The business situation.
The $1-1/2 billion upward revision in real GNP resulted from partly offsetting revisions in the major components (table 1). The largest upward revision--$3-1/2 billion--was in change in business inventories. Book values of manufacturing inventories, both durable and nondurable, were revised up sharply. Personal consumption expenditures were revised up $3 billion. Estimates of new and used car purchases were raised, as were estimates of expenditures on electricity and gas services. The $1 billion upward revision in nonresidential fixed investment was more than accounted for by revisions in producers' durable equipment, principally computers and communications equipment. The largest downward revision--$4 billion--was in net exports. Most of the revision was accounted for by merchandise imports, largely capital goods. A $1 billion downward revision in government purchases was mainly in Federal defense purchases. Residential investment was revised down $1/2 billion.
For the most part, the revisions in GNP do not alter the picture of robust economic expansion described in the April "Business Situation." The 9-percent increase in real GNP followed increases of 5 percent in the fourth quarter and 7-1/2 percent in the third.
About two-thirds of the increase in real production in the first quarter took the form of an increase in inventory investment. Inventories accumulated at a rapid pace, following moderate accumulation in the third and fourth quarters. The first-quarter step-up was largely in farm, manufacturing, and retail inventories. A sharp accumulation in farm inventories, after little change, reflected the transfer of crops from the Commodity Credit Corporation (CCC) to farmers under the payment-in-kind (PIK) program, and a step-up in production. In manufacturing, inventories of both durables and nondurables increased after little change in the fourth quarter. An increase in the pace of inventory accumulation in retail trade was more than accounted for by nondurables. The large inventory accumulations led to the first increases in the ratios of constant-dollar inventories to final sales since mid-1982.
Among the components of final sales, personal consumption expenditures again increased strongly. About one-half of the first-quarter increase was accounted for by spending on durables; sales of new domestic cars were up sharply. Nonresidential fixed investment registered another substantial increase. Residential investment bounced back with a strong increase after a pause in the fourth quarter. Net exports declined even more sharply than in the fourth quarter. Exports increased moderately, but imports increased much more. Government purchases declined in the first quarter, as they had in the fourth. The declines were due to operations of the CCC, principally under the PIK program. Highlights of corporate profits
Corporate profits from current production--profits with inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj)--increased $9-1/2 billion to $277-1/2 billion, in the first quarter of 1984, following a $20 billion increase in the fourth quarter. Profits have continued to decelerate since a sharp increase of $36-1/2 billion in the second quarter of 1983. Such a slowing is typical as the business cycle progresses.
First-quarter profits were 52-1/2 percent above their year-earlier level. Most of the increase was in profits of domestic nonfinancial corporations. The increase in these profits reflected both a strong recovery in economic activity and increases in unit profits. The latter stemmed from decreases in unit costs and increases in unit prices.
In the first quarter, profits of domestic nonfinancial corporations more than accounted for the increase in profits; durable manufacturing industries contributed substantially. Widespread increasses in profits of durable goods manufacturers more than offset widespread declines in profits of nondurable goods manufacturers. Within durables, motor vehicles profits were up substantially, as output increased. Primary metals profits also increased. Within nondurables, petroleum accounted for most of the decline in profits, as prices for refined products fell.
Adjustments to profits. --Profits before tax--profits without IVA and CCAdj--increased $12-1/2 billion in the first quarter, to $240-1/2 billion. This increase exceeded the increase in profits from current production, which includes the IVA and CCAdj. These adjustments convert inventories and depreciation reported by business to those used in the national income and product accounts. The IVA decreased $6-1/2 billion, to -$13 billion, reflecting larger increases in inventory prices in the first quarter than in the fourth. An increase of $3-1/2 billion, to $50 billion, in the CCAdj was largely due to provisions of the Economic Recovery Tax Act of 1981 that allowed the use of shorter service lives for the depreciation of capital. Government sector
The fiscal position of the government sector in the national income and product accounts improved considerably in the first quarter as the combined deficit of the Federal Government and of State and local governments declined $22 billion. This improvement was accounted for by a 10-percent decline in the Federal deficit and a 5-percent increase in the State and local surplus. Moreover, the combined deficit, at $110 billion, was also considerably smaller than the $143 billion deficit of a year earlier. Over the past year, the Federal Government deficit declined $12-1/2 billion and the State and local government surplus increased $20-1/2 billion.
The Federal Sector. --The Federal Government deficit declined $19 billion in the first quarter, as receipts increased significantly more than expenditures.
Receipts increased $30 billion, compared with $12 billion in the fourth quarter. Over one-half of the increase--$16-1/2 billion--was in social insurance contributions; a number of legislated changes, primarily under provisions of the Social Security Amendments of 1983 and effective January 1, 1984, contributed to the large increase. Those changes were:
* An increase in the combined social security tax rate, to 13.7 percent from 13.4 percent, contributed $4-1/2 billion. The increase was for employers only; the rate for employees remained at 6.7 percent.
* An increase in the maximum social security taxable wage base, to $37,800 from $35,700, contributed almost $2 billion.
* An increase in the social security tax rate for the self-employed, to 11.30 percent from 9.35 percent, coupled with the base increase and final payments for 1983, contributed $1-1/2 billion.
* An increase in the premium for supplemental medical insurance--the voluntary program for the aged and disabled medicare beneficiaries--to $14.60 from $12.20 contributed $1 billion.
* An extension of mandatory social security coverage to new Federal Government civilian employees and to employees of nonprofit institutions contributed almost $2 billion.
* An increase in the Federal and State unemployment insurance tax rate contributed $2-1/2 billion.
Among the other categories of receipts, personal tax and nontax receipts increased $7-1/2 billion and corporate profits tax accurals increased $5-1/2 billion. Indirect business tax and nontax accruals were unchanged; an increase in customs duties was offset by a decline in windfall profit taxes.
Expenditures increased $11 billion, compared with $15 billion in the fourth quarter. Subsidies less the current surplus of government enterprises increased $8-1/2 billion; a $12-1/2 billion increase in payment-in-kind (PIK) subsidies was partly offset by a $3 billion decline in the Commodity Credit Corporation (CCC) deficit and a $1 billion decline in regular Government payments to farmers. National defense purchases of goods and services increased $7 billion, including $2-1/2 billion for the 4-percent civilian and military pay raise effective January 1, 1984 (including the 0.5 percent retroactive pay raise enacted in mid-April). Grants-in-aid to State and local governments increased $4 billion, the largest increase since the first quarter of 1978. Among the grant programs, the largest increases were for public assistance ($2-1/2 billion) and for community development ($1/2 billion). Net interest paid increased $3-1/2 billion and transfer payments to persons increased $2-1/2 billion. The increase in transfer payments was the net result of increases in social security benefits ($3 billion), medicare ($1-1/2 billion), and a variety of other programs ($1 billion), and a decline in unemployment benefits ($3 billion). Within social security benefits, a 3-1/2-percent cost-of-living increase--over $51/2 billion--was partly offset by a $3 billion decline in retroactive benefit payments.
Nondefense purchases and transfer payments to foreigners declined in the first quarter. The decline in non-defense purchases--$8-1/2 billion--was more than accounted for by a $10 billion decline in agricultural purchases by the CCC; a $12-1/2 billion decline due to PIK transfers was partly offset by a $2-1/2 billion increase in regular CCC purchases. Spending also declined over $1/2 billion each for the National Aeronautics and Space Administration and for purchases for the strategic petroleum reserve. Increases in a variety of other purchases ($2 billion) partly offset these declines. The decline in foreign transfer payments--$5 billion--was due to a large fourth-quarter payment to Israel; the payment was the full amount earmarked for Israel in the fiscal year 1984 appropiation.
Cyclically adjusted surplus or deficit. --When measured using cyclical adjustments based on middle-expansion trend GNP, the Federal fiscal position was essentially unchanged in the first quarter. The cyclically adjusted deficit was $160 billion, or 4.5 percent of middle-expansion trend GNP (see table 3 on page 10).
The State and local sector. --The State and local government surplus increased $3 billion, to $61 billion, as receipts increased more than expaenditures. Most of the increase--$2 billion--was in the surplus of "other" funds, that is, other than social insurance funds. This other funds measure showed a deficit throughout 1982, when it averaged $2 billion. It swung to surplus in the first quarter of 1983 and since then has increased substantially, from $5-1/2 billion to $23 billion. (See "The State and Local Government Fiscal Position: An Alternative Measure" in the March 1984 SURVEY OF CURRENT BUSINESS for discussions of how this surplus came about and of an alternative measure of this sector's fiscal position.)
Receipts increased $13-1/2 billion, compared with $11-1/2 billion in the fourth quarter. Indirect business tax and nontax accruals increased $5 billion; sales taxes accounted for three-fifths of the increase, reflecting strong retail sales. Federal grants-in-aid accounted for $4 billion of the increase. Rising incomes resulted in a $2-1/2 billion increase in personal tax and nontax receipts and a $1-1/2 billion increase in corporate profits tax accruals. Contributions for social insurance increased $1/2 billion.
Expenditures increased $10-1/2 billion, slightly less than in the fourth quarter. Purchases of goods and services accounted for most of the increase; all other expenditures, on balance, increased $1/2 billion. Within purchases, compensation increased $5 billion, construction increased $2 billion, and all other purchases increased $3 billion.
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|Title Annotation:||1st quarter 1984|
|Publication:||Survey of Current Business|
|Date:||May 1, 1984|
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