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The business situation.

REVISED (45-day) estimates show that real GNP increased at an annual rate of 7-1/2 percent in the second quarter of 1984, practically the same rate as shown by the preliminary (15-day) estimates (table 1). Small upward revisions in some components were largely offset by small downward revisions in others. Upward revisions were in personal consumption expenditures (due mainly to revisions in durable and nondurable goods), nonresidential fixed investment (more than accounted for by a revision in producers' durable equipment), and net exports (due to a larger downward revision in merchandise imports than in merchandise exports). Downward revisions were in residential investment (mainly due to an upward revision in prices) and change in business inventories (more than accounted for by revisions in wholesale and retail trade inventories).

The increase in prices, as measured by the GNP fixed-weighted price index, was revised up one-half of a percentage point to 4 percent. The revision was largely due to upward revisions in aprices of housing and defense purchases of aircraft.

Overall, the economic picture presented in the July "Business Situation" remains largely unaltered, as most revisions in the second-quarter estimates reinforced the direction of change indicated by the preliminary estimates. The decline registered by inventory investment in the preliminary estimates became more pronounced in the revised estimates. Final sales, which increased strongly, increased even more. Corporate profits

Profits from current production--profits with inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj)--increased $14 billion,a to $291-1/2 billion, in the second quarter, following a $17-1/2 billion increase in the first quarter. Domestic profits of nonfinancial corporations contributed $12 billion of the second-quarter increase, domestic profits of financial corporations $1-1/2 billion, and profits from the rest of the world $1/2 billion.

The second quarter's rate of increase in profits from current production, at 5 percent, was in line with the 6-1/2- and 6-percent rates of the first quarter of 1984 and the fourth quarter of 1982, but markedly lower than the 13- and 21-percent rates of the third and second quarters of 1983. In those early quarters of recovery, unit costs declined while prices of products rose and rates of increase in corporate product were high; together these factor accounted for high rates of increase in profits. Later, prices received by corporations continued to rise; however, unit costs edged up each quarter and rates of increase in corporate product became smaller. Thus, the growth in profits slowed.

Adjustments to profits.--Profits before tax (book profits)--profits without IVA and CCAdj--increased $3-1/2 billion to $246-1/2 billion, following an increase of $18 billion. The IVA and CCAdj convert inventories and depreciation reported by business to those used in the national income and product accounts. The CCAdj was up $4-1/2 billion, following a $4 billion increase, reflecting mainly the effect of the Economic Recovery Tax Act (ERTA) of 1981. The IVA became less negative, by $6 billion, reflecting smaller increases in inventory prices. In the first quarter, it had became more negative, by $4-1/2 billion.

As chart 1 illustrates, the IVA has fluctuated between --$7 billion and -$19 billion since the third quarter of 1982. In contrast, the CCAdj has grown steadily from $4-1/2 billion to $52 billion over the same period. It now equals 18 percent of profits from current production.

The steady growth in the CCAdj mainly reflects provisions of ERTA athat allow the use of shorter service lives for the depreciation of new capital for tax purposes. Moreover, with the passage of time, a larger part of the capital stock is becoming eligible for the accelerated depreciation.

Disposition of profits before tax.--Corporate profits tax liability was up $1 billion to $94 billion, following an $8 billion increase. The 1984 quarterly estimates incorporate the effects of changes in tax law that resulted from the enactment of the Deficit Reduction Act of 1984. (For a more detailed explanation of these changes, see the "Federal Budget Developments" article in this issue.) Dividends were up $2 billion, to $80 billion, following a $2-1/2 billion increase. Undistributed profits were uncharged at $73 billion, following a $7-1/2 billion increase.

Profits by industry.--Profits with IVA but without CCAdj--the varient of profits available by industry--increased $9-1/2 billion in the second quarter, to $239-1/2 billion, following an increase of $13-1/2 billion in the first quarter.

Domestic profits of financial corporations were up $1-1/2 billion to $30 billion. An upswing in savings and loan associations' profits accounted for the increase, as higher mortgage rates and moderation in costs of funds accompanied larger volumes of mortgage loans closed by thrift institutions.

Domestic profits of nonfinancial corporations were up $7-1/2 billion to $183 billion, following a $13 billion increase in the first quarter. Manufacturers' profits declined in the second quarter. Although profits of nondurable manufacturers were up, they were more than offset by a decline in profits of durable manufacturers. A decline in profits of motor vehicles manufacturers, in turn, more than accounted for the slide in durables profits. The decline in motor vehicles profits was a departure from the recent trend. Production dropped sharply in the second quarter, partly due to shutdowns of several assembly plants for remodeling and retooling. In most quarters of the economic recovery and expansion, profits of motor vehicles manufacturers contributed substantially to manufacturers' profits. Although profits of motor vehicles manufacturers were sharply lower in the second quarter than in the first, they remained nearly two-thirds above the level a year earlier.

Profits of manufacturers of nondurable goods increased; the increase was more than accounted for by profits of manufacturers of petroleum and coal products, which, in contrast, had declined in the first quarter.

Trade profits increased, accounting for two-thirds of the increase in profit its of nonfinancial corporations. Retail trade profits, in turn, conributed about three-fourths of the increase in trade profits. Food store profits accounted for a large part of the increase in retail profits. Government sector

The fiscal position of the government sector in the national income and product accounts (NIPA's) deteriorated somewhat in the second quarter, as the combined deficit of the Federal Government and of the State and local governments increased $5-1/2 billion. The deterioration was accounted for by an increase in the Federal deficit; the State and local surplus was unchanged. However, at $113 billion, the combined deficit was lower than a year earlier. This improvement was largely due to a $10 billion increase in the State and local surplus.

The Federal sector.--The Federal Government deficit increased $5-1/2 billion in the second quarter to $167 billion, as expenditures increased more than receipts. Receipts increased $16 billion, one-half as much as in the first quarter, when the Social Security tax base and rate increased and corporate profits tax accruals were up strongly. In the second quarter, personal tax and nontax receipts increased $9 billion and contributions for social insurance increased $4 billion, both reflecting a strong increase in wages and salaries. Of a $1-1/2 billion increase in indirect business tax and nontax accruals, $1 billion was in customs duties. Corporate taxes increased $1 billion, reflecting the gain in corporate profits.

Expenditures increased $21-1/2 billion, compared with $12 billion in the first quarter. Purchases of goods and services increased $31-1/2 billion, maore than accounting for the increase in total expenditures. Nondefense purchases increased $24 billion: Purchases by the Commodity Credit Corporation (CCC) increased $23-1/2 billion, purchases for the strategic petroleum reserve increased $1 billion, and all other purchases declined $1-1/2 billion. The sizable increase in CCC purchases was largely the result of the phasing out of the PIK program. In the first quarter, the distribution of agricultural commodities under the PIK program reduced CCC inventories $19 billion; in the second quarter, it reduced CCC inventories only $1-1/2 billion. Regular CCC purchases of agricultural commodities increased $5-1/2 billion in the second quarter, compared with a $4 billion decline in the first. National defense purchases increased $8 billion; nearly 60 percent of the gain was in purchases of military equipment (see table 4 on page 10).

Net interest paid increased $3-1/2 billion and transfer payments to persons increased $3 billion. Grants-in-aid to State and local governments increased $2-1/2 billion--the second consecutive large increase in this category of expenditures. Grants increased for highways ($2 billion) and for education ($1-1/2 billion), and declined for public assistance ($1 billion). Subsidies less the current surplus of government enterprises declined $18 billion, reflecting a decline in subsidy payments to farmers under the PIK program. (These subsidy payments offset CCC inventory changes due to PIK, so that PIK transactions have no effect on total Federal expenditures.)

When measured using cyclical adjustments based on middle-expansion trend GNP, the Federal fiscal position moved from a deficit of $149 billion in the first quarter to a deficit of $170 billion in the second (see table 2 on page 9). The cyclically adjusted deficit as a percentage of middle-expansion trend GNP increased from 4.2 percent to 4.7 percent--a move toward a more expansionary fiscal position. (These estimates reflect last month's revisions in the NIPA's and updates in the middle-expansion trend GNP and unemployment rate series.)

The State and local sector.--The State and local government surplus, at $54 billion, was unchanged as receipts and expenditures each increased by the same amount. A small decline--the first since the fourth quarter of 1982--in the surplus of "other" funds was offset by a small increase in the surplus of the social insurance funds.

Receipts increased $10-1/2 billion, compared with $14-1/2 billion in the first quarter, when grants-in-aid and indirect business tax and nontax accruals recorded stronger increases. Indirect business taxes increased $4 billion in the second quarter; sales taxes and property taxes contributed $2 billion and $1/2 billion, respectively, to the increase. Personal tax and nontax receipts increased $3 billion, contributions for social insurance increased $1 billion, and corporate profits tax accruals were unchanged.

Expenditures also increased $10-1/2 billion, compared with $12 billion in the first quarter. Puarchase of goods and services accounted for all of the increase. Within purchases, compensation increased $4-1/2 billion, construction increased $3 billion, and all other purchases increased $3 billion. The increase in construction was more than accounted for by highway construction; all other types of construction, on balance, declined slightly. In he first quarter, in contrast, highway construction had declined $1/2 billion and all other construction had increased $3 billion.
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Title Annotation:2nd quarter of 1984
Publication:Survey of Current Business
Date:Aug 1, 1984
Words:1754
Previous Article:The economy and the federal budget: guides to the automatic effects.
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