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The business situation.

ECONOMIC activity continued to expand rapidly in the first quarter of 1984. Real GNP increased at an annual rate of 8-1/2 percent, following increases of 5 percent in the fourth quarter of 1983 and 7-1/2 percent in the third quarter. Inflation remained moderate. The GNP fixed-weighted price index increased 4-1/2 percent at an annual rate in the first quarter, following increases of 4 percent in the fourth and 4-1/2 percent in the third.1

More than one-half of the increase in real production in the first quarter took the form of an increase in inventory investment (chart 1). Inventory investment was up $18 billion, following a $5 billion increase in the fourth quarter. About one-half of the first-quarter and all of the fourth-quarter increases were in farm inventories. Transfers of crops from the Commodity Credit Corporation (CCC) to farmers under the payment-in-kind (PIK) program accounted for $5 billion of the first-quarter increase and for $3-1/2 billion of the fourth-qarter. The handling of PIK in the national income and product accounts (NIPA's) offsets these transfers, which relate to commodities produced in the past, in final sales; as a result, GNP, which is a measure of current production, is not affected. (The PIK program, introduced last year as part of the Federal acreage reduction program designed to reduce agricultural inventories, and its handling in the NIPA's were described in the Hanuary 1984 "Business Situation.")

Real final sales increase 3-1/2 percent in the first and fourth quarters. In both quarters, changes in government purchases and, in turn, in final sales were greatly affected by CCC inventory transactions. In the NIPA's these transactions are treated as Federal purchases, positive or negative. (CCC inventories were reduced by the transfers of crops to farmers under PIK, and thus Federal purchases and, in turn, final sales were held down in the fourth and first quarters.) Had it not been for transactions of the CCC, final sales would have increased 4-1/2-5 percent in the first and fourth quarters, about as strong as the 5-percent increase in the third. For these quarters in which PIK transactions were large, this measure is more useful in assessing the strength of final demand than is unadjusted final sales.

Increases in economic activity have been robust in the business sector of the economy (table 1). Real business product registered larger percent increases in each of the past several quarters than did GNP. Until the first quarter of 1984, nonfarm business product registered still larger inceases. In that quarter, farm product, which had dropped steeply in 1983 due to widespread drought and Federal acreage reduction programs, increased sharply. Housing product--that is, the value of the services of owner- and tenant-occupied residences--is removed from nonfarm business product to derive a measure that can be used with labor variables for productivity analysis. Increases in this aggregate--nonfarm business product less housing--were very strong, ranging from 8 to 14 percent in the past four quarters.

Real motor vehicle output, which is shown in the addenda to table 1, again contributed significantly to the increase in GNP. Over the past several quarters, manufacturers have progressively stepped up production of cars and trucks to rebuild inventories from recession lows. GNP less motor vehicle output was up 7-1/2 percent in the first quarter. As in the past several quarters, this measure increased about 1-2 percentage points less than did total GNP.

Productivity and costs.--Table 2 shows changes in real gross product, aggregate hours, and compensation in the business economy other than farm and housing. As in the preceding several quarters, real product and aggregate hours registered sizable increases in the first quarter. Again, the increase in product exceeded that in hours; productivity was up 3 percent, following gains of 3 percent and 2-1/2 percent in the preceding two quarters. The increases in compensation and in compensation per hour accelerated in the first quarter. Expanded coverage and increased rates for employer contributions for social insurance, effective January 1, accounted for about 1-1/2 percentage points of the acceleration in compensation and for 1 percentage point of that in compensation per hour. The increase in unit labor cost remained moderate. Unit labor cost less the impact of the increase in employer contributions about matched the 1-1/2-percent increases of the preceding two quarters.

Prices.--GNP prices as measured by the fixed-weighted price index increased 4-1/2 percent in the first quarter--about the same rate as in the preceding several quarters (table 3). A Federal pay raise, which in the NUPA's is reflected in the price of employee services purchased by the Federal Government, accounted for 0.5 percentage point of the first-quarter increase.

Prices paid by domestic purchasers for the goods and services they buy--whether produced in the United States or abroad--also increased 4-1/2 percent in the first quarter. In the fourth quarter, a decline in import prices held the increase in prices paid by domestic purchasers to 3-1/2 percent compared with the 4-percent increase in GNP prices. The convergence in the first quarter occurred as the increase in export prices decelerated and import prices turned up.

Prices of personal consumption expenditures (PCE) increased 4-1/2 percent--about the same rate as in the preceding several quarters. Food prices jumped 11 percent. The prices of fruits and vegetables shot up in January in response to freeze damage. Egg prices moved up sharply, as a large number of chickens exposed to avian flu were destroyed. Prices also rose for beef and pork. PCE energy prices dropped 6 percent, as lower gasoline prices more than offset sharp increases in fuel oil prices. Other PCE prices increased somewhat less than they had in the preceding several quarters.

Components of Real GNP

Nost of the major components of real GNP registered changes in the first quarter of 1984 that were broadly similar to those in the fourth quarter of 1983 (table 4). PCE again increased strongly, as did nonresidential fixed investment. Net exports again fell sharply. Government purchases declined, but not as much as in the fourth quarter. The increase in business inventory investment picked up sharply. Residential investment increased after declining in the Fourth quarter. Personal consumption expenditures

Real PCE increased 6 percent after a 6-1/2-percent increase in the fourth quarter. The continued strength was backed by large increases in real disposable income, as well high levels of consumer confidence. On a monthly basis, the latter has weakened since January, as have many of the components of PCE, which may indicate that the boom in consumer spending is beginning to moderate.

Expenditures for durable goods increased slightly less than in the fourth quarter. Motor vehicles continued to increase, but at a slower pace, largely due to a weakening in purchases of trucks and used cars. Purchases of new cars increased at a higher rate than in the fourth quarter. Expenditures for furniture and household equipment and for other durables increased at about the same rate.

Expenditures for nondurable goods registered a slightly stronger increase than in the fourth quarter. Gasoline and oil increased substantially, following several quarters of decline or little change, and other nondurables increased more than in the fourth quarter. In contrast, purchases of clothing and shoes increased somewhat less than in the fourth quarter. Food purchases again changed little.

Expenditures for services increased more slowly than in the fourth quarter, as energy declined significantly. Both the natural gas and the electricity components of energy services have fluctuated over the past several quarters. Electricity purchases, which had been high in the third quarter due to unusually hot weather, declined in the fourth and again in the first. Natural gas purchases increased in the fourth quarter--December was unusually cold--and declined in the first. A slowdown in the increase in other services was largely in foreign travel. Nonresidential investment

Real nonresidential fixed investment registered another strong increase--12 percent, following third- and fourth-quarter increases of 18-1/2 percent and 27 percent, respectively. Structures accelerated sharply, but producers' durable equipment (PDE), which accounts for more than two-thirds of total nonresidential fixed investment, decelerated even more sharply.

Commercial and industrial buildings accounted for virtually all of the 26-percent increase in structures in the first quarter. Both the office and nonoffice components of commercial building recorded substantial gains. In the two preceding quarters, increases had been based mainly on the strength of the nonoffice component. An increase in industrial buildings--the first in 2 years--was also substantial.

PDE increased only 7 percent in the first quarter, following a 36-1/2-percent increase in the fourth. Motor vehicle PDE and, to a larger extent, other PDE contributed to the deceleration. Trucks, in the former category, and communications equipment, in the latter, both declined in the first quarter, following extraordinarily large increases in the fourth. In trucks, purchases appear to have turned up again late in the first quarter. In communications equipment, one may speculate that the circumstance surrounding the January 1 divestiture of A.T. & T. may have led to a bunching of purchases in the fourth quarter.

Most of the factors commonly used in assessing the future course of capital spending point toward continued increases. Corporate profits, cash flow, capacity utilization, real final sales, and net new orders for capital goods all registered substantial increases in the past several quarters. Interest rates, however, moved up late in the first quarter; the rate on seasoned corporate bonds, for example, increased almost one-half percentage point in March. Residential investment

Real residential investment, which had slipped slightly in the fourth quarter after four consecutive strong increases, bounced back in the first quarter. Single-family construction was up 46 percent, multifamily construction was up 24-1/2 percent, and the "other" component (which includes additions and alterations, brokers' commissions, and mobile home sales) was up 15-1/2 percent.

Housing starts increased sharply in the first 2 months of the year and then posted an unprecedented 26-1/2-percent drop (not an annual rate) in March (chart 2). Unusually mild weather in February, followed by an unusually cold and wet March, appears to have played an important part in this month-to-month pattern.

On a quarterly basis, starts were up 14-1/2 percent (not an annual rate) in the first quarter. Starts of singlefamily units increased 221,000 to 1,258,000 (seasonally adjusted annual rate) in the first quarter, and starts of multifamily units increased 30,000 to 691,000. Building permits also were up in the first quarter. Permits for single-family units increased from 896,000 in the fourth, quarter to 1,026,000 in the first, and permits for multifamily units increased from 710,000 in the fourth quarter to 800,000 in the first.

Sales of both new and existing single-family residences were also strong in the first quarter. Sales of new one-family houses increased 26,000 to 695,000 (seasonally adjusted annual rate) in January-February, after a strong fourth-quarter increase of 83,000, and sales of existing single-family homes increased 123,000 to 2,880,000 (seasonally adjusted annual rate) in January-February after a fourth quarter in which they had changed little. The inventory of unsold new one-family houses in February was low-5.1 months' supply at current sales rates.

The commitment rate on fixed-rate mortgages has hovered around 13-1/2 percent since July (chart 3). An increasing proportion of mortgages are being written with adjustable rates; initial interest rates on these mortgages are 1-1/2 to 2 percentage points less than on fixed-rate mortgages. In each of the first three quarters of 1983, about one-third of conventional mortgages carried adjustable rates; in the fourth quarter, this share jumped to over 50 percent. In the first quarter of 1984, it increased to almost 60 percent.

The lower interest rate on an adjustable-rate mortgage results in initial monthly payments lower than on a fixed-rate mortgage; it also reduces the income that a potential borrower needs to qualify for a mortgage. On a 25-year, $65,000 mortgage, for example, initial monthly payments for principal and interest on an adjustable-rate mortgage are about $85 (11 percent) lower than on a fixed-rate mortgage. Assuming that a borrower needs an income equal to at least four times morgage payments, the annual income needed to qualify for a $65,000 adjustable-rate mortgage is about $4,000 lower than for a fixed-rate mortgage.

Financial conditions at savings and loan associations, major suppliers of mortgage credit, continued generally favorable in January-February. The inflow of funds was strong; net new deposits received and mortgage repayments totaled $20.2 billion in just 2 months, compared with a total of $25.7 billion for the whole fourth quarter. Mortgage activity was also strong; outstanding commitments to originate mortgages increased $1.6 billion, after remaining unchanged in the fourth quarter. Change in Business inventories

Real business inventories were up $26-1/2 billion in the first quarter, following an $8-1/2 billion increase in the fourth (table 5). The $18 billion step-up in the rate of accumulation was about evenly split between farm and nonfarm inventories. An $8-1/2 billion accumulation in farm inventories, after little change in the fourth quarter, reflected the transfer of inventories to farmers under the PIK program and the step-up in production, which is assumed to go largely into inventories in the short run.

The $18 billion accumulation in nonfarm inventories in the first quarter was about double that in the fourth. The pickup was mainly in manufacturing and retail trade. In manufacturing, durables inventories--particularly primary metals and electrical machinery--accumulated at a faster pace than in the fourth quarter. In nondurables, most of the turnaround from liquidation to accumulation was in food processing. The pickup in retail trade inventories was centered in apparel and department stores, and probably reflected a dropoff in sales at the end of the quarter. Auto dealers' inventories accumulated at the same rate as in the fourth quarter.

The large inventory accumulations led to the first increases in the aggregate inventory-sales ratios since mid-1982. The ratio of constant-dollar business inventories to total business final sales edged up from 3.02 to 3.04, and the ratio of nonfarm business inventories to final sales of goods and structures from 4.24 to 4.25.

Real net exports fell $9-1/2 billion, following an $8-1/2 billion decline in the fourth quarter. Exports increased, but imports increased much more.

Exports increased moderately--$3-1/2 billion--in the first quarter, following little change in the fourth. The lack-luster performance in the past several quarters reflected the sluggish economic recoveries of most major trading partners; the effects of trade constraints, particularly of less developed countries; and the impact of the strong dollar. Agricultural exports increased $1 billion after a small decline. A $1-1/2 billion increase in exports of nonagricultural merchandise was concentrated in capital goods and automotive products. In services, investment income recorded a small increase.

Imports registered another strong increase--$12-1/2 billion--in the first quarter. The increases in the last several quarters largely reflected the strength in U.S. business activity. Imports of nonpetroleum merchandise jumped $11-1/2 billion in the first quarter. The increase was spread across most major end-use categories; the largest were in consumer goods, industrial supplies, and capital goods. Petroleum imports remained low--at about 5.2 million barrels per day. In services, payments of investment income increased somewhat more than in the fourth quarter, largely reflecting increased direct investment payments. Government purchases

Real government purchases declined 1 percent in the first quarter, following a 4-percent decline in the fourth. Federal purchases declined again; State and local purchases increased after a decline.

In Federal purchases, national defense purchases jumped 9-1/2 percent, following increases that averaged about 5 percent in the past five quarters. Sharp declines in nondefense purchases in the past two quarters were due to CCC operations, principally under the PIK program. As mentioned earlier, the transfer of crops to farmers under PIK reduces CCC inventories and is treated as a negative Federal purchase. Reductions in CCC inventories amounted to $7-1/2 billion in the first quarter, and to $3 billion in the fourth.

The turnaround in State and local purchases was in purchases of structures. These purchases increased $1 billion, following a decline of $1 billion in the fourth quarter. All types of construction--buildings, highways, and other structures--showed improvement.

The Federal sector--Changes in current-dollar Federal receipts and expenditures on a NIPA basis are shown in table 6. Among expenditures, purchases were up $1 billion; national defense purchases increased strongly, and nondefense purchases continued to decline due to the operations of the CCC. Transfer payments fell $3-1/2 billion; large payments to Israel--the full amount earmarked for that country in the appropriation for fiscal year 1984--had boosted transfers to foreigners in the fourth quarter. A $3 billion increase in grants-in-aid to State and local governments was largely in public assistance, highway grants, and community development grants. Net interest paid continued to increase, largely reflecting higher interest rates on Goverment securities. The large increases in subsidies less the current surplus of Government enterprises in the last two quarters were more than accounted for by subsidies paid to farmers, primarily under the PIK program. (The PIK subsidy payments offset the reduction of CCC inventories due to PIK, so these transactions have no effect on total Federal expenditures.) These changes sum to an increase of $13 billion in total expenditures, about the same amount as in the past several quarters.

Among receipts, an increase of $7-1/2 billion in personal tax and nontax payments was largely due to growth in the tax base. A $16-1/2 billion increase in employer and employee contributions for social insurance resulted from legislated changes in social security coverage, taxable wage base, and tax rate. Estimates of corporate profits, and thus of corporate profits tax accruals, are not yet available. Because business production continued to expand in the first quarter, it is likely that profits and profits tax accruals also increased. These changes indicate a substantial increase in total receipts in the first quarter--perhaps twice as large as the $12-1/2 billion increase in the fourth.

An increase of this size in receipts would exceed the $13 billion increase in expenditures, so the deficit on a NIPA basis would decline from the $190 billion registered in the fourth quarter.

Personal Income

Personal income increased $89-1/2 billion in the first quarter, following a $73-1/2 billion increase in the fourth (table 7). These large increase reflected a number of specific developments, particularly in farm proprietors' income and in transfer payments, as well as the continued expansion in economic activity.

Wage and salary disbursements were up $39 billion in the first quarter, about as much as in the past several quarters. Wages and salaries in manufacturing recorded another substantial increase, primarily due to increases on both employment and hourly earnings. The increase was concentrated in durables and was particularly large in motor vehicles and equipment. Wages and salaries in other commodity-producing industries and in services increased at about the same pace as in the past several quarters. The pattern of increases in the distributive industries in the past three quarters largely reflected the impact of a 3-week strike in August by telephone workers. In the first quarter, a 3-1/2-percent pay rise for Federal civilian and military employees boosted government wages and salaries by $3 billion.

Proprietors' income contributed significantly to the large increases in personal income in both the fourth and first quarters. The ballooning of farm income in these quarters was attributable to the step-up in crop production and to large subsidy payments under the PIK and other programs. Payments under PIK amounted to $11 billion in the fourth quarter and $23-1/2 billion in the first. These payments probably peaked early in the quarter and then tapered off. The pickup in nonfarm income in the first quarter was in retail trade and in construction.

Personal interest income registered another substantial increase in the first quarter. The increases in the past three quarters were due to increased holdings of personal financial assets and to slowly rising interest rates (chart 3).

The increase in transfer payments slowed somewhat in the first quarter. Reflecting improvements in labor market conditions, unemployment insurance benefits continued to decline, and at a more rapid rate than they had in the fourth quarter. In the first quarter, a social security cost-of-living increase that had been postponed 6 months from July 1, together with other cost-of-living increases, boosted social security and associated benefits by $6-1/2 billion. This boost was nearly offset by a swing, from a $3 billion increase to a $3 billion decline, in retro-active payments to social security recipients.

Personal contributions for social insurance, which are subtracted in deriving the personal income total, were affected in the first quarter by several legislated changes in social security. As a result, increases in these contributions were stepped up $4 billion--to $6 billion--in the first quarter. An increase in the maximum social security taxable wage base from $35,700 to $37,800 accounted for $1 billion of the step-up. (The social security tax rate for employees was not changed from 6.70 percent.) A rate increase for self-employed persons from 9.35 percent to 11.30 percent, together with final payments for 1983, accounted for another $1-1/2 billion of the step-up. A rate increase for supplementary medical insurance and an extension of social security coverage accounted for much of the remainder.

Personal tax and nontax payments increased $10 billion in the first quarter, following an $11 billion increase in the fourth. With the exception of the third quarter, when a sizable reduction in withheld income taxes occurred, personal taxes have increased steadily due to the continued growth in the taxable wage base.

Disposable personal income registered an even stronger increase than in the preceding two quarters. The strength again carried through to real income, as the increase in PCE prices remained moderate. Real disposable personal income jumped 10 percent in the first quarter, following increases of 6-1/2 percent in the third quarter and 8 percent in the fourth.

The increase in disposable personal income exceeded the increase in personal outlays by a wider margin than in the fourth quarter. Thus, personal saving was up by a larger amount than in the fourth quarter. Three consecutive quarters of increase in personal saving have raised the personal saving rate to 6.1 percent from a low of 4.0 percent in the second quarter of 1983.

Employment and


The employment picture continued to brighten in the first quarter. Civilian employment, as measured by the household survey, increased 1.2 million to 103.7 million. The civilian labor force turned up after a fourth-quarter decline. The increase in employment exceeded that in the labor force, and unemployment declined 0.6 million to 8.9 million. The unemployment rate declined 0.6 percentage point to 7.9 percent (chart 4).

The unemployment rates for adult men and women converged in the first quarter after eight quarters of higher rates for men. Presumably, the rate for men will drop below that for women if the recovery in employment continues. Typically, the unemployment rate for men has been lower than that for women.

Total nonfarm payroll employment, as measured by the establishment survey, increased 0.9 million to 92.3 million in the first quarter--the first time that the payroll measure of employment exceeded its prerecession peak in the third quarter of 1981. Employment increased 3.5 million from the fourth quarter of 1982 to the first quarter of 1984 (table 8). The increase was buoyed by manufacturing, construction, retail trade, services, and finance, insurance, and real estate.

In manufacturing, the 1.2 million increase n employment since the fourth quarter of 1982 represents a recovery of more than one-half of the recession's decline. Within manufacturing, five of twenty industries more than recouped recession losses in employment. Four were durables industries: lumber and wood products, furniture and fixtures, electric and electronic equipment, and transportation equipment. The first two relate to housing, and the second two relate to high-technology equipment and to motor vehicles--three areas of recent strong economic growth. The nondurables industry that more than recouped losses was rubber and miscellaneous plastics products, which is tied, in part, to motor vehicles.

In construction and retail trade, the increases in employment since the fourth quarter of 1982 more than offset recessionary declines; construction increased by slightly more than the amount lost, and retail trade increased by over two-and-a-half times the amount lost. Employment in the services industry and the finance, insurance, and real estate industry increased both during the recession and, even more strongly, thereafter.

Mining was the only private industry in which employment continued to decline--albeit slightly--since the recession. Employment also continued to decline in the government sector; a small decline in State and local government employment more than ofset an increase in Federal Government employment.

Corporate Profits in 1983

Profits from current production--profits with inventory valuation and capital consumption adjustments--increased 40 percent in 1983, to $229 billion. The increase reflected recovery from recession; profits had declined 14 percent in 1982. Domestic profits of nonfinancial corporations increased about 40 percent, to $178 billion, following a 17-percent decline; those of financial corporations increased about 50 percent, to $30 billion, following a slight increase. Prpfits from the rest of the world declined slightly to $21 billion, following a moderate decline.

Nearly one-half of the increase for the year appeared in the capital consumption adjustment (CCAdj), as the effects of the Accelerated Cost Recovery System of the Economic Recovery Tax Act of 1981 (ERTA) became more pronounced. For investment in new capital, ERTA permitted the acceleration of depreciation, which is deducted from revenues in deriving profits. Depreciation charges as reported for tax purposes now exceed capital consumption as defined in the NIPA's (economic depreciation). Thus, the CCAdj, which converts depreciation for tax purposes to economic depreciation, became positive in 1983 (chart 5).

The inventory valuation adjustment (IVA), which is the difference between acquisition and replacement cost of goods removed from inventory, remained negative in 1983. Because the positive CCAdj was larger than the IVA in absolute value, the sum of the two adjustments lifted profits from current production above profits before tax (book profits).

Prfits by industry.--Profits with IVA but without CCAdj is the publication form for profits by industry in the current year because the CCAdj is not estimated by industry. This profits measure increased $32-1/2 billion, or 20 percent, to $198 billion, following an 18-percent decline. Manufacturers' profits contributed 40 percent of the increase, largely because primary metals manufacturers cut their losses and motor vehicles manufacturers increased their profits. financial institutions' profits contributed another 30 percent of the increase, largely because profits of savings and loan associations and of mutual savings banks improved.

Nondurables manufacturers increased their profits $3 billion, or 6 percent. The increase was held down by declines in two large industries: food and petroleum manufacturers. Most others increased sharply.

Durables manufacturers doubled their depressed 1982 profits. Profits of primary metals manufacturers were down slightly after huge losses in 1982, reflecting some improvement in constant-dollar sales. Profits of motor vehicles manufacturers soared, as constant-dollar sales increased nearly one-third. Profits of fabricated metals manufacturers and of "other" durables manufacturers also increased. In sharp contrast, nonelectric and electric machinery manufacturers both registered profit declines, which occurred despite increases in constant-dollar sales.

Financial profits increased substantially. Savings and loan associations and mutual savings banks accounted for most of the improvement. As in 1982, when their losses diminished throughout the year, these institutions benefited from falling interest rates. Profits of Federal Reserve banks held approximately even.

In 1983, trade profits increased $7 billion; both wholesale and retail profits were up substantially. Among retailers, general merchandise profits were up the most; food profits held even; and auto dealers turned losses into profits as sales rose. Utility profits increased, in part the result of unusually hot weather in the third quarter and unusually cold weather in the fourth. Transportation profits increased, primarily because airlines cut losses substantially.

In sharp contrast to the large increase in domestic profits, those from the rest of the world declined slightly, from $22 to $21-1/2 billion, following a $2 billion decline. The decline in 1983 reflected more rapid economic expansion in the United States than abroad, particularly in Europe.

Disposition of profits.--Book profits increased 19 percent, to $207 billion, following a 23-percent decline. The effect of accelerated depreciation under ERTA limited the increase in book profits, compared with levels they would have registered under previous legislation. The limited increase in book profits, in turn, limited the increase in tax liability (table 9). The Tax Equity and Fiscal Responsibility Act of 1982 partially offset ERTA. The limited increase in tax liability and the economic recovery produced an increase in undistributed profits of 23 percent. Dividends increased only 7 percent.
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Title Annotation:1st quarter 1984
Publication:Survey of Current Business
Date:Apr 1, 1984
Previous Article:State and local government fiscal position in 1983.
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