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The business situation.

the BUSINESS SITUATION

REAL GNP increased at an annual rate of 4 1/2 percent in the fourth quarter of 1983. The slowing from the very strong increases in the second and third quarters was in final sales, especially residential investment and net exports, and in inventory investment (chart 1). Prices as measured by the GNP fixed-weighted price index increased 4 1/2 percent at an annual rate, about the same as in earlier quarters of the year.1

1. Quarterly estimates in the national income and product accounts are expressed at seasonally adjusted annual rates, and quarterly changes in them are differences between these rates. Real, or constant-dollar, estimates are expressed in 1972 dollars.

The fourth-quarter GNP estimates are based on the following major source data: For personal consumption expenditures (PCE), retail sales, and unit auto and truck sales through December; for nonresidential fixed investment, the same information for autos and trucks as for PCE, manufacturers' shipments of machinery and equipment for October and November, October and November construction put in place, and investment plans for the quarter; for residential investment, October and November construction put in place, and housing starts for October and November; for change in business inventories, October and November book values for manufacturing and trade, and unit auto and truck inventories through December; for net exports of goods and services, October and November merchandise trade, and fragmentary information on investment income for the quarter; for government purchases of goods and services, Federal unified budget outlays for October and November, State and local construction put in place for October and November, and State and local employment through December; and for GNP prices, the Consumer Price Index for October and November, the Producer Price Index for October and November, and unit-value indexes for exports and imports for October and November. Some of these source data are subject to revision.

Over the four quarters since the recession trough in the fourth quarter of 1982, real GNP increased 6 percent. (This period is hereafter referred to as "recovery' even though real GNP surpassed its previous peak, and thus moved from recovery into expansion, in the third quarter of 1983.) The increase in real GNP over the recovery was about one-half percentage point less than that in the first four quarters of the median of recoveries since 1945, and also of the 1975 recovery (table 1). (The 1975 recovery is singled out because it followed a recession similar to the recent one in depth and duration.) Final sales increased 4 percent in the 1983 recovery, also about one-half point less than in the median and 1975 recoveries. Thus, inventories, as they swung from decumulation to accumulation, contributed about as much to the change in GNP in the 1983 recovery as in the median and 1975 recoveries.

Among the components of final sales, the increase in personal consumption expenditures (PCE) in the 1983 recovery--5 1/2 percent--was about in line with the median recovery and somewhat less than that of the 1975 recovery. Fixed investment was up quite strongly in 1983. Both residential and nonresidential investment registered larger increases than is typical in the first four quarters of recovery. Net exports typically decline in the early quarters of a recovery, but the decline in 1983 was much steeper than in any previous recovery. The increase in exports was about in line with most recoveries, but imports were up much more sharply. The sharper increase in imports can be attributed largely to increased price-competitiveness of imported goods reflecting the strengthening of the U.S. dollar. Government purchases registered a small decline, primarily due to the operations of the Commodity Credit Corporation; typically government purchases increase somewhat during the first four quarters of recovery.

Table 2 shows an alternative breakdown of real GNP that sheds light on developments in the various sectors of the economy in the 1983 recovery. Product originating in the rest of the world, in line 2, is receipts of factor income less payments of factors income. Both receipts and payments increased, but by equal amounts, so that the net changed little over the four quarters. Product originating in households and institutions, line 4, increased 2 1/2 percent; inasmuch as this sector is not significantly affected by the business cycle, this increase was close to the sector's average increase since the mid-1970's. In line 5, product originating in government, which is a measure of the services of government employees, showed little change, reflecting efforts to hold down employment by the Federal and by State and local governments. (See "State and Local Government Fiscal Position in 1983' later in this issue.) Farm product, in line 7, was down sharply. The decline, discussed later in the "Business Situation,' was due to widespread drought and Federal acreage reduction programs. Nonfarm business product, which excludes these sectors, increased more than GNP over the recovery period--8 percent. The exclusion of housing, which is product originating in owner- and tenant-occupied residences, provides an aggregate that may be related to labor varibles for productivity analysis. This aggregate--nonfarm business product less housing, shown in line 11--increased 8 1/2 percent over the 1983 recovery; the increase was slightly less than that of the median recovery and the 1975 recovery.

The addenda to the table shows motor vehicle output, which is the value of new autos and trucks produced plus the margin on the sale of used autos by business. Motor vehicle output increased $24 1/2 billion, or almost 50 percent, over the 1983 recovery. GNP less motor vehicle output increased 4 1/2 percent.

Employment and unemployment.-- The improvement in labor markets since the fourth quarter of 1982 is another dimension of the recovery. Civilian employment, as measured by the household survery, increased 3.5 million (of which 2.6 million was in the second half of 1983), or 3.5 percent. This increase was about three times the increase in the civilian labor force, which grew at the slowest rate in two decades.

The resulting decline in unemployment amounted to 2.3 million from the fourth quarter of 1982. The civilian unemployment rate declined from 10.6 to 8.5 percent; most of the decline occurred in the third and fourth quarters (chart 2). This decline was large--much larger than over the 1975 recovery. Unemployment rates for adult men and adult women declined 2.1 and 1.8 percentage points, respectively, to 7.8 and 7.2 percent, so that the differential between them narrowed. The differential had reached 0.9 percentage points in the fourth quarter of 1982, reflecting the relative concentration of adult men in cyclically sensitive goods-producing industries. Teenage unemployment dropped 3.5 points from the fourth quarter of 1982 to 20.6 percent in the fourth quarter of 1983; a slight decline in employment was more than offset by a sharp decline in the teenage labor force.

Nonfarm payroll employment, as measured by the establishment series, increased 2.6 million, or 2.9 percent, from the fourth quarter of 1982. About three-fifths of the increase was in service-producing industries, principally in services; the remainder was concentrated in durables manufacturing.

Average weekly hours for private nonfarm production workers increased 0.5 hours from the fourth quarter of 1982 to 35.2 hours, regaining much of the ground lost during the recession. In manufacturing, the increase in regular hours was 0.6 from the fourth quarter of 1982 and the increase in overtime hours was 1.0.

Productivity and costs.--Table 3 refers to the nonfarm business economy less housing, the sector mentioned earlier. It shows the 8.5-percent increase in product in the 1983 recovery and a substantial increase in aggregate hours--4.7 percent--that was suggested by the improvement in employment and average weekly hours. The combination yielded a 3.6-percent increase in productivity as measured by real product per hour. This increase represents substantial improvement over the poor performance of the last few years, but such improvement is typical of recovery periods. For example, in the first four quarters of the 1975 recovery, productivity increased about 5 percent. (The difference in the increases in the 1975 and 1983 recoveries is primarily due to the larger increase in aggregate hours in the latter; the increase in product in the 1983 recovery was only slightly smaller than in the 1975 recovery.)

Unit labor cost was up only 1.1 percent from the fourth quarter of 1982 to the fourth quarter of 1983, much less than increases ranging from 7 to 11 percent in the preceding 3 years. Increases in unit labor cost typically slow in recoveries. However, the increase in 1983 appears particularly small; for example, the increase in the 1975 recovery was about 2 percent. The 1983 performance contributed substantially to sustaining the low rate of inflation in final product prices.

Prices.--GNP prices as measured by the fixed-weighted price index increased 4 1/2 percent (table 4). Prices in the fourth quarter (table 4). Prices increased at similar rates in each quarter of 1983--down from higher rates of increase in recent years--so that the increase over the recovery period was also about 4 1/2 percent.

Prices paid by domestic purchasers for the goods and services they buy-- whether produced in the United States or abroad--increased at an annual rate of 4 percent in the fourth quarter. In that quarter, and in earlier quarters of 1983, the export-import price relationship as measured in terms of fixed-weighted price indexes moved in favor of the United States; the prices of exports increased while the prices of imports declined or increased less. As a result, prices paid by domestic purchasers increased less than GNP prices, by amounts ranging up to 1 percentage point. Over the 1983 recovery, these prices increased 3 1/2 percent.

Price increases for most GNP components continued to decelerate from the highs reached in 1979 and 1980 (chart 3). The deceleration was less obvious for the more volatile components --food and energy within PCE (and within GNP), and residential investment. Abnormal weather, which discrupted the marketing of crops and livestock, added volatility to food prices. Food prices in PCE increased 2 1/2 percent from the fourth quarter of 1982 to the fourth quarter of 1983, compared with increases of 3 percent and 5 percent over the four quarters of 1982 and 1981, respectively. Decontrol of oil and deregulation of natural gas, coupled with weather conditions, continued to cause wide fluctuation in energy prices. Energy prices in PCE declined 1 percent over 1983, compared with increases of 2 percent and 12 1/2 percent over 1982 and 1981, respectively.

Prices of residential investment increased 5 percent over 1983, after a slight decline over 1982; over 1981, they had increased 7 1/2 percent. The 1983 increase can be traced to strong increases in the price of nonfarm structures in the first and third quarters. The calculation of price changes for nonfarm structures is based, in part, on changes in the claculated average sales price of the kind of new one-family house sold in 1977. Using the hedonic technique, the reported average sales price of a house is adjusted each period to remove the effects of changes in the mix of characteristics of houses actually sold. These characteristics include size, location, and amenities.

Components of Real GNP

The components of real GNP registered sharply divergent movements in the fourth quarter of 1983 (table 5). The following sections discuss developments in these components and measures related to them in the context of the 1983 recovery.

Personal consumption expenditures

Real PCE increased 6 1/2 percent at an annual rate in the fourth quarter --another strong quarter in the 1983 pattern of widely varying increases. Over the recovery, PCE increased 5 1/2 percent. The strength reflected several general factors. Real disposable personal income was up 5 percent over the four-quarter period, with stronger increases in the second half. Consumer wealth was boosted by increases, beginning in 1982, in the value of financial assets. As employment increased and the unemployment rate declined, concern over job security lessened. These and related developments appear to underlie the marked improvement in consumer attitudes in 1983. The University of Michigan's Index of Consumer Sentiment jumped early in 1983 to the highest levels in over a decade. Against this background, consumers have stepped up their spending rate-- that is, reduced their saving rate-- from recession levels.

The quarter-to-quarter volatility of the PCE increases had several sources. Among them, weather conditions and sales incentive programs for motor vehicles appear to have been especially important. Unusual weather conditions--a mild winter, a cool spring, a summer heat wave, and, finally, severe cold in December--affected expenditures for home heating and cooling. Sales incentive programs probably influenced the quarterly pattern of motor vehicle purchases. The programs featured financing at interest rates that were varied from 1 or 2 percentage points up to 5 percent points below market rates.

In the fourth quarter, durables were the strongest PCE category, as they were over the entire 1983 recovery. They increased 15 1/2 percent at an annual rate in the fourth quarter and 14 percent over the four-quarter period. Purchases of furniture and household equipment again were up substantially in the fourth quarter, continuing the uptrend that began after the turnaround in residential investment in 1982. Purchases of motor vehicles were a major factor in the quarterly volatility of durables. In the fourth quarter and in the second, these purchases registered large increases following little or no change in the preceding quarter. Both new autos and trucks were up in 1983. By the fourth quarter, sales of new passenger cars (which include sales to business as well as to persons) reached 9.9 million (seasonally adjusted annual rate), up from 8.4 million a year earlier. The increase was spread across all domestic size categories and imports.

Nondurables increased 5 1/2 percent at an annual rate in the fourth quarter, showing somewhat more strength than they had over the entire recovery. Purchases of clothing and shoes registered a fourth-quarter increase of 19 1/2 percent at an annual rate. The erratic pattern in 1983 included little change in the first quarter, an increase in the second roughly as large as that in the fourth, and a decline in the third. However, over the period from the fourth quarter of 1982, the increase only slightly exceeded that for PCE as a whole. Energy purchases declined in the fourth quarter after earlier, albeit decelerating, increases. Purchases of gasoline declined after no change in the second and third quarters. Poor driving conditions due to the unusually harsh December weather in much of the country contributed to the fourth-quarter decline. Purchases of fuel oil declined after increases in the second and third quarters. In response to fuel oil prices that were below 1982 levels, consumers rebuilt their inventories to higher-than-usual levels in the spring and summer. As a result, the unusual fourth-quarter heating needs could be met by drawing down inventories rather than by stepping up purchases.

Services increased 4 1/2 percent at an annual rate in the fourth quarter, also showing somewhat more strength than they had over the entire recovery. Purchases of electricity and natural gas were up sharply--12 1/2 percent --in the fourth quarter, partly due to the severe cold in December in much of the country.

Residential investment

Residential investment registered a slight decline in the fourth quarter. Even with that decline, it increased 38 percent over the last four quarters. This increase was larger than the increases over the first four quarters of any of the preceding seven recoveries.

Construction of single-family units, which accounted for 40 percent of total residential investment a year ago, accounted for 60 percent of the four-quarter increase. Increases in single-family construction were largest in the first two quarters of 1983, and increases in multifamily construction were largest in the second and third quarters. In the fourth quarter, singles slipped somewhat and multis were unchanged. The "other' component of residental investment-- which includes mobile home sales, additions and alterations, and brokers' commissions on the sale of new and existing residences--registered relatively small gains during the year.

Starts of both singles and multis surged early in the year, raising total starts from an average of 1.3 million (annual rate) in the fourth quarter of 1982 to 1.7 million in the first quarter of 1983 (chart 4). During the first half of 1983, singles fluctuated around an average level of 1.09 million and multis around an average level of 0.6 million. In the second half, singles slipped, but multis continued to increase. For the year as a whole, total starts were 1.7 million, the highest level since 1979.

Sales of new and existing residences also were up sharply in 1983. Sales of new one-family houses increased through spring, fell during the summer, and then increased again in the autumn. Sales for January-November averaged 616,000 (annual rate) out 50 percent higher than in ?? period of 1982. Sales of ?? single-family homes generally increased during the first half of the hour and then drifted down during the second half. For January-November, sales averaged 2,707,000, almost 40 percent higher than in the same period in 1982.

Mortgage markets.--Throughout the year, financial conditions were generally supportive of the increase in residential investment. Mortgage commitment rates, for example, drifted steadily lower during the first part of the year, continuing a decline from 17 1/2 percent in early 1982 (chart 5). Rates turned up a little in late May; in July-December, they fluctuated around 13 1/2 percent.

The increase in mortgage rates after May, small though it was, might have depressed housing more if adjustable rate mortgages (ARM's) had not been available. On average, the initial interest rate on ARM's was about 1 1/2 percentage points less than the rate on fixed-rate mortgages. In May, after more than a year of declining mortgage rates, ARM's accounted for 26 percent of all mortgage closings at savings and loan associations (S&L's). The share increased steadily during the rest of the year; by November, it reached 63 percent. (For all major mortgage lenders, ARM's share of mortgage closings reached 55 percent in November.)

The introduction of money market deposit accounts (MMDA's) in December 1982 did much to hold funds in S&L's (and other depository institutions) for mortgage lending. In that month, $36 billion flowed into these accounts at S&L's, and by March, MMDA balances were over $100 billion. These balances remained close to that amount through September. Much, but not all, of the funds placed in MMDA's came from other deposits at S&L's. For the first 11 months of 1983, net new deposits received (exclusive of interest credited) amounted to $59 billion; during the first 11 months of 1982, in contrast, net new deposits received had been a negative $17 billion.

S&L mortgage activity was vigorous. During January-November, S&L's made commitments to originate mortgages of $121 billion, almost three times the amount during the comparable period in 1982. Because of the lag between commitments and closings, and because some commitments were not "taken down,' S&L mortgage closings increased less than commitments. Nevertheless, closings were 160 percent higher during the first 11 months of 1983 than during the same period in 1982. A notable feature of S&L mortgage loans closed in January-November 1983 was the high proportion (18.4 percent) that refinanced outstanding mortgages. In January--November 1982, 13.6 percent had been used for this purpose.

Nonresidential fixed investment

Real nonresidential fixed investment increased 22 1/2 percent at an annual rate in the fourth quarter and surpassed its previous peak. With the fourth-quarter increase, this form of investment was 11 1/2 percent above its level at the business cycle trough in the fourth quarter of 1982; in the preceding seven recoveries, in contrast, it was typically--i.e., as measured by the median--7 1/2 percent above its business cycle trough after four quarters (chart 6).2

2. This section uses business cycle troughs as designated by the National Bureau of Economic Research (NBER) in cyclical comparisons; table 1 uses troughs in real GNP. Although the fourth quarter of 1982 was a trough in both the NBER cycle and in real GNP, several of the earlier NBER troughs differ from the troughs in real GNP. These differences in trough dates account for the difference between the 3 1/2-percent median increase indicated for nonresidential fixed investment in table 1 and the 7 1/2-percent increase indicated here.

Chart 6 is an adaptation of a type of chart frequently published in Business Condition Digest (BCD). For more information, see "How to Read Cyclical Comparison Charts,' BCD, July 1983, p. 106.

All of the strength in nonresidential fixed investment since the business cycle trough can be attributed to producers' durable equipment (PDE). As the bottom panel of chart 6 shows, structures continued to decline for two quarters after the trough. Four quarters after the trough--i.e., in the fourth quarter of 1983--they remained 2 1/2 percent below the trough level. PDE, in contrast, turned up immediately after the business cycle trough and increased much faster than is typical of the early stages of a recovery. In the fourth quarter of 1983, PDE was 18 percent above its business cycle trough; this performance was stronger than in any of the preceding seven recoveries except the one following the 1949 trough.

All PDE product categories shown in table 6 registered strong increases during 1983. Quarterly increases in "high-technology' PDE during 1983 were in a narrower range--8 1/2 to 23 1/2-percent at annual rates--than the increases in other product categories, and yielded a somewhat smaller four-quarter increase. The increase for high-technology PDE was less than the increases in other categories partly because high-technology PDE is not as cyclically sensitive.

In contrast, "transportation equipment' registered the largest four-quarter increase among the product categories; the quarterly changes varied widely, from a small decline to a 50-percent annual rate increase. Trucks, which accounted for about 30 percent of transportation equipment at the business cycle trough, accounted for almost 70 percent of the category's four-quarter increase. Most of the increase in trucks occurred in the third and fourth quarters, as sales of high-value heavy trucks picked up. From the business cycle trough to the fourth quarter of 1983, unit sales of new trucks (which includes sales to persons as well as to business) increased sharply, from 2.7 million to 3.6 million (annual rates).

Despite increases in the third and fourth quarters, structures remained below their business cycle trough. Most of the components of structures declined during the first two quarters of 1983, and, of the major components, only two registered sizable increases after that. Commercial buildings other than offices accounted for one-half of the third-quarter increase in structures; public utility structures accounted for the entire fourth-quarter increase. Office buildings leveled out after dropping in the first and second quarters, and industrial buildings declined in each quarter.

Inventories

Businesses added to real inventories in the fourth quarter, as they had in the third (table 7). In contrast, a sharp reduction in inventories, which got underway during the recession, had extended, with progressively smaller reductions, into the first half of 1983. Inventories contributed positively to the change in real GNP in each quarter of 1983, with the smallest contribution in the fourth. Since the trough in real GNP, inventories accounted for $30 billion of the $90 billion recovery in real GNP.

Farm inventories were reduced $4 billion in the fourth quarter, the seventh consecutive quarter of reduction. Inventories had built up as a result of the bumper crops of the 2 preceding years; Federal acreage reduction programs and the summer's drought led to the reduction in 1983.

Nonfarm inventories were up $11 1/2 billion in the fourth quarter, following a smaller addition in the third, as restocking got underway in the wake of earlier sharp reductions. The additions were almost across-the-board by industry group, but concentrated in trade; the bulk of the addition was in durables. Motor vehicle inventories-- wherever held--accounted for about one-third of the additions in the third and fourth quarters. In manufacturing, the small additions appear to represent a restocking of materials and supplies; finished goods inventories, particularly in durables, were being drawn down.

Despite the additions to inventories, and reflecting the strength in final sales, the aggregate inventory-sales ratios held about steady in the fourth quarter. The ratio of constant-dollar business inventories to total business final sales was 3.02, down from 3.18 in the fourth quarter of 1982. It had averaged 3.27 in the first three quarters of that year. The ratio of nonfarm business inventories to final sales of goods and structures was 4.27, down from 4.49 in the fourth quarter of 1982 and its average of 4.62 in the first three quarters of 1982.

Net exports

Real net exports declined sharply in the fourth quarter. The decline accounted for $9 billion of the $20 1/2 bullion decline since the fourth quarter of 1982. In the fourth quarter of 1983, as over the four-quarter period, the decline was concentrated in merchandise and was largely due to increases in imports. These increases were widely spread across end-use categories and, in most categories, they were steady.

Terms of trade.--The terms of trade moved irregularly higher, from 84.6 to 89.8, over the period since the fourth quarter of 1982 (chart 7). The BEA series on terms of trade--shown each quarter among the "Reconciliation and Other Special Tables,' usually in the March, June, September, and December issues of the SURVEY OF CURRENT BUSINESS--is calculated as the ratio of the implicit price deflator for total exports to the implicit price deflator for total imports. The improvement in the terms of trade occurred as the import deflator moved irregularly lower while the export deflator moved steadily higher. Over this period the improvement was 6 percent, about three-fourths due to the increase in the export deflator and one-fourth due to the decline in the import deflator. Within the import deflator, the deflator for petroleum dropped sharply in the first half of 1983. If the effect of petroleum imports is excluded, the improvement would have been only 3 percent; this 3-percent improvement largely reflected the appreciation of the dollar.

Changes in the terms of trade do not directly increase or decrease real production as measured by GNP, but such changes do increase or decrease the quantity of foreign goods and services the United States can purchase. This effect is taken into account in series that may be called "command over goods and services resulting from current production.' These series are obtained by using an alternative to the conventional procedure used by BEA to obtain deflated net exports. (The conventional procedure is to deflate current-dollar exports by export prices and current-dollar imports by import prices, and subtract the latter from the former.) For the "command' counterparts of the BEA production measures, the procedure used is to deflate current-dollar net exports by the implicit price deflator for total imports. (This procedure is the equivalent of deflating current-dollar exports by the implicit price deflator for imports.) Other price indexes could have been used; the choice among indexes is somewhat arbitrary.3 Command GNP and the conventional GNP thus differ by the former's inclusion of net exports calculated in this way (and shown in the lower panel of chart 9 as "command' net exports) and the latter's inclusion of net exports calculated in the conventional way (and shown in the chart as "GNP' net exports). The effect of the improvement in the terms of trade appears as the difference between the rates of increase in command GNP and conventional GNP. Since the fourth quarter of 1982, command GNP increased 6 1/2 percent, about one-half percentage point more than conventional GNP.

3. See Edward F. Denison, "International Transactions in Measures of the Nation's Production,' SURVEY OF CURRENT BUSINESS 61 (May 1981):17-22.

Government purchases

Real government purchases declined 2 1/2 percent at an annual rate in the fourth quarter; they had also declined in each quarter of 1983 except the third. Over the four quarters, they declined 2 percent. Federal purchases accounted for the fourth-quarter decline and for most of the decline since the GNP trough.

In Federal purchases, national defense purchases were up 7 percent at an annual rate, somewhat more than over the 1983 recovery as a whole. Sharp changes in nondefense purchases in the fourth quarter--a decline of 34 1/2 percent--and in earlier quarters of 1983 were largely due to Commodity Credit Corporation (CCC) purchases. In the national income and product accounts (NIPA's), CCC loans to farmers on their crops add to CCC inventories and are treated as Federal purchasers; redemptions of the crops by farmers, and also the transfer of crops to farmers under the payment-in-kind (PIK) program, reduce CCC inventories and are treated as negative purchases.4 (The PIK program is discussed in "Farm Product and Income' later in the "Business Situation.') In the fourth quarter, a CCC inventory reduction of $3 billion was the net of $1 billion of regular additions to CCC inventories and $4 billion of PIK reductions. A third-quarter addition to CCC inventories of almost $1 billion was the net of $2 billion of regular additions and $1 billion of PIK reductions. Thus, the change in Federal purchases from CCC operations was a negative $3 1/2 billion in the fourth quarter. Other Federal nondefense purchases again changed only moderately in the fourth quarter, up 2 1/2 percent.

4. In the National Income and Product Accounts Tables, tables 3.7B and 3.8B were expanded in July 1983 to show the CCC inventory change separately. This component includes the loan and redemption activity of the CCC in support of agricultural prices.

State and local purchases were unchanged in the fourth quarter, in part reflecting the fiscal restraint that held down purchases over the last few years. In the third quarter, purchases of structures had increased substantially, apparently reflecting the beginning of the use of grant funds from the 5-cents-a-gallon increase in the Federal excise tax on gasoline effective April 1. Structures were down in the fourth quarter, however, but their decline was offset by increases in the other noncompensation components.

The Federal sector.--Changes in current-dollar Federal receipts and expenditures on a NIPA basis are shown in table 8. In current dollars, the fourth-quarter decline in purchases just referred to amounted to $2 1/2 billion. Transfer payments were up $4 billion after a decline in the third quarter; the shift was party due to slowing declines in regular and extended unemployment benefits. Net interest paid registered a sizable increase, although not as large as in the third quarter. These increases mainly reflected the higher interest rates paid on Federal securities. An increase of $9 1/2 billion in subsidies less the current surplus of Government enterprises was more than accounted for by subsidies paid to farmers, including those paid under the PIK program. (The PIK subsidy payments offset the reduction of CCC inventories due to PIK, so that PIK transactions have no effect on total Federal expenditures.) Changes in these components, together with other smaller and partly offsetting changes, resulted in an increase of $14 1/2 billion in total expenditures.

Among receipts, the increase of $7 1/2 billion in personal tax and nontax payments was largely due to the increase in the tax base. In the third quarter, increases in the tax base had been more than offset by legislated tax cuts, so that personal taxes had declined. Indirect business taxes were again down slightly due to declines in the windfall profit tax. Contributions for social insurance were up $4 billion. Estimates of corporate profits, and thus of corporate profits tax accruals, are not yet available. It is quite likely that profits before tax--i.e., book profits--and thus profits tax accruals declined; the declines reflected a drop in inventory profits and the continued impact of accelerated depreciation patterns established under the Economic Recovery Tax Act of 1981. If a decline in profits tax accruals is assumed, total receipts probably increased $5-10 billion.

With the $14 1/2 billion increase in expenditures and an increase of this size in receipts, the deficit on a NIPA basis increased from the $187 billion registered in the third quarter.

Personal Income

Personal income was up sharply in the fourth quarter, following strong increases in the third and second quarters and a moderate increase in the first (table 9). Over the four quarters of recovery since the GNP trough, personal income increased 7 1/2 percent; over the four previous quarters of recession, personal income had been up only 4 1/2 percent.

Wage and salary disbursements increased substantially in each quarter of 1983. Employment and average hours, as noted earlier, as well as earnings, were up strongly. The most striking improvements were in wages and salaries in manufacturing and in the other commodity-producing industries, which were up sharply after declines in the previous year. In manufacturing, the improvement was concentrated in durables; in the other commodity-producing industries, it was mainly in construction. In the distributive industries, quarterly increases generally were larger than in 1982. A deceleration in the third quarter of 1983 and an acceleration in the fourth reflected the impact of a 3-week strike in August by telephone workers. In the service industries and in government, wages and salaries in 1983 continued to increase at about their recent trend rates. Some of the quarterly fluctuations in government wages and salaries were accounted for by the timing of special payments that were made to Postal Service employees.

Farm proprietors' income declined in the first three quarters of 1983, in part due to the impact of drought in many agricultural areas of the Midwest and South. A fourth-quarter jump was mainly due to subsidies under the payment-in-kind (PIK) program. The decline in farm income since the fourth quarter of 1982 was considerably smaller than that over the preceding four quarters. (See the discussion later in the "Business Situation.') Nonfarm proprietors' income increased strongly in the beginning of 1983, but, as the year progressed, the increases slowed. The pattern largely reflected the course of residential construction activity.

Personal interest income was up sharply in the second half of 1983, following four quarters of decline. The turnaround was due to increases in holdings of personal financial assets and to higher interest rates. (See chart 5; the 3-month Treasury bill rate is representative of the course of short-term rates.)

Over the past four quarters, transfer payments increased much less than they had over 1982. Unemployment insurance benefits fell off as the economy picked up and laid-off workers were rehired. The increase in social security benefits slowed in 1983 because the cost-of-living increase usually effective in July was postponed until January 1984. A cost-of-living increase in Federal employee retirement benefits did boost transfer payments in the second quarter.

The large quarterly increases in the "other income' component in table 9 were mostly accounted for by other labor income, which picked up in response to improving economic conditions. Rental income of persons was up in the fourth quarter, after having been reduced in the third by a $2 billion loss due to damage to residential property from hurricane Alicia.

Personal contributions for social insurance, which are subtracted in deriving the personal income total, continued to increase steadily. These contributions were raised $2 1/2 billion in the first quarter due to an increase in the social security taxable wage base.

Despite sizable increases in the taxable wage base resulting from the economic recovery, the increase in personal tax and nontax payments over the past four quarters was small. In the first quarter, personal taxes were reduced $14 1/2 billion under various provisions of the Economic Recovery Tax Act of 1981 (ERTA). In the third quarter, the final stage of reduction in income withholding rates under ERTA amounted to $29 1/2 billion. In the second and fourth quarters, when the impact of legislation was small, taxes were up sharply due to the growth in the wage base.

Disposable personal income picked up sharply in the first half of the year and registered strong increases in the second half. The strength carried through to real income, as increases in PCE prices were moderate. Increases in real disposable personal income accelerated from 3 percent at an annual rate in the first quarter to 7 1/2 percent in the fourth. Over the four quarters of recovery, real disposable personal income increased 5 percent, following no change over the preceding four quarters. Over the first four quarters of the 1975 recovery, it had increased 6 1/2 percent, following a 2-percent decline.

Primarily due to sharp fluctuations in personal outlays, changes in personal saving moved within a wide range in 1983. The personal saving rate fell from 5.4 percent in the first quarter to 4.0 percent--its lowest level in more than three decades--in the second. By the fourth quarter, the saving rate had moved back up to 5.1 percent (chart 8).

Farm Product and Income

As noted earlier, the farm sector, as measured by real gross farm product, was the only sector that declined over the period since the GNP trough in the fourth quarter of 1982. For the year 1983, this measure--which is the product, or value added, originating in farming--was $36 1/2 billion, down from the bumper crop years of 1981 and 1982 (table 10).

The decline in real gross farm product was the result of the Federal payment-in-kind (PIK) program, other Federal acreage reduction programs, and drought. The Federal farm programs aimed, in part, to reduce production and thereby reduce the large stocks of grains and some other crops accumulated in 1981 and 1982 (table 11). Under the programs initially announced for 1983 crops, farmers could idle a fixed percentage of their acreage in certain crops in return for eligibility to use crops as collateral for Commodity Credit Corporation (CCC) loans and for subsidy payments if average prices for the marketing year fall below specified target levels. Under the PIK program, announced later, farmers who participated in the initial programs could idle still more acreage and receive crops from CCC inventories in return. The in-kind payments equaled a percentage of the normal yield on the acreage idled--95 percent for wheat and 80 percent for corn, sorghum, cotton, and rice.

After farmers had reduced acreage under both types of programs, severe drought last summer sharply reduced yields on the acres that remained in production. (The winter wheat crop, however, largely escaped drought, because it is harvested in the spring.) Farm output--that is, production before the deduction of purchases of intermediate goods and services-- foregone by participation in the Federal programs nearly equaled output lost to drought. However, for each unit of output, drought reduced farm product more than did participation in the Federal programs. In the case of drought, the farmer incurred the expenses of seed, fertilizer, and other input to be netted against the lower amount of output. In the case of participation in the Federal programs, the farmer did not incur many of these expenses.

Under the PIK program, farmers took title in 1983 to an estimated $3 billion of crops previously held by the CCC. In the national income and product accounts (NIPA's), this transfer does not affect gross farm product or GNP (or Federal Government expenditures, as noted in discussing the Federal sector). In gross farm product (and also output), the reduction in CCC stocks is shown as a reduction in net CCC loans (in table 10, shown along with cash receipts from marketings). This reduction is offset by an increase in the change in farm inventories and/or an increase in cash receipts from marketings. In GNP, the reduction in CCC stocks is a reduction in Federal purchases. This reduction is offset among the product components by an increase in the change in inventories and/or an increase in final sales. Correspondingly, the PIK transfers do not affect GNP seen as the sum of income components. GNP is valued at market prices--that is, exclusive of subsidies. PIK transfers appear as subsidies to farmers and are part of farm proprietors' income (or, for corporate farms, corporate profits); they are subtracted, along with other subsidies, as a separate item in the derivation of GNP.

On a quarterly basis, real farm product was down $1 1/2-$2 billion each quarter.5 A quarterly pattern is particularly difficult to estimate for at least two reasons. Even if complete data were available, measurement would be difficult during the growing year for an output that is heavily influenced by weather and becomes a certainty only when harvested. Moreover, quarterly data are fragmentary, particularly for inventories held by farmers, and in most cases do not become available until long after the current NIPA estimates for a given quarter have been released.

5. In the NIPA tables shown each month in the SURVEY, farm product is in tables 1.5-1.6.

Despite the decline in farm product, farm income for the year 1983, at $52 billion in current dollars, held even with 1982, although both years fell short of 1981. Within this measure, which is national income originating in farming, farm proprietors' income showed the same pattern. In 1983, Federal programs provided historically high levels of help in maintaining income, as shown in the upper panel of chart 9. While net CCC loans, exclusive of PIK transfers to farmers, were a negative $1 billion, Federal programs paid substantial amounts of cash subsidies in addition to the PIK subsidies of $3 billion. These cash subsidies, which consist primarily of crop program payments, were $4 billion. The high level of cash subsidies reflected low U.S. crop prices relative to the targets specified for 1982 crops, most of which were marketed in 1983.

On a quarterly basis, farm proprietors' income increased $10 billion in the fourth quarter of 1983, after declines of $5 1/2 billion in the third quarter and smaller amounts in the second and first.6 The PIK program provided options to farmers that affect quarterly and annual patterns in farm proprietors' income. PIK permitted farmers to receive crops at their normal harvest time, but with an optional 5 months of free storage from that date if farmers delayed taking title. Thus, the estimated pattern of PIK subsidies and proprietors' income in the second half of 1983 is preliminary until administrative records become available.

6. In the NIPA tables shown each month in the SURVEY, farm proprietors' income is in tables 1.11 and 2.1.

Table: CHART 1; Real Product: Change From Preceding Quarter

Table: Change in Real Product Over First Four Quarters of Recovery

Table: Alternative Measures of Production

Table: CHART 2; Unemployment Rate

Table: Real Gross Product, Hours, and Compensation in the Nonfarm Business Economy Less Housing: Percent Change

Table: Fixed-Weighted Price Indexes: Change From Preceding Quarter

Table: CHART 3; Fixed-Weighted Price Index: Change From Preceding Quarter

Table: Real GNP: Change From Preceding Quarter

Table: CHART 4; Housing Starts

Table: CHART 5; Selected Interest Rates

Table: CHART 6; Nonresidential Fixed Investment in Business Cycles

Table: Nonresidential Producers' Durable Equipment

Table: Change in Business Inventories

Table: CHART 7; Terms of Trade and Net Exports of Goods and Services

Table: Federal Government Receipts and Expenditures, NIPA Basis: Change From Proceding

Table: CHART 8; Personal Saving Rate

Table: Personal Income and Its Disposition

Table: Farm Output, Gross Product, and Income

Table: Marketing Year Final Stocks and Average Prices for Major U.S. Crops

Table: CHART 9; Market Sales and Proceeds From Government Programs

Table: National Income and Product Accounts Tables

Gross National Product in Current and Constant Dollars

Gross National Product by Major Type of Product in Current and Constant Dollars

Gross National Product by Sector in Current and Constant Dollars

Relation of Gross National Product, Net National Product, National Income, and Personal Income

National Income by Type of Income

Relation of Gross National Product, Net National Product, and National Income in Constant Dollars

Gross Domestic Product of Corporate Business in Current Dollars and Gross Domestic Product of Nonfinancial Corporate Business in Current and Constant Dollars

Auto Output in Current and Constant Dollars

Truck Output in Current and Constant Dollars

Personal Income and Its Disposition

Personal Consumption Expenditures by Major Type of Product in Current and Constant Dollars

State and Local Government Social Insurance Funds Receipts and Expenditures

Federal Government Receipts and Expenditures

State and Local Government Receipts and Expenditures

Government Purchases of Goods and Services by Type in Current and Constant Dollars

Foreign Transactions in the National Income and Product Accounts in Current and Constant Dollars

Merchandise Exports and Imports by Type of Product and End-Use Category in Current and Constant Dollars

Gross Saving and Investment

Inventories and Final Sales of Business in Current and Constant Dollars

Change in Business Inventories by Industry in Current and Constant Dollars

National Income Without Capital Consumption Adjustment by Industry

Implicit Price Deflators for Gross National Product

Corporate Profits by Industry

Fixed-Weighted Price Indexes for Gross National Product, 1972 Weights

Implicit Price Deflators for Gross National Product by Major Type of Product

Implicit Price Deflators for Gross National Product by Sector

Implicit Price Deflators for the Relation of Gross National Product, Net National Product, and National Income

Current-Dollar Cost and Profit Per Unit of Constant-Dollar Gross Domestic Product of Nonfinancial Corporate Business

Implicit Price Deflators for Auto Output

Implicit Price Deflators for Truck Output

Implicit Price Deflators for Personal Consumption Expenditures by Major Type of Product

Implicit Price Deflators for Government Purchases of Goods and Services by Type

Implicit Price Deflators for Exports and Imports of Goods and Services

Implicit Price Deflators for Merchandise Exports and Imports by Type of Product and by End-Use Category

Implicit Price Deflators for Inventories and Final Sales of Business

Percent Change From Preceding Period in Gross National Product in Current and Constant Dollars, Implicit Price Deflators, and Price Indexes
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Title Annotation:analysis of various components of GNP in 1983
Publication:Survey of Current Business
Date:Jan 1, 1984
Words:7710
Next Article:Plant and equipment expenditures, 1984.
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