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The business situation.

THE "FINAL" estimate of growth in real gross domestic product (GDP) for the second quarter of 1993 is 1.9 percent, 0.1 percentage point higher than the "preliminary" estimate reported in last month's Survey of Current Business (table 1).(1) Small upward revisions in nonresidential fixed investment and personal consumption expenditures (PCE) were partly offset by a small downward revision in exports of goods and services.

[TABULAR DATA 1 OMITTED]

The upward revision in nonresidential fixed investment was in producers' durable equipment (PDE) other than transportation equipment and computers and in structures. The upward revision in PCE was primarily in "other services" (largely in net foreign travel and brokerage commissions). The downward revision in exports of goods and services was primarily in travel services.

The final estimate of real gross domestic purchases shows a 3.1-percent increase, 0.3 percentage point higher than the preliminary estimate. The revision in gross domestic purchases was larger than the revision in GDP because revisions to exports and imports do not affect the estimates of gross domestic purchases.

The final estimates of the fixed-weighted price indexes for gross domestic purchases and for GDP show increases of 2.9 percent and 2.8 percent, respectively, little changed from the preliminary estimates.

Gross national product (GNP).--Real GNP increased 1.9 percent in the second quarter (table 2). GNP equals GDP plus receipts of factor income from the rest of the world less payments of factor income to the rest of the world. In the second quarter, receipts increased $6.7 billion, and payments increased $7.2 billion. For both receipts and payments, the increases were accounted for by profits and interest income.

[TABULAR DATA 2 OMITTED]

Real GNP on a command-basis increased at the same rate as real GNP--1.9 percent--reflecting little change in the terms of trade.(2) In the first quarter, command-basis GNP had increased more than GNP--1.9 percent, compared with 1.0 percent-reflecting an improvement in the terms of trade.

Corporate Profits

According to the "final" estimates, profits from current production--profits before tax plus inventory valuation adjustment (IVA) and capital consumption adjustment (CCADj)--increased $26.0 billion in the second quarter after decreasing $7.4 billion in the first (table 3). Profits from the domestic operations of nonfinancial corporations increased $22.9 billion after decreasing $22.0 billion; about three-fourths of the increase reflected an increase in unit profits, as unit prices increased and unit labor and nonlabor costs decreased. Profits from the domestic operations of financial corporations increased $4.0 billion after increasing $10.3 billion. Profits from the rest of the world decreased $0.9 billion after increasing $4.3 billion.

[TABULAR DATA 3 OMITTED]

Cash flow from current production, a profits-related measure of internally generated funds available to corporations for investment, increased $15.6 billion after decreasing $12.3 billion. As a percentage of nonresidential fixed investment, cash flow remained high, at 84.2 percent.

Profits by industry.--Industry profits are measured as profits before tax (PBT) With IVA because estimates of the CCADj by industry do not exist. For the aggregates of domestic financial and nonfinancial, PBT plus IVA presents much the same picture of the second quarter as does profits from current production. For domestic operations, profits increased $27.3 billion after decreasing $12.1 billion. The upswing reflected an upturn in profits of nonfinancial corporations that was accounted for by manufacturing and trade. In manufacturing, profits turned up in all durable-goods-producing industries except electronic and other electric equipment; the sharpest upturn was in motor vehicles. In nondurable-goods-producing industries, profits in petroleum refining increased more in the second quarter than in the first, but profits of food and chemical manufacturers turned down. In trade, most of the upturn was in profits in the wholesale part of the industry.

As already noted, profits from the rest of the world decreased $0.9 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. Both receipts and payments increased in the second quarter, but the increase in payments was larger. Receipts increased $4.7 billion; about two-thirds of the increase was accounted for by petroleum companies. Payments increased $5.6 billion; the increase was attributable to increases in most nonmanufacturing industries, and the largest increases were in petroleum and wholesale trade.

Revisions in profits and related measures.--The final" second-quarter estimates of profits show substantial revisions from the "preliminary" estimates published in last month's Survey (table 4).

[TABULAR DATA 4 OMITTED]

Much of the revision in profits from the domestic operations of nonfinancial corporations was accounted for by manufacturing, wholesale trade, and mining. For those industries, the preliminary estimates had been based on tabulations of a subsample of firms reporting to the Census Bureau for its Quarterly Financial Report; the final estimates are based on tabulations of the full sample.

Most of the revision in profits from the domestic operations of financial corporations was accounted for by casualty insurance. For this industry, the preliminary estimate was based on a judgmental trend; the final estimate is based on data from a trade association.

Most of the revision in profits from the rest of the world was accounted for by receipts from foreign affiliates of U.S. corporations. The preliminary estimate had been based on incomplete tabulations of receipts of dividends and reinvested earnings on U.S. investment abroad from BEA's direct investment surveys; the final estimate is based on more complete tabulations.

Estimates of profits and related series for 1990--were 92 revised as part of the annual revision of the national income and product accounts (NIPA's) that incorporates new and revised source data and methodologies. Most of the revised NIPA estimates were presented in last month's Survey; the rest appear in this issue.(3) The revised estimates underlie table 5, which presents selected rates of return and property income as a percentage of domestic income of domestic nonfinancial corporations. (Property income is composed of profits and net interest.) Most of the revisions were small. In general, the estimates for 1990 were revised down slightly, the estimates for 1991 were unchanged, and the estimates for 1992 were revised up slightly.

[TABULAR DATA 5 OMITTED]

Government Sector

The fiscal position of the government sector improved in the second quarter of 1993, as the combined deficit of the Federal Government and of State and local governments decreased $41.3 billion, to $221.5 billion (table 6). The Federal Government deficit decreased $40.9 billion, and the State and local government surplus increased $0.3 billion.

[TABULAR DATA 6 OMITTED]

Federal

The Federal Government deficit decreased to $222.6 billion, as receipts increased more than expenditures. The second-quarter decrease in the Federal deficit was the largest decrease since the first quarter of 1991.

Receipts.--Receipts increased $49.6 billion in the second quarter after decreasing $2.7 billion in the first. All categories of receipts contributed to the increase.

Personal tax and nontax receipts increased $18.6 billion after decreasing $9.7 billion. The increase was attributable mainly to a large increase in withheld personal income taxes. In the past three quarters, changes in withheld income taxes reflected the pattern of wages and salaries, which increased sharply in the fourth quarter, decreased in the first quarter, and increased in the second quarter. These changes in wages and salaries were largely due to the payment in the fourth quarter of 1992 of yearend bonuses that typically would have been paid in the first quarter of 1993.

Contributions for social insurance increased $16.4 billion after increasing $3.6 billion. The sharp second-quarter increase reflected the upturn in wages and salaries.

Corporate profits tax accruals increased $10.0 billion after an increase of $5.3 billion. The second-quarter increase was attributable to a large increase in corporate profits, primarily in the domestic profits of nonfinancial corporations. The first-quarter increase largely reflected retroactive provisions of the Revenue Reconciliation Act of 1993.

Indirect business tax and nontax accruals increased $4.7 billion after decreasing $2.0 billion. In the second quarter, business nontax payments, net customs duties, and net excise taxes all increased.

Expenditures.--Expenditures increased $8.7 billion in the second quarter after decreasing $3.4 billion in the first. In the second quarter, increases in most categories of expenditures were partly offset by a sharp decrease in subsidies.

Grants-in-aid to State and local governments increased $6.7 billion after decreasing $0.6 billion. This increase was mainly attributable to programs for social services and for education.

Purchases increased $4.8 billion after decreasing $9.7 billion. Defense purchases increased $2.8 billion after a $10.9 billion decrease, the largest in current-dollar defense purchases since 1965. Nondefense purchases increased $2.1 billion after increasing $1.2 billion.

Net interest paid increased $4.2 billion after decreasing $3.0 billion. The increase, the first in four quarters, was more than accounted for by a $4.9 billion increase in interest paid on the public debt.

Transfer payments increased $3.6 billion after increasing $0.3 billion. The second-quarter increase was more than accounted for by transfer payments to persons, which increased $3.8 billion; in the first quarter, transfer payments to persons jumped $11.8 billion, reflecting a cost-of-living adjustment that became effective January 1, 1993. Transfer payments to the rest of the world decreased $0.2 billion after decreasing $11.5 billion. The second quarter decrease reflected decreases in humanitarian assistance to Somalia; the first-quarter decrease followed unusually high disbursements to Israel in the fourth quarter.

Subsidies less the current surplus of government enterprises decreased $10.6 billion after increasing $9.7 billion. The decrease was largely attributable to agricultural subsidies, which decreased $7.9 billion after a $7.5 billion increase that reflected unusually large deficiency payments to farmers in March. (Deficiency payments make up the difference between support prices and market prices for farm commodities.)

State and local

The State and local government surplus edged up to $1.1 billion, as receipts increased slightly more than expenditures.

Receipts increased $20.8 billion in the second quarter after decreasing $1.4 billion in the first. Federal grants-in-aid increased $6.7 billion after decreasing $0.6 billion; the increase was mainly attributable to programs for social services and education. Personal tax and nontax payments increased $5.3 billion after decreasing $3.8 billion. Indirect business tax and nontax accruals increased $5.9 billion after increasing $1.9 billion. Reflecting the pattern of corporate profits, corporate profits tax accruals increased $2.3 billion after increasing $0.6 billion.

Expenditures increased $20.6 billion in the second quarter after increasing $11.4 billion in the first. In both quarters, most of the increase was accounted for by purchases, which increased $14.1 billion after increasing $5.6 billion. Within purchases, structures accounted for $7.4 billion of the second-quarter increase. Transfer payments to persons increased $6.9 billion after increasing $5.7 billion.

Looking Ahead...

* Evaluation of the GDP Estimates. The results of a periodic evaluation of the GDP estimates is scheduled to appear in the October or November Survey. The article will examine the record of revisions in the quarterly estimates in order to provide insights into their reliability and accuracy.

* Composite Indexes Revision. A revision of the composite indexes of leading, coincident, and lagging indicators from 1948 forward is scheduled to appear in the November Survey. This revision--which incorporates changes in the methodology used to compute the indexes, updated statistical factors, historical revisions in component data, and a shift to a 1987 base year--takes the place of the usual October annual revision of the indexes. An article previewing the revisions will appear in the October Survey.

Impact of the 1993 Floods and Drought

The national income and product accounts (NIPA's) reflect the effects of disasters such as this year's floods in the Midwest and drought in the Southeast. For the most part, these effects are embedded in the source data for the NIPA's; where they are not, BEA prepares adjustments to account for the effects. The adjustments for this year's natural disasters affect the estimates of gross domestic product (GDP), personal income, and other NIPA aggregates beginning with the third quarter (or July). For several reasons, BEA does not attempt to quantify the total impact of disasters such as the floods or the drought on these aggregates.1 The following paragraphs describe the adjustments that BEA has prepared thus far.

GDP.--The third- and fourth-quarter estimates Of GDP will reflect the adjustments to farm output for the effects of the floods and the drought. In constant (1987) dollars, these adjustments will reduce farm output by $7 1/2 billion (annual rate) in the third quarter and by $2 1/2 billion (annual rate) in the fourth.

The adjustments to farm output are based on the U.S. Department of Agriculture (USDA) forecasts of the physical quantity of farm output in 1993. To make the adjustments, BEA has assumed that the floods and drought are responsible for the difference between the june 1993 usda forecast, which reflects conditions before the floods and drought, and the August 1993 forecast, which reflects conditions afterward.' This difference indicates losses amounting to about $2 1/2 billion (in constant dollars) for the calendar year.

To spread this annual loss over the quarterly estimates, BEA has modified its normal procedure for calculating quarterly farm output. Normally, the current quarterly estimates are derived by interpolating between previous USDA annual estimates and the most recent usda forecast for the current year. Using this procedure with the August forecast would have spread the losses over all quarters of the year, thus yielding a quarterly pattern of farm output that would not have properly recorded the timing of the effects of the floods and drought.

To obtain the proper timing, BEA is making adjustments to the quarterly estimates of farm output based on the june forecast and the normal interpolation procedure, which would have allocated production equally among the four quarters. For the first and second quarters, no adjustments are made, because the losses were not "recognized" until the third quarter and because farmers incurred expenses for those crops that were subsequently destroyed. For the third quarter, an adjustment reduces farm output based on the June forecast by the sum of the value of farm output related to the destroyed crops recorded in the first two quarters and the value of farm output that would have been recorded in the third quarter had there been no disasters. For the fourth quarter, an adjustment reduces farm output based on the June forecast by the value of farm output that would have been recorded had there been no disasters. Thus, the adjustments allocate three-fourths of the annual loss to the third quarter and one-fourth to the fourth quarter. (These types of adjustments, which have been used in the past for other disasters, result in a treatment that is consistent with the approach used to treat losses of nonfarm inventories.)

The adjustments to farm output primarily affect GDP and the other NIPA aggregates through the change in farm inventories. The extent to which the losses affect the estimates of the change in farm inventories (as opposed to the estimates of the other components Of GDP in which the losses would be embedded) depends on the extent to which they affect sales; estimates of both current- and constant-dollar change in farm inventories are calculated by BEA as the difference between output and sales by farmers. BEA prepares estimates of quarterly sales on the basis Of USDA receipts from farm marketings, and it does not appear that the crop losses will affect sales until the fourth quarter. Consequently, the change in farm inventories will be reduced by the full $7 1/2 billion (annual rate) in the third quarter. In the fourth quarter, whereas GDP will be reduced by $2 1/2 billion (annual rate), the change in farm inventories will be reduced by a smaller amount that will depend on fourth-quarter sales.

Personal income.--The third-quarter estimates of personal income will reflect adjustments for crop losses due to the floods and drought and for the destruction by the floods of residential buildings and of structures and equipment owned by unincorporated businesses. The largest adjustment, about $10 billion (annual rate), will reduce farm proprietors' income to account for the crop losses. This adjustment is based on the reduction in farm output valued at current prices. A second adjustment, about $1 1/2 billion (annual rate), will reduce farm and nonfarm proprietors' income to account for unincorporated business property that was not insured. A third adjustment, about $2 billion (annual rate), will reduce rental income of persons to account for residential buildings that were not insured.

These adjustments have been incorporated into the personal income estimates for july and August.3 As a result, farm proprietors' income was reduced by $26 billion (annual rate) in july and by $3 billion (annual rate) in August. For July, rental income of persons was reduced by $7 billion, and nonfarm proprietors' income by $2 billion (annual rate). The monthly adjustments that account for the crop losses were based on the quarterly adjustments described previously and on the assumption that these losses were "recognized" in July.

Other NIPA aggregates.--The third-quarter estimates of national income, gross national income, and net national product will also reflect adjustments for the floods and drought. National income will be reduced by the adjustments to proprietors'' income and rental income of persons described previously. In addition, corporate profits may be adjusted downward to account for uninsured property losses. For gross national income, the reductions in business incomes 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 flood. Net national product will be reduced by the adjustment to the consumption of fixed capital. (1.) It is very difficult to determine the total impact of natural disasters on the aggregates. First, most of the effects are embedded in the source data. For example, if a disaster temporarily curtailed home construction, then the housing start data from the Census Bureau would be lower than it otherwise would have been; however, this effect cannot be easily separated from those of other factors that may also have influenced starts. Second, reductions in production and incomes in areas hit by the floods and drought may be at least partly offset by increases in production and incomes elsewhere in the United States. Third, production and incomes in the flooded areas may be boosted by rebuilding efforts. (2.) The June forecast was based on a survey of intended acreage plantings, which was conducted in March, and on projections of prospective yields. The August forecast was based on surveys of actual acreage planted and of prospective yields, which were conducted in late July and early August. (3.) The monthly estimates of personal income are found on page S-1 of the "Current Business Statistics" section of the Survey of Current Business.

(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 in 1987 weights. (2.) 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 values of receipts and of most payments of factor income are deflated by the implicit price deflator for net domestic product. In the estimation of command-basis GNP--a measure of U.S. production in terms of its purchasing power--the current-dollar values of exports of goods and services and of receipts of factor income are deflated by the implicit price deflator for imports of goods and services and payments of factor income. (3) See "National Income and Product Accounts Tables" (table 1.15 and 1.16) and "Fixed Reproductive Tangible Wealth, 1989-92" is this issue.
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Title Annotation:includes related article on the impact of floods and drought in 1993; 2nd quarter, 1993
Author:Moran, Larry R.; Larkins, Daniel; Webb, Michael W.
Publication:Survey of Current Business
Date:Sep 1, 1993
Words:3366
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