as inventory accumulation slowed to $13.9 billion from $29.3 billion (table 5). In contrast, inventory investment increased $20.6 billion in the first quarter.

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Nonfarm inventories increased 17.5 billion after increasing $29.3 billion. The slowdown was more than accounted for by a downturn in automotive inventories at the retail level.

Manufacturing inventories increased $4.2 billion after decreasing $0.8 billion. Inventories of durable goods increased after having decreased for 10 consecutive quarters; the increase was more than accounted for by electronic and industrial equipment. Inventories of nondurable goods increased less than in the first quarter.

Wholesale trade inventories increased 7.9 billion after increasing $0.7 billion. Inventories of durable goods - particularly those of motor vehicles and parts, electrical goods, and sports and recreation goods - increased after decreasing. Inventories of nondurable goods increased slightly less than in the first quarter.

Retail trade inventories increased $1.8 billion after increasing $24.0 billion. Retail automotive inventories decreased after a substantial increase; the decrease reflected strength in motor vehicle sales. Other retail trade inventories increased a little less than in the first quarter.

"Other" nonfarm inventories increased $3.6 billion after increasing $5.4 billion. (The "other" component consists mainly of inventories held by the mining, construction, public utilities, transportation, communication, and service industries.)

Farm inventories decreased $3.6 billion after no change. Inventories of crops decreased more than in the first quarter. Inventories of livestock decreased slightly after increasing.

The constant-dollar ratio of nonfarm inventories to all final sales of domestic businesses moved down to 2.50 in the second quarter from 2.51 in the first. A different ratio, in which final sales are limited to goods and structures, move down to 4.35 from 4.37. Both ratios are quite low by historical standards.(4)

Net exports of goods and services

Real exports increased 4.8 percent in the second quarter after decreasing 2.4 percent in the first. Real imports increased 13.1 percent after increasing 11.6 percent (table 6).

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Exports of merchandise turned up, but exports of services decelerated. Most of the strengthening in merchandise exports was accounted for by nonautomotive capital and consumer goods and by agricultural products. Within nonautomotive capital goods, exports of civilian aircraft and of computers turned up, the former more sharply than the latter. Within nonautomotive consumer goods, exports of durable and nondurable goods contributed equally to the strengthening. Exports of agricultural products increased slightly after a sharp decrease.

Imports of merchandise accelerated, and imports of services turned down. The acceleration in merchandise imports was more than accounted for by step-ups in imports of petroleum and products and of nonautomotive capital goods. In contrast, auto imports increased much less than in the first quarter.

Government purchases

Real government purchases increased 4.3 percent in the second quarter after decreasing 6.4 percent in the first (table 7). Federal Government purchases turned up, and purchases of State and local governments increased substantially more than in the first quarter.

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Federal defense purchases increased 2.0 percent after decreasing 21.4 percent; the decrease was the largest in the 21 years that constant-dollar defense purchases have been separately estimated in the NIPA's. The increase was spread across all types of purchases other than employee compensation, which decreased for the ninth consecutive quarter.

Federal nondefense purchases increased 5.9 percent after decreasing 3.2 percent. The increase was accounted for by purchases of services; both compensation of employees and "other" services increased.

State and local government purchases increased 5.0 percent after increasing 0.3 percent. The pickup was accounted for by purchases of structures, which increased after having decreased in the preceding four quarters; most types of structures contributed to the increase, but the increase in highway construction was especially large.

Corporate Profits

Profits from current production - profits before tax plus inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj) - increased $11.2 billion in the second quarter after decreasing $7.4 billion in the first (table 8). Profits from the domestic operations of nonfinancial corporations increased $13.2 billion after decreasing $22.0 billion. Profits from the domestic operations of financial corporations increased $1.4 billion after increasing $10.3 billion. Profits from the rest of the world decreased $3.5 billion after increasing $4.3 billion.

Cash flow from current production, a profits-related measure of internally generated funds

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Cash flow from current production, a profits-related measure of internally generated funds available to corporations for investment, increased $6.7 billion after decreasing $12.3 billion. As a percentage of nonresidential fixed investment, cash flow remained high, at 83.2 percent, though slightly below its first-quarter level.

Profits by industry. - Industry profits are measured by profits before tax (PBT) with IVA because estimates of the CCAdj by industry do not exist. In the aggregate, PBT plus IVA presents much the same picture of the second quarter as does profits from current production. For domestic operations, PBT with IVA increased $15.1 billion after decreasing $12.1 billion. The swing mainly reflected an upturn in profits of nonfinancial corporations. On the basis of preliminary and incomplete information, most of the upturn appears to be accounted for by durable goods manufacturing and wholesale trade. (Detailed estimates by industry will not be available until next month.)

As already noted, profits from the rest of the world decreased 3.5 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 second quarter shows receipts increasing $2.6 billion and payments increasing $6.1 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 large first-quarter decrease was due to an acceleration of bonus payments - that is, the payment in the fourth quarter of 1992 of year-end bonuses that typically would have been paid in the first quarter of 1993. The upswing in the second quarter reflected a return to more normal levels. See the section "Changes in methodology" in "Annual Revision of the U.S. National income and Product Accounts" in this issue.

(3.) The "other" component includes additions and alterations, major placements, sales of new mobile homes, brokers' commissions on house sales, and residential equipment.

(4.) The first ratio, in which the denominator consists of all final sales of domestic businesses, implies that the demand for inventories that results from the production of services is similar to the demand for inventories that results from the 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.
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Title Annotation:2nd quarter 1993
Author:Larkins, Daniel; Moran, Larry R.; Morris, Ralph W.
Publication:Survey of Current Business
Date:Aug 1, 1993
Words:2431
Previous Article:National income and product accounts.
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