The business situation.
The deceleration in real GNP can be traced to inventories. After a positive $22 billion contribution to the change in real GNP in the first quarter, inventories contributed negatively to the change in the second.
Total final sales accelerated to about double the first-quarter rate of 4 percent. The total includes the inventory transactions of the Commodity Credit Corporation (CCC). These transactions, largely reflecting the transfer of crops to farmers under the payment-in-kind (PIK) program, held down the increase in final sales in the first (and also the fourth) quarter, but added to it in the second. Final sales excluding CCC transactions increased 5 percent in the first quarter and about 7 percent in the second. (For quarters in which PIK transactions are large, this variant of final sales is more useful in assessing the underlying strength of demand than is total final sales.) The acceleration was partly attributable to net exports, which declined less in the second quarter than in the first. Final sales to domestic purchasers (also adjusted to exclude the CCC) increased only slightly more than the 7-1/2-percent rate in the first quarter. As indicated in the following highlights of second-quarter developments in real GNP, prices, and personal income, the evidence available in mid-June suggests that most other major components of GNP registered changes similar to those in the first quarter.
* Personal consumption expenditures increased at about the same strong rate--6-1/2 percent--as in the first quarter. Durable goods purchases increased less than in the first quarter, largely reflecting the pattern of motor vehicle sales. As discussed later in the "Business Situation," auto sales changed little after a very strong increase, but truck sales strengthened. Purchases of both nondurable goods and services were up more than in the first quarter. In nondurables, food increased after a decline; in services, the pickup was largely in net foreign travel.
* Nonresidential fixed investment increased slightly more than the 16-percent rate in the first quarter. Structures again were up strongly; the second-quarter strength was in commercial buildings and in public utilities. Producers' durable equipment, with a widespread increase, was up more than in the first quarter. As discussed in the article on the BEA plant and equipment expenditures survey, the strength of investment in recent quarters and the increase planned for the rest of 1984 are consistent with favorable developments in a number of investment indicators.
* Residential investment increased less than in the first quarter. In the first quarter, when residential investment increased 26-1/2 percent, housing starts had averaged 1.96 million (seasonally adjusted annual rate). In April and May, they averaged 1.89 million. Reflecting the pattern of housing starts, most of the deceleration in investment was in single-family housing units.
* Inventories accumulated at a substantial rate, but less than in the first quarter. Accordingly, they contributed negatively to the change in real GNP; in the first quarter, a step-up in the rate of accumulation had contributed a positive $22 billion. Motor vehicle inventories--the only part of inventories for which information about second-quarter developments is reasonably complete--were down sharply. Only fragmentary information is available about farm inventories; it appears that accumulation was substantial, but less than the $8-1/2 billion rate in the first quarter. In contrast to the preceding two quarters, the transfer of crops to farmers under PIK--which appears in the national income and product accounts as farm inventory accumulation--was small, because the PIK program was being phased out. However, other farm inventories increased after 2 years of runoff. Nonfarm inventories other than motor vehicles appear to have registered substantial accumulation, probably somewhat more than the $17-1/2 billion rate in the first quarter.
* For net exports, limited evidence suggests a decline roughly one-half the size of the $10-1/2 billion first-quarter decline. Both exports and imports increased in the second quarter, but the increase in imports was larger. Imports continued to reflect the U.S. economic expansion and the strength of the dollar.
* Government purchases increased sharply after a $1-1/2 billion decline in the first quarter. In the first quarter, CCC transactions--largely PIK--had declined $4 billion, more than accounting for the decline in Federal purchases. In the second quarter, with the phasing out of PIK, these transactions accounted for a substantial increase. Other Federal nondefense purchases again changed little, and defense purchases increased somewhat more than in the first quarter. State and local purchases increased moderately in both quarters, mainly due to increases in purchases of structures.
* In the GNP fixed-weighted price index, the deceleration of about 1-1/2 percentage points was largely due to food prices. In the first quarter, prices of the food components of GNP had increased 11-1/2 percent; in the second quarter, the increase was only 1 or 2 percent. The effect of a Federal pay raise, which had added 0.6 percentage point to the first-quarter increase in the GNP price index, accounted for the rest of the deceleration.
* Personal income increased about $53 billion, following an extraordinarily large--$91 billion--increase in the first quarter. The deceleration largely reflected Federal subsidy payments to farmers. These subsidies, primarily under the PIK program, had added $10-1/2 billion to the change in farm proprietors' income in the first quarter; their winding down subtracted about twice that much in the second. The remaining major components of personal income registered increases about in line with those in the first quarter: Personal interest income and transfer payments were up a little more; wage and salary disbursements and nonfarm proprietors' income were up a little less. Personal contributions for social insurance, which are subtracted in deriving the personal income total, increased less than in the first quarter, when they had been boosted by several legislated changes in social security.
The deceleration in personal income carried through to disposable income; personal taxes were up about the same in both quarters. Despite a slowing in price increases, real disposable income increased only about one-half as much as the 10-percent rate in the first quarter. The increase in personal outlays exceeded that in disposable income, so personal saving declined. The saving rate fell about one-half percentage point from 5.9 percent in the first quarter. Motor vehicles
Real motor vehicle output declined about $6-1/2 billion in the second quarter, following a $5-1/2 billion increase in the first. The swing was more than accounted for by auto output. Sales of autos changed little after a very strong increase in the first quarter, and inventories fell after an increase. Truck output was up strongly for the sixth consecutive quarter. Sales increased considerably more than in the first quarter; inventories increased less than in the first quarter.
Unit sales of new cars steadied at about 10.6 million (seasonally adjusted annual rate) in the second quarter, following sharp increases in the preceding two quarters (chart 1). The slowing growth in disposable income, increases in interest rates on consumer loans, and shortages in supplies of some models contributed to the flattening of sales.
Sales of imported cars declined slightly to about 2.2 million from 2.3 million in the first quarter, and their market share slipped to 21 percent from 22 percent. A weakness in Japanese car sales in the beginning of the quarter probably reflected supply shortages; several manufacturers had reduced shipments to the United States to comply with the March 31 cutoff of the voluntary quota agreement.
Sales of domestic cars increased slightly to about 8.3 million from 8.2 million in the first quarter. A step-up in subcompact car sales more than accounted for the increase. Compact car and intermediate car sales changed little, and full-size and luxury car sales declined slightly. Sales of some domestic models may have been constrained by shortages, particularly toward the end of the quarter.
Domestic car production dropped to 7.2 million (seasonally adjusted annual rate) in the second quarter from 8.9 million in the first. Part of the drop was due to shutdowns of three assembly plants that had been producing rear-wheel drive cars. After extensive remodeling and retooling, two of these plants will produce front-wheel drive cars, and the third will produce small vans.
Domestic car inventories fell sharply to 1.43 million (seasonally adjusted) in May from 1.61 million in March, and a further reduction appears likely in June. The ratio of inventories to sales fell from 2.3 in the first quarter to belo 2.0, the ratio generally considered desirable by the industry. Further, supplies of some individual models are much tighter. Shortages probably will persist well into the third quarter.
Unit sales of new trucks increased to about 4.2 million (seasonally adjusted annual rate) from 3.8 million in the first quarter. Both consumer and business purchases strengthened. Sales of light domestic trucks increased strongly to about 3.4 million in the second quarter, their highest level in more than 5 years. Sales of "other" domestic trucks were up sharply to about 0.29 million. Imported truck sales changed little from 0.55 million in the first quarter. Despite another substantial increase in production, inventories declined in the second quarter. First-quarter corporate profits
Profits from current production--profits with inventory valuation and capital consumption adjustments--increased $13-1/2 billion in the first quarter, to $281-1/2 billion, following a $20 billion increase in the fourth quarter. The first-quarter estimate is $4 billion higher than the preliminary one published a month ago. Domestic profits of nonfinancial corporations and the foreign component of profits were both revised up $2-1/2 billion; domestic profits of financial corporations were revised down by $1/2 billion.
Domestic profits of nonfinancial corporations contributed most of the first-quarter increase in profits of domestic corporations, accounting for $12-1/2 billion out of the $13 billion increase. The increase in nonfinancial profits resulted from increases in both constant-dollar output and in unit profits. The latter, in turn, was due to larger increases in unit prices than in unit costs.
Profits before tax--profits without inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj)--increased $16 billion in the first quarter, to $244-1/2 billion. This increase exceeded the increase in profits from current production by $2-1/2 billion, because the changes in the two adjustments reduce the latter by that amount (see accompanying tabulation). In contrast, in the fourth quarter, when the sum of the changes in the two adjustments had been $20-1/2 billion, profits before tax had declined slightly, while profits from current production had increased $20 billion.
The adjustments convert the costs of inventories and depreciation reported by businesses into those used in the national income and product accounts. The IV A declined from -- $6 billion to -- $12-1/2 billion in the first quarter, reflecting larger increases in inventory prices in the first quarter than in the fourth. An increase of $3-1/2 billion in the CCAdj was largely due to provisions of the Economic Recovery Tax Act (ERTA) that allowed the use of shorter service lives for the depreciation of capital.
Disposition of profits before tax.-- Corporate profits tax liability increased $7-1/2 billion following an increase of $1/2 billion. Dividends were up $2 billion and undistributed profits, $6-1/2 billion. Compared with year-earlier levels, tax liability was up 51 percent, dividends were up 9-1/2 percent, and undistributed profits were up 100 percent. Although economic recovery and expansion raised profits and thus tax liability, ERTA helped keep the tax liability lower than it would have been under previous tax laws.
Profits by industry.-- Profits with the IV A but without the CCAdj--the variant of profits available by industry--increased $10 billion in the first quarter, following an $11 billion increase in the fourth. While profits of domestic financial industries were up only slightly, those of domestic nonfinancial industries increased $9 billion, following an increase of $14 billion. Manufacturing profits accounted for nearly one-half of the first-quarter increase in nonfinancial industries' profits. A decline in profits of nondurable goods manufacturers partly offset widespread increases in profits of durable goods manufacturers. Within durables, motor vehicles, accounted for more than one-half the gains. Within nondurables, a decline in profits of manufacturers of petroleum products more than accounted for the decline in total profits.
Trade profits increased $1 billion, following a $3-1/2 billion increase; both wholesale and retail trade profits registered increases. Within retail trade, declines in profits of food stores and auto dealers were more than offset by increases in profits of general merchandisers and other retailers. Transportation profits were up, primarily because airlines continued to cut their losses. First-quarter NIPA revisions
The 75-day revisions of the national income and product accounts estimates for the first quarter of 1984 are shown in table 2.
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|Title Annotation:||second quarter 1984|
|Publication:||Survey of Current Business|
|Date:||Jun 1, 1984|
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