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The business situation.

Real gross domestic product (GDP), a measure of goods and services produced in the United States, increased 2.7 percent in the third quarter, according to the "preliminary" estimates of the national income and product accounts (NIPA's) released December 1; the "advance" estimates of the NIPA's, issued October 28, had shown very nearly the same increase.(1) Real gross domestic purchases, a measure of goods and services purchased by U.S. residents, increased 3.6 percent, 0.4 percentage point more than the advance estimate. The fixed-weighted price index for gross domestic purchases increased 1.8 percent, the same as the advance estimate. (The "Revisions" section of this article discusses the sources of these revisions.)

The 2.7-percent increase in real GDP in the third quarter represented an acceleration from a 1.9-percent increase in the second (chart 1). Services, structures, and goods other than motor vehicles all contributed to the acceleration (table 1). In contrast, motor vehicles decreased much more than in the second quarter, as auto output dropped sharply after a modest increase. (For a discussion of motor vehicles during the past year, see "Motor Vehicles, Model Year 1993" in this issue.)

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Farm product decreased sharply. Most of the decrease was due to floods in the Midwest and drought in the Southeast. The Bureau of Economic Analysis does not attempt to quantify the total impact of disasters, such as floods and drought, but it does adjust for the effects of disasters when these effects are not adequately captured in the source data. Adjustments were prepared for the effects of the floods and drought on farm output (and on several components of personal income), as follows: The U.S. Department of Agriculture issued a forecast of the 1993 physical quantity of farm output in June 1993 and another - substantially lower - forecast in August 1993. The difference between the two forecasts was assumed to reflect the effects of the floods and drought. Three-fourths of these effects, or $7.5 billion, were allocated to the third quarter and were assumed to take the form of a reduction in crop inventories; the remainder of the effects was allocated to the fourth quarter.(2)

The 3.6-percent increase in real gross domestic purchases also represented an acceleration, from a 3.1-percent increase in the second quarter (table 2). The acceleration was accounted for by the change in business inventories, which subtracted $7.5 billion from the change after subtracting about twice as much from the second-quarter change. Inventory accumulation slowed to $5.5 billion from $13.0 billion. The slowing was mostly accounted for by farm inventories; nonfarm inventories increased about as much as in the second quarter.

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Growth of final sales to domestic purchasers slowed slightly to 4.2 percent from 4.4 percent. The following are highlights of the estimates of final sales:

* Nonresidential fixed investment increased only about half as much as in the second quarter; the slowdown mainly reflected a sharp downturn in purchases of transportation equipment.

* Government purchases increased only a little after a moderate gain; national defense purchases turned down, and Federal nondefense purchases, along with purchases of State and local governments, slowed.

* Personal consumption expenditures stepped up; purchases of energy products were strong.

* Residential investment rebounded from a second-quarter drop; the rebound reflected upturns in single-family and multifamily construction and a step-up in "other" residential investment.

Exports and imports are the link between goods and services produced in the United States (GDP) and goods and services purchased by U.S. residents (gross domestic purchases). Exports - produced in the United States but purchased abroad - decreased in the third quarter after increasing in the second. Imports - produced abroad but purchased by U.S. residents - increased less than half as much as in the second quarter.

Personal consumption expenditures

Real personal consumption expenditures (PCE) increased 4.4 percent in the third quarter after increasing 3.4 percent in the second (table 3). The pickup was more than accounted for by services and nondurable goods - mainly energy products in both cases. Durable goods increased less than in the second quarter.

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Three of the factors that underlie consumption spending are shown in table 2. Real disposable personal income increased only 1.3 percent after increasing 5.8 percent.(3) The Index of Consumer Sentiment (prepared by the University of Michigan's Survey Research Center) decreased, as it had in the second quarter. In contrast to these negatives, the unemployment rate fell to 6.7 percent, its lowest level since the first quarter of 1991 (chart 2).

Expenditures for services increased 4.0 percent after increasing 2.1 percent. Most of the step-up was accounted for by a sharp upturn in household operation - primarily in electricity and gas. The upturn reflected spending for air conditioning, which jumped in the warmer-than-normal third quarter after falling in the cooler-than-normal second quarter. "Other" services, medical care, and housing also contributed to the step-up in services. In contrast, transportation services increased less than in the second quarter, as consumers responded to an upturn in air fares.

Expenditures for nondurable goods increased 3.7 percent after increasing 2.7 percent. Fuel oil and coal turned up; gasoline and oil accelerated. Food also accelerated. Clothing and shoes increased about as much as in the second quarter, and "other" nondurable goods - largely toys and sporting equipment, cleaning preparations, and paper products - increased less than in the second quarter.

Expenditures for durable goods increased 7.3 percent after increasing 10.8 percent. The slow-down was accounted for by a downturn in purchases of new cars and trucks. Purchases of furniture and household equipment and of "other" durable goods increased more than in the second quarter. For furniture and household equipment, the largest pickups were in kitchen and household appliances; in china, glassware, tableware, and utensils; and in consumer electronics such as computers and televisions. For "other" durable goods, the largest pickups were in jewelry and boats.

Nonresidential fixed investment

Real nonresidential fixed investment increased 7.4 percent in the third quarter after increasing 16.6 percent in the second (table 4). Structures and producers' durable equipment both contributed to the slowdown.

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Many of the factors that underlie investment spending were moderately favorable in the third quarter. The yield on new high-grade corporate bonds continued its downtrend, and the capacity utilization rate in manufacturing continued its uptrend. (However, the increase in the utilization rate was small.) Real final sales of domestic product increased moderately, as it had, on average, over the preceding four quarters. Corporate profits from current production have been erratic in recent quarters, but cash flow relative to fixed investment has remained high.

Structures increased 0.3 percent after increasing 8.1 percent, its largest increase in more than 3 years. Nonresidential buildings increased slightly; increases in industrial, educational, and hospital structures were largely offset by a decrease in commercial buildings (after three quarterly increases). Utilities were unchanged after an increase; telecommunications increased slightly, but other utilities decreased slightly. Mining, exploration, shafts, and wells increased substantially, as it had in the second quarter. "Other" structures decreased substantially after little change.

Producers' durable equipment increased 10.0 percent after increasing 19.8 percent. Transportation equipment decreased sharply after an equally sharp increase; autos and trucks accounted for about two-thirds of the downturn, and aircraft accounted for most of the remainder. Industrial equipment and "other" equipment both increased about as much as in the second quarter. A sizable step-up in information processing equipment was accounted for by computers.

Residential investment

Real residential investment increased 10.9 percent in the third quarter after decreasing 9.5 percent in the second. Single-family and multifamily construction turned up, and "other" residential investment increased much more than in the second quarter.

Single-family construction increased 4.1 percent after decreasing 17.0 percent. Single-family construction in a quarter is largely determined by housing starts in that quarter and in the preceding quarter. Third-quarter construction, thus, reflects housing starts in the second and third quarters. Starts averaged 1.109 million units (annual rate) in the second and third quarters, up from a combined average of 1.054 minion in the first and second quarters (chart 3).

Multifamily construction increased 34.9 percent after decreasing 4.3 percent; the increase was the first in more than a year and only the second in 4 years. Rental vacancy rates decreased somewhat in the second and third quarters but still remained high. The Low Income Housing Tax Credit program, which had expired in mid-1992, was reauthorized on August 10, 1993, as part of the Omnibus Budget Reconciliation Act. The program is expected to give a substantial boost to starts of subsidized housing, which currently accounts for about one-third of multifamily construction.

"Other" residential investment increased much more than in the second quarter, largely reflecting step-ups in improvements and in brokers' commissions.(4) The increase in brokers' commissions reflected stronger house sales: Sales of existing houses increased 7.7 percent (not an annual rate), and sales of new houses increased 4.0 percent. These increases partly reflected a continued downtrend in mortgage interest rates (chart 4).

Inventory investment

Real inventory investment - that is, the change in business inventories - decreased $7.5 billion in the third quarter (table 5). The decrease reflected a reduction in crop inventories as a result of the floods and the drought.

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Nonfarm inventories increased $16.7 billion, about the same as in the second quarter. Manufacturing inventories of both durable goods and nondurable goods increased less than in the second quarter. Retail trade inventories also increased less than in the second quarter; retail automotive inventories dropped sharply after a modest decrease, while "other" retail inventories increased substantially more than in the second quarter.

Wholesale trade inventories increased about twice as much as in the second quarter. The step-up was more than accounted for by inventories of durables - particularly those of motor vehicles and parts, electrical goods, and sports and recreation goods.

The constant-dollar ratio of nonfarm inventories to all final sales of domestic businesses moved down to 2.49 in the third quarter from 2.50 in the second. A different ratio, in which final sales are limited to goods and structures, shows much the same picture; it moved down to 4.32 from 4.34. Both ratios have declined about 4 1/2 percent since the trough of the recession in the first quarter of 1991, and both are quite low by historical standards.

Net exports of goods and services

Real exports decreased 1.5 percent in the third quarter after increasing 3.6 percent in the second. Real imports increased 6.1 percent after increasing 13.3 percent (table 6).

[TABULAR DATA OMITTED]

Exports of both merchandise and services turned down. The downturn in merchandise was more than accounted for by exports of autos, nonautomotive capital goods, and agricultural products. Within nonautomotive capital goods, a sharp downturn in exports of civilian aircraft was only partly offset by stepped-up exports of computers and other capital goods.

Imports of both merchandise and services slowed. About half of the deceleration in merchandise imports was accounted for by imports of petroleum and petroleum products. Most of the rest was accounted for by nonautomotive capital goods and autos.

Government purchases

Real government purchases increased 0.3 percent in the third quarter after increasing 4.3 percent in the second (table 7). Both Federal Government purchases and State and local government purchases contributed to the slowdown.

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Federal defense purchases decreased 7.9 percent after increasing 0.7 percent. The decrease represents the resumption of a downtrend in defense purchases that reflects declining budget authority for national defense spending. The third-quarter decrease reflected decreases in all categories of military equipment; compensation of employees also decreased (for the tenth consecutive quarter). Structures and services other than compensation increased.

Federal nondefense purchases increased 1.4 percent, much less than in the second quarter; all categories except structures contributed to the slowdown.

State and local government purchases increased 3.6 percent after increasing 5.6 percent. The slowdown was attributable to structures and to employee compensation.

Revisions

The preliminary first-quarter estimate of a 2.7-percent increase in real GDP is only 0.1 percentage point less than the advance estimate (table 8). The small downward revision was more than accounted for by imports, which were revised up $6.8 billion. (Imports are subtracted in the calculation Of GDP, so an upward revision in imports leads to a downward revision in GDP.) The revision in imports primarily reflected the incorporation of newly available data that showed an unexpectedly large increase in merchandise imports in September. The change in business inventories was revised down $1.8 billion, largely on the basis of revised source data for manufacturing and trade inventories for August.

The effect on GDP of the revisions in imports and in inventory change was largely offset by upward revisions in the other major components of GDP. The largest of these upward revisions was in Government purchases; it largely reflected revised source data for August on highway construction by State and local governments.

For real gross domestic purchases, the preliminary estimate of a 3.6-percent increase is 0.4 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 1.8-percent increase is the same as the advance estimate. For the fixed-weighted price index for GDP, the preliminary estimate of a 2.2-percent increase is 0.1 percentage point higher than the advance estimate.

Corporate Profits

Profits from current production - profits before tax (PBT) plus inventory valuation adjustment (IVA) and capital consumption adjustment (ccadj) - increased $12.2 billion in the third quarter after increasing $26.0 billion in the second (table 9). Domestic operations of financial corporations accounted for most of the third-quarter increase. Profits from domestic operations of nonfinancial corporations increased only $1.9 billion, reflecting an increase in real gross product; profits per unit were unchanged. Profits from the rest of the world increased $0.9 billion. Cash flow from current production, a profits-related measure of internally generated funds available for investment, increased $20.7 billion after increasing $15.6 billion. As a percentage of nonresidential investment, cash flow remained high, at 86.8 percent.

[TABULAR DATA OMITTED]

Profits by industry. - Industry profits are measured by PBT with IVA because estimates of the ccadj by industry do not exist. In the aggregate, this measure of profits presents much the same picture of the third quarter as does profits from current production. For domestic operations, PBT with IVA increased $13.2 billion after increasing $26.4 billion. Profits from the domestic operations of nonfinancial corporations slowed markedly, while profits from domestic operations of financial corporations picked up.

On the basis of preliminary and incomplete information, it appears that the slowdown in the profits of nonfinancial industries reflected downturns in the profits of motor vehicle manufacturing, petroleum refining, and wholesale trade. It appears that the pickup in the profits of financial industries was accounted for by commercial banks and savings and loan associations. Detailed estimates by industry are scheduled to be released on December 22.

Profits from the rest of the world 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 third quarter shows receipts increasing $2.0 billion and payments increasing $1.1 billion.

PBT and related measures. - PBT increased only $1.2 billion. The difference between this increase and the $12.2 billion increase in profits from current production mainly reflected an increase in the IVA. The IVA is an estimate of inventory profits with the sign reversed. In the third quarter, inventory profits decreased $12.0 billion, to virtually zero. The Producer Price Index, a major source for inventory prices, decreased at an annual rate of 2.3 percent (not seasonally adjusted) in the third quarter after increasing at an annual rate of 3.8 percent in the second.

Government Sector

The fiscal position of the government sector improved in the third quarter of 1993, as the combined deficit of the Federal Government and of State and local governments decreased $10.9 billion, to $210.6 billion (table 10). The Federal Government deficit decreased $10.9 billion, and the State and local government surplus did not change.

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Federal

The Federal Government deficit decreased to $211.7 billion, as receipts increased and expenditures decreased. The deficit has decreased for four consecutive quarters.

Receipts. - Receipts increased $10.7 billion in the third quarter after increasing $49.6 billion in the second. All the major components of receipts contributed to the slowdown.

Personal tax and nontax receipts increased $6.8 billion after increasing $18.6 billion. The slowdown was mainly attributable to withheld personal income taxes, which in turn reflected changes in wages and salaries.

Contributions for social insurance increased $4.1 billion after increasing $16.4 billion. The slowdown reflected changes in wages and salaries.

Indirect business tax and nontax accruals increased $0.5 billion after increasing $4.7 billion. Excise taxes increased less in the third quarter than in the second, and customs duties decreased after an increase.

Corporate profits tax accruals decreased $0.7 billion after increasing $10.0 billion. The downturn reflected the pattern of profits of nonfinancial corporations, which decreased $9.5 billion after increasing $22.8 billion.

Expenditures. - Expenditures decreased $0.3 billion in the third quarter after increasing $8.7 billion in the second. The downturn was more than accounted for by downturns in purchases and net interest.

Purchases decreased $2.1 billion after increasing $4.8 billion. Defense purchases decreased $3.8 billion after increasing $2.8 billion; the decrease was in purchases of military equipment. Nondefense purchases increased $1.6 billion after increasing $2.1 billion.

Net interest paid decreased $0.1 billion after increasing $4.2 billion. Gross domestic interest paid increased $0.8 billion after a $4.9 billion increase; gross interest received decreased in both quarters.

Transfer payments increased $6.9 billion after increasing $3.6 billion. The step-up was attributable to both transfer payments to persons, which increased $5.5 billion after increasing $3.8 billion, and to transfer payments to the rest of the world, which increased $1.4 billion after decreasing $0.2 billion.

Grants-in-aid to State and local governments increased $5.9 billion after increasing $6.7 billion. The third-quarter increase was mainly attributable to programs for highways and for social services, notably medicaid.

Subsidies less the current surplus of government enterprises decreased $10.9 billion after decreasing $10.6 billion. The decreases reflected agricultural subsidies, which decreased $11.6 billion after decreasing $7.9 billion.

State and local

The State and local government surplus was unchanged at $1.1 billion in the third quarter. Receipts and expenditures both increased less in the third quarter than in the second.

Receipts increased $15.0 billion in the third quarter after increasing $20.8 billion in the second. Indirect business tax and nontax accruals increased $6.9 billion after increasing $5.9 billion. Federal grants-in-aid increased $5.9 billion after increasing $6.7 billion. The third-quarter increase was mainly attributable to programs for highways and for social services. Reflecting changes in wages and salaries, personal tax and nontax receipts increased $1.7 billion after increasing $5.3 billion. Reflecting the pattern of corporate profits, corporate profits tax accruals decreased $0.1 billion after increasing $2.3 billion. Contributions for social insurance increased $0.6 billion after increasing $0.7 billion. Expenditures increased $14.9 billion in the third quarter after increasing $20.6 billion in the second. In both quarters, most of the increase was accounted for by purchases, which increased $9.0 billion after increasing $4.1 billion. Within purchases, structures increased $4.1 billion in the third quarter; construction of educational buildings and highways accounted for most of the increase. Transfer payments to persons increased $6.4 billion after increasing $6.9 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.

In NIPA table 8.1, changes in real GDP based on fixed (1987) weights are compared with changes in the alternatively weighted measures of real GDP. In the third quarter, the alternative measures (chain-type annual weights and benchmark-years weights) each increased 2.1 percent, compared with the 2.7-percent increase in the 1987-weighted measure. The alternative measures are especially useful for comparisons over long timespans, such as business cycles. Over the 10 quarters since the most recent business-cycle trough (first quarter of 1991), the chain-type annual-weighted measure for real GDP increased at an average annual rate of2.t percent, the benchmark-years-weighted measure 2.2 percent, and the i987-weighted measure 2.4 percent. (2.) The methodology used to compute the adjustments was described in detail in "Impact of the i993 Floods and Drought," Survey of Current Business (September 1993): 2. (3.) The large second-quarter increase in income reflected a rebound from a first-quarter level that was depressed because certain bonus payments that normally would have been paid in the first quarter Of 1993 had instead been paid in the fourth quarter of 1992. See "Annual Revision of the U.S. National Income and Product Accounts," Survey (August 1993): 28. (4.) The "other" component includes improvements (major replacements and additions and alterations), sales of new mobile homes, brokers' commissions on house sales, and residential equipment.
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Title Annotation:3d quarter 1993
Author:Larkins, Daniel; Moran, Larry R.; Morris, Ralph W.; Webb, Michael W.
Publication:Survey of Current Business
Date:Nov 1, 1993
Words:3635
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