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The business situation.

REAL GNP increased as an annual rate of 7-1/2 percent in the second quarter, following a 10-percent increase in the first, according to revised estimates presented later in this issue (table 1). Increases of this size are unusual six and seven quarters after a trough in GNP.

Labor markets, productivity, costs, and prices also registered favorable second-quarter develoments. Civilian employment, as measured by the household survey, increased 1.4 million and unemployment declined 0.4 million. the civilian unemployment rate declined 0.4 percentage point, to 7.5 percent (chart 2). The unemployment rate for men dropped to 6.6 percent below the rate for women (by 0.1 percentage point for the first time since the fourth quarter of 1982. The unemployment rate for teenagers declined 0.9 percentage point in the second quarter to 18.7 percent.

Productivity--as measured by real gross product per hour in the non-farm business economy less housing--continued to improve, which is typical in recovery/expansion periods. Both the first- and second-quarter increases were 3-1/2 percent (see table 1 on page 101). Unit labor cost, which was flat after a 3-percent increase in the first quarter, continued to contribute substantially to sustaining a low rate of inflation in final product prices.

Prices as measured by the GNP fixed-weighted price index increased 3-1/2 percent, down from 5 percent in the first quarter (table 2). The deceleration was more than accounted for by food prices. The price of GNP food components declined 2 percent, after a 12-percent increase in the first quarter. The first-quarter increase had been largely due to freeze damage to fruits and vegetables and to higher meat prices; prices for these items have since declined. GNP energy prices were a partial offset; after a first-quarter decline of 2-1/2 percent due to lower gasoline prices, energy prices increased 4 percent in the second quarter.

Real GNP

The second-quarter deceleration in real GNP took the form of a large swing in inventory investment. Real business inventories were up $21-1/2 billion, after increasing $31-1/2 billion in the first quarter, and $7 billion in the fourth (table 3). A major factor in the second-quarter decline in the rate of accumulation in inventories was a swing in motor vehicles from an increase of $7 billion in the first quarter to a decline of $3-1/2 billion in the second. Other nonfarm inventories, in contrast, were up even more in the second quarter than in the first.

A decline in the rate of accumulation in farm inventories--from $5-1/2 billion in the first quarter to $1 billion in the second--was primarily due to the phasing out of the payment-in-kind (PIK) program. Transfers of crops from the Commodity Credit Corporation (CCC) to farmers under PIK amounted to $8 billion in the first quarter; in the second quarter, they were only $1/2 bilion. Net exports

Real final sales jumped 10-1/2 percent, following a 3-1/2 percent increase in the first quarter. About 3 percentage points of the acceleration was due to CCC inventory transactions in government purchases. CCC inventory depletions are treated in the national income and product accounts (NIPA's) as negative Federal purchases. In the first quarter, CCC inventories had declined due to PIK transfers. This, in turn, had reduced Federal purchases. Other contributions to acceleration came from personal consumption expenditures (PCE), which increased even more strongly than in the first quarter, and net exports, which declined much less. Nonresidential fixed investment was up strongly in both quarters; residential investment increased less than in the first quarter. Developments in final sales component are discussed in the following sections. Personal consumption expenditures

Real PCE increased 7 percent, following an increase of 4-1/2 percent in the first quarter. The acceleration was in nondurable goods and in services. Gains in real income and employment continued to spur consumer spending. Also, consumer confidence remained at high levels, despite some fluctuation.

Expenditures for durable goods increased 9-1/2 percent, substantially less than in the first quarter. The slowdown was evident in all of the major components. Increases in expenditures for motor vehicles had been very strong in the two preceding quarters.

Expenditures for nondurable goods increased 9-1/2 percent, a much larger gain than in the first quarter. The acceleration was accounted for by large increases in expenditures for food and for clothing and shoes.

Expenditures for services were up 4 percent more than in the first quarter. Transportation was up more than in the first quarter. Electricity and natural gas increased, after two quarters of decline. Increases in most other components of services were either the same as, or larger than, in the first quarter. Fixed investment

Real residential investment increased 9-1/2 percent in the second quarter, following a 21-percent increase in the first. The deceleration was mainly attributable to single family construction, which slowed from a 30-percent rate of increase to a 13-percent rate.

The deceleration in single-family construction mirrored housing starts (chart 3). Single-family starts surged in January-February to 1.4 million (annual rate)--a surge many attribute to unusually favorable weather conditions--before dropping to a March-June average of 1.1 million.

Mortgage commitment rates increased almost a full percentage point in the second quarter, to 14.5 percent at the end of the June, and further increases are widely expected (chart 4). The runup in rates, along with increased house prices, appears to have put a damper on house sales. Sales of existing single-family homes decelerated in April and fell in May. Sales of existing single-family homes decelerated in April and fell in May. Sales of new one-family houses fell in 4 of the first 5 months of the year. The greater weakness in sales of new houses is attributable, in part, to larger price increases. During the first 5 months of the year, the median sales price of new houses increased more than twice as fast as that of existing houses.

Real nonresidential fixed investment increased 20-1/2 percent in the second quarter, the same rate as in the first. A slight deceleration in producers' durable equipment (PDE) offset an acceleration in structures. Motor vehicles--which are about one-fifth of PDE--accounted for more than two-fifths of the second-quarter increase. Computers and photographic equipment accounted for about one-half of the remaining increase. In structures, about three-fourths of the second-quarter increase was in commercial buildings. Industrial buildings registered its second straight increase following a prolonged decline.

Real net exports declined $10 billion, following an $8-1/2 billion decline in the first quarter. Exports increased $4 billion in both quarters. The first-quarter increase had been concentrated in goods, mainly agricultural products, automotive products to Canada, and capital goods. The second-quarter increase was largely in receipts of portfolio investment income.

Imports were up $5-1/2 billion, following a $14 billion jump in the first quarter. A large first-quarter increase in merchandise imports had been spread across most major end-use categories; merchandise imports increased much less in the second quarter. Payments for services picked up after no change in the first quarter. Government purchases

Real government purchases were up strongly, following a slight increase in the first quarter. The pickup was largely in Federal nondefense purchases which were greatly affected during the past several quarters by CCC operations, primarily under the PIK program. (As mentioned earlier, CCC inventory depletions are treated as negative Federal purchases.) Reductions in CCC inventories amounted to $9 billion in the first quarter; in the second quarter, CCC inventories were unchanged, as PIK was phased out. Federal defense purchases increased $2-1/2 billion, mostly in military hardware, following a small increase in the first quarter. State and local government purchases increased $1-1/2 billion in both quarters; construction accounted for about one-half of the increases.

The Federal sector.--Changes in current-dollar Federal receipts and expenditures on a NIPA basis are shown in table 4. Among expenditures, purchased were up $32 billion; the huge increase was largely due to the CCC operations. Defense purchases also were up strongly in the second quarter. Transfer payments were up $2 billion, as the decline in unemployment insurance benefits tapered and other transfers to persons continued to increase. Net interest paid continued to increase, mainly reflecting higher interest rates on the Federal debt. An $18 billion drop in subsidies less the current surplus of Government enterprises was accounted for by a reduction in subsidies paid to farmers, as the PIK program was phased out. (The PIK subsidy payments offset CCC inventory changes due to PIK, so these transactions have no effect on total Federal expenditures.) These changes and smaller changes in other components sum to an increase of $19-1/2 billion in total expenditures in the second quarter.

Among receipts, an increase of $6 billion in personal tax and nontax payments was largely due to continued growth in the tax base. Indirect business taxes were up $1 billion, and contributions for social insurance were up $4 billion. Estimates of corporate profits, and thus of corporate profits tax accruals, are not yet available. If, as is likely, profits and profits tax accruals changed little, then total receipts would register an increase about one-fourth as large as that in the first quarter.

An increase of this size in receipts would be less than one-half of the increase in expenditures, so the deficit on a NIPA basis would increase about $10 to $15 billion from the $161-1/2 billion registered in the first quarter.

Personal Income

Personal income increased $64-1/2 billion in the second quarter, following an $84 billion increase in the first (table 5). The deceleration can be almost entirely attributed to the sharp drop in Federal subsidy payments to farmers.

Wage and salary disbursements registered another strong increase in the second quarter. Wages and salaries in manufacturing and in other commodity-producing industries were up less than in the first quarter, but those in the distributive and in the service industries were up more. Government wages and salaries increased $3 billion less than in the first quarter; the difference was due to a pay raise for Federal civilian and military employees in the first quarter.

Farm proprietors' income dropped in the second quarter after a strong increase. Payments to farmers under PIK amounted to only $1-1/2 billion; they had been $19 billion in the first quarter. A slowdown in the increase in nonfarm proprietors' income was in retail trade and, to a lesser extent, in construction.

Among the other components of personal income, personal interest income registered another substantial increase in the second quarter. Transfer payments were up somewhat more than in the first quarter, as the decline in unemployment insurance benefits tapered. 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.

Reflecting the continued growth in the taxable wage base, personal tax and nontax payments were up $9 billion in the second quarter after a $10-1/2 billion increase in the first. The increase in disposable personal income--personal income less taxes--decelerated to $55-1/2 billion, or 9 percent, from $73-1/2 billion, or 12-1/2 percent, in the first quarter. Due to a slowing donw in PCE prices, real income did not decelerate as much. Real disposable personal income increased 7 percent in the second quarter, following an 8-percent increase in the first.

Personal outlays increased about as much as disposable income in the second quarter, so personal saving changed little. The personal saving rate edged down 0.1 percentage point to 6.0 percent.
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Title Annotation:second quarter, 1984
Publication:Survey of Current Business
Date:Jul 1, 1984
Words:1933
Previous Article:Constant-dollar inventories, sales, and inventory-sales ratios for manufacturing and trade.
Next Article:The U.S. national income and product accounts: revised estimates: 1981-83: first and second quarter 1984.
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