The business situation.
Over the eight quarters since the trough in real GNP in the third quarter of 1982, real GNP increased at an annual rate of 5-1/2 percent (table 2). (This period is hereafter referred to as recovery, even though real GNP surpassed its previous peak, and thus moved into expansion, in the second quarter of 1983). This rate of increase is about the same as that for the median of the seven preceding recoveries and for the 1975-77 recovery. The 1975--77 recovery is singled out because it followed a recession similar in depth and duration to the one preceding the current recovery. The rate of increase in final sales was also about the same in the current recovery as in the median of the seven preceding and 1975-77 recoveries. Thus, inventory investment contributed about as much to the increase in GNP in the current recovery as in the median and 1975-77 recoveries.
Within final sales, the positive and negative contributions of fixed investment and net exports, respectively, stand out. The rates of increase in fixed investment, and in its nonresidential and residential components, were much higher in the current recovery than in the median of recoveries--indeed, they were highest among all seven preceding recoveries. Net exports reflectd a much higher rate of increase in imports--more than twice as strong as in the median and, in fact, strongest among all seven preceding recoveries--and a lower rate of increase in exports. (Developments over the current recovery in fixed investment and in net exports are highlighted in the section on real GNP that follows.) The rate of increase in PCE in the current recovery was somewhat more than in the median, but somewhat less than in 1975-77, and the rate of increase in government purchases was higher than in the median and 1975-77 recoveries.
Table 3 shows an alternative breakdown of GNP, which sheds light on developments in the various sectors. As is typical of most recoveries, the business sector, and its nonfarm and nonfarm less housing subsectors, increased more than GNP, at annual rates of 6-1/2 to 7 percent. However, the amount by which these rates of increase exceeded the rate of increase in GNP was somewhat larger in the current recovery than in the median of earlier recoveries. Thus, the nonbusiness sectors contributed less to GNP growth than is typical. Rest-of-the-world product declined. Product originating in government--that is, the compensation of government employees--showed only a very small increase, a Federal, State, and local governments held down employment. At an annual rate of only 1 percent, the increase in product originating in households and institutions, was below its trend rate.
Motor vehicle output, which is the value of new autos and trucks produced plus the margin on the sale of used autos by business, is shown in the addenda to table 3. It increased at an annual rate of 17-1/2 percent in the current recovery. The recovery covers roughly the same period as model years 1983 and 1984, which--as described in the article on motor vehicles later in this issue--showed strong increases in both auto and truck production.
Prices. --Inflation continued moderate. The GNP fixed-weighted price index increased 4 percent in the third quarter, following increases of 4-1/2, percent and 5 percent in the second and first quarters, respectively (table 4). The third-quarter rate was about the same as the average annual rate of the 2 years of recovery. Inflation had averaged about 2 percentage points more in the 1975-77 recovery.
In the current recovery, the prices of most of the items shown in the table registered increases within a few percentage points of the increase in GNP prices: PCE prices increased at about the same rate, prices of fixed investment increased somewhat less, and those paid by government increased somewhat more. Import prices were the only prices that declined over the period; the decline partly reflected the appreciation of the dollar against most foreign currencies.
Productivity and costs. --Table 5 shows changes in real gross product, aggregate hours, and compensation in the business economy other than farm and housing. Productivity, as measured by real product per hour, was flat in the third quarter, following increases in recent quarters. The slowing froma 5-1/2-percent increase in the second quarter reflected sharper deceleration in real product than in aggregate hours.
Over the 2 years of recovery, productivity, which typically increases during recoveries, increased at an annual rate of 3-1/2 percent--the strongest sustained growth since the 1975-77 recovery. Real product increased 7 percent; aggregate hours increased 3-1/2 percent, reflecting increases in employment and average weekly hours. Productivity had increased faster during the 1975-77 recovery, when aggregate hours grew at a much slower rate than i n the current recovery.
Unit labor cost increased 4 percent--more than in recent quarters. However, the average increase for the 2 years of recovery--1 percent at an annual rate--was by far the lowest sustained rate in a decade, and contributed substantially to the low rate of inflation in final product prices. In the 1975-77 recovery, unit labor cost had increased at an annual rate of about 4 percent; compensation had increased more, and real product less, than in the current recovery.
Employment and unemployment. --The civilian unemployment rate was unchanged at 7.5 percent in the third quarter, following declines of 0.4 and 0.6 percentage points in the second and first quarters, respectively. The third-quarter unemployment rate was about the same as that prior to the recessionary runup in 1981-82 (chart 2). The decline in the unemployment rate in the current recovery--whether measured as 2.5 percentage points from the third-quarter 1982 trough in real GNP or as 3.1 points from the fourth-quarter 1982 peak in unemployment--was more than double the decline in the 1975-77 recovery.
Employment gains in the third quarter, as measured by both the household and the establishment surveys, quarters. Over the 2 years of the current recovery, employment increased at an annual rate of 3 percent--about the same as in the 1975-77 recovery.
Average weekly hours for private nonfarm production workers declined slightly in the third quarter. This decline was the first since the fourth quarter of 1982. Over the 2 years, hours increased 0.4 to 35.2; the increase was much stronger than that in the 1975-77 recovery.
The third-quarter deceleration in real GNP was in all major components of final sales except residential investment. PCE changed little, after an unusually large increase in the second quarter; net exports declined much more than in the second quarter; and nonresidential fixed investment and government purchases were up much less. Residential investment registered little change in both quarters. In contrast with final sales, change in business inventories--that is, inventory investment--was up sharply in the third quarter, following a sharp decline in the second.
Personal consumption expenditures
Real PCE changed little in the third quarter, after an increase of 8 percent in the second. Several factors may have led to the third-quarter flattening in PCE, to which all three of its major components contributed. Real disposable personal income decelerated sharply in both the second and third quarters, and consumer confidence--as measured, for example, by the Conference Board's consumer confidence index--slipped in the third quarter. Both had increased during 1983 and the early part of 1984. Also, to some extent, the flattening may have been an aftereffect of the unusually large second-quarter increase.
Expenditures for durable goods declined 3-1/2 percent in the third quarter, after very strong--but decelerating--increases in each of the preceding three quarters. The decline was spread across all major categories: motor vehicles, furniture and household equipment, and other durable goods.
A sharp falloff in expenditures for nondurable goods accounted for about one-half the slowdown in total PCE. Expenditures for nondurables were down slightly in the third quarter, following an increase of 10-1/2 percent. A decline in purchases of clothing and shoes, which had registered a large increase in the second quarter, accounted for most of the swing. Food, energy, and other nondurables all increased moderately in the third quarter.
Expenditures for services increased 2 percent, following an increase of 4-1/2 percent in the second quarter. Purchases of electricity and gas, which had surged in the second quarter, declined in the third. The decline reflected mild summer weather in many parts of the country. A slowdown in foreign travel by U.S. residents and a pickup in travel in the United States by foreigners also contributed to the deceleration in services.
Nonresidential fixed investment
Real nonresidential fixed investment increased 8 percent in the third quarter, following an increase of 21 percent in the second. Producers' durable equipment (PDE) and structures, which had both increased 21 percent in the second quarter, increased 10-1/2 percent and 2 percent, respectively, in the third.
The third-quarter slowdown in PDE was in motor vehicles; other PDE registered another sharp increase. Despite a third-quarter drop, motor vehicles contributed substantially to the strength in PDE over most of the recovery (table 6). Since the GNP trough, motor vehicles--which had amounted to 15 percent of PDE at the trough--accounted for one-third of the increase in PDE. Another one-third of the increase was accounted for by office, computing, and accounting machinery; this category, which consists mainly of computers, had amounted to 25 percent of PDE at the trough.
Most of the sharp third-quarter slowdown in structures was in commercial buildings, which increased slightly, following a 57-percent increase in the second quarter. This component also dominated structures over most of the recovery. Since the GNP trough, commercial buildings--which amounted to 32 percent of structures at the trough--accounted for most of the increase in structures.
Over the first eight quarters of recovery, nonresidential investment and its PDE component both increased at rates substantially higher than those in all seven preceding recoveries. The rate of growth of structures was higher than in all but two.
Investment was especially strong during the second four quarters of the current recovery. PDE grew almost twice as fast during the second four quarters as during the first four. Structures turned around from an 8-percent decline in the first four quarters, to an 18-percent increase in the second four.
Many factors contributed to the surge in investment over the eight quarters. Some of the major ones may be identified, although it would be difficult to determine their relative importance. After-tax corporate profits and the net cash flow of corporations, both in constant dollars, increased rapidly. (The Economic Recovery Tax Act of 1981, which shortened service lives for many types of capital, contributed to improved cash flow.) Yields on corporate bonds--despite erratic upward movement during much of the recovery--averaged several percentage points lower than during the preceding recession. Appreciation of the dollar against major foreign currencies reduced the price of imported capital equipment. Capital stocks had increased very slowly in the 2 years prior to the recovery, and, as a result, pent-up demand for modernization may have developed. Further, the rate of capacity utilization in manufacturing increased rapidly and, although it remained below previous peaks, may have triggered spending for additional capacity.
Real residential investment increased 3 percent in the third quarter, following an even smaller increase in the second. Multifamily construction more than accounted for the third-quarter increase; single-family construction fell, and the "other" component (which includes additions and alterations, sales of new mobile homes, and brokers' commissions on sales of new and existing residences) changed little.
Over the eight quarters of recovery, residential investment increased faster than it had in the seven earlier recoveries. Single-family and multifamily construction both increased at annual rates of about 40 percent, and both decelerated significantly in the second four quarters of the recovery (table 6). Construction of single-family units increased much faster than construction of multifamily units in the first four quarters, and accounted for about two-thirds of the increase in residential investment. In the second four quarters, the reverse was true, as multifamily construction accounted for about four-fifths of the (much smaller) increase in residential investment.
Financial conditions played an important role in the growth of residential investment in the recovery. Interest rates fell early in the recovery (chart 3). From more than 16 percent at the GNP trough, the mortgage commitment rate fell to less than 13 percent three quarters later, before increasing about 1 percentage point in the third quarter of 1983. The slower growth of residential investment over the second four quarters of the recovery was associated with mortgage commitment rates that hovered in the neighborhood of 13-1/2 percent until mid-1984, when they increased to 14-1/2 percent.
The introduction of money market deposit accounts in December 1982 helped depository institutions attract funds for mortgage loans during the recovery. A steadily increasing share of these loans was written with adjustable rate provisions, which are widely credited with giving considerable support to residential investment. Adjustable rate mortgages, which had accounted for 44 percent of conventional mortgage loans closed in the third quarter of 1982, accounted for 67 percent in the third quarter of 1984.
Change in business inventories
Real business inventories increased $31 billion in the third quarter, after increasing $20-1/2 billion in the second (table 7). Both farm and nonfarm inventories contributed to the $11 billion step-up in the rate of accumulation.
Nonfarm inventories increased $27 billion in the third quarter, $8 billion more than in the second. The pickup was most evident in wholesale trade, where durables contributed twice as much as nondurables. Inventory investment in manufacturing and in retail trade changed little. In retail trade, a reduction in the rate of inventory liquidation by auto dealers was largely offset by lower rates of accumulation in inventories of nondurables and other durables.
Largely reflecting the course of its nonfarm component, inventory investment has passed through three phases, since the GNP trough. In the first three quarters of the recovery, inventories were liquidated at an average annual rate of $15-1/2 billion. The next two quarters of the recovery saw moderate accumulation that averaged $4 billion. In the most recent three quarters, inventory investment increased significantly, averaging $27-1/2 billion.
Farm inventory investment followed a different course. Farm inventories were reduced substantially in each of the first four quarters after the GNP trough, as farmers used inventories to supplement production, which fell as a result of drought and Federal acreage reduction programs. In the most recent four quarters, farm inventories increased erratically; in the fourth quarter of 1983 and the first quarter of 1984, they were boosted substantially by transfers of crops from the Commodity Credit Corporation (CCC) to farmers under the payment-in-kind (PIK) program.
In the first three quarters of recovery, large inventory liquidation, combined with a moderate increase in final sales, led to a sharp drop in inventory/sales ratios. Chart 4 shows two of these ratios: the ratio of constant-dollar business inventories to total business final sales, and the ratio of nonfarm business inventories to final sales of goods and structures. The former dropped from 3.30 in the third quarter of 1982 to 3.08 three quarters later; the latter dropped from 4.68 to 4.36 over the same period. Declines in both ratios continued in the next two quarters of the recovery, as the moderate increases in inventories were more than balanced by increases in sales. In the most recent three quarters, both ratios fluctuated; at the end of the period, both remained far below their 1972-82 average levels. Both ratios, therefore, suggest that the high rates of inventory investment in these quarters are largely adjustments toward desired inventory-sales relationships.
Real net exports declined $11-1/2 billion--to --$22-1/2 billion--in the third quarter, follwoing a $3 billion decline in the second (table 8). Exports were up $5-1/2 billion in the third quarter, but imports jumped $16-1/2 billion.
The third-quarter deterioration in net exports was again in the merchandise trade balance. Merchandise exports registered a small increase in the third quarter, primarily in industrial supplies and materials, automotive goods, and capital goods. A sharp increase in merchandise imports was spread across most major end-use categories; the increase in capital goods was especially strong.
In the current recovery, net exports declined each quarter, turning negative in the first quarter of 1984 and becoming progressively more negative. The deterioration amounted to $48-1/2 billion and was concentrated in the merchandise trade balance, which declined $40 billion. Factor income contributed $3 billion to the deterioration, and other services (such as U.S. Government transactions, largely those of defense agencies, and expenditures for travel and transportation) contributed $5 billion. Major factors that discouraged exports and encouraged imports were appreciation of the dollar and faster economic growth in the United States than abroad.
Real government purchases increased 8-1/2 percent in the third quarter, following increases of 18-1/2 percent and 1 percent in the second and first quarters, respectively. The quarterly pattern of increases in 1984 largely reflected operations of the CCC, primarily under the PIK program. (Transfers of crops to farmers from CCC inventories are treated in the national income and product accounts as negative Federal purchases.) Reductions in CCC inventories were large--$9 billion--in the first quarter, as they had been in the fourth. In the second quarter, CCC inventories were unchanged, as the PIK program would down; CCC incentories increased $2 billion in the third quarter.
Other Federal nondefense purchases increased 5 percent in the third quarter, following a 4-1/2-percent decline in the second quarter and no change in the first. Federal defense purchases increased 7 percent in the third quarter, about the average increase of the preceding two quarters.
Purchases by State and local governments increased 5 percent in the third quarter, following increases of 3-1/2 percent in the first and second quarters. The acceleration was in purchases of structures.
The Federal sector. --Changes in current-dollar Federal receipts and expenditures on a NIPA basis are shown in table 9. Among expenditures, purchases were up $11-1/2 billion; defense and nondefense purchases were each up less than in the second quarter. Transfer payments were up $2-1/2 billion, the same increase as the second uarter; an increase in payments to persons more than offset a decline in foreign payments. Net interest paid increased strongly--$10 billion. a $2-1/2 billion decline in subsidies less the current surplus of Government enterprises was much less than that in the second quarter, which had reflected the winding down of PIK payments to farmers. (The PIK subsidy payments are offset by the reductions in CCC inventories due to PIK, so these transactions have no effect on total Federal expenditures.) These changes and smaller changes in other components sum to a third-quarter increase in expenditures of $21 billion.
Among receipts, an increase of $11 billion in personal tax and nontax payments was largely due to continued growth in the taxable wage base. Indirect business taxes were up about the same as in the second quarter; contributions for social insurance were up, but less than in any quarter since the fourth quarter of 1982. Estimates of corporate profits, and thus of corporate profits tax accruals, are not yet available. It is likely that profits before tax, and thus profits tax accruals, declined. The third-quarter decline in corporate profits tax accruals can be approximated by using a residual calculation of corporate profits that assumes that the statistical discrepancy in the national income and product accounts was the same as in the preceding quarter. On the basis of this calculation of corporate profits tax accruals, total receipts probably increased only $5 to $10 billion in the third quarter.
An increase of this size in receipts would be considerably less than that in expenditures, so the deficit on a NIPA basis would increase about $10 to $15 billion from the $163-1/2 billion registered in the second quarter.
Personal income increased $63 billion in the third quarter, following an increase of about the same size in the second (table 10). The similarity of the third- and second-quarter increases masked opposite movements in wage and salary disbursements and in farm proprietors' income.
Wage and salary disbursements were up $25-1/2 billion in the third quarter, $12 billion less than in the second. Wages and salaries in all major private industry groups were up less than in the second quarter; the deceleration was due to the weaker increases in employment and earnings and the decline in average hours worked. Wages and salaries lost due to the auto strike were minimal. The increase in government wages and salaries was about the same as in the second quarter.
Farm proprietors' income increased $5 billion in the third quarter, after dropping $9 billion in the second. It had nearly doubled--up $15 billion--in the first quarter. The quarter-to-quarter volatility in farm income largely reflected the pattern of agricultural subsidies, mainly under the PIK program. Payments under PIK increased $6 billion to $19 billion in the first quarter, and then fell to $1-1/2 billion in the second and to $1/2 billion in the third. The strength in farm income in 1984 largely reflected a step-up in crop production.
Other components of personal income registered third-quarter increases that were about the same as, or only moderately smaller or larger than, those in the second quarter. A deceleration in nonfarm proprietors' income was largely in retail trade and construction. Personal interest income registered another strong increase of $21-1/2 billion. Transfer payments increased slightly more in the third quarter than in the second, and personal contribution for social insurance--which are substracted in deriving the personal income total--increased slightly less.
Largely reflecting the growth in the taxable wage base, increases in personal tax and nontax payments have been in the range of $10-1/2-$12-1/2 billion in the past several quarters. Disposable personal income increased $50-1/2 billion, or 8 percent, in the third quarter--only slightly less than it had in the second. Real disposable personal income decelerated more sharply than did current-dollar disposable income, due to an acceleration in the PCE implicit price deflator. Real disposable income increased 3-1/2 percent in the third quarter after an increase of 6-1/2 percent in the second.
Over the eight quarters of the current recovery, real disposable, personal income increased 5-1/2 percent, about 1 percentage point more than in the eight quarters of the 1975-77 recovery. In contrast, the increase in current-dollar disposable income--9 percent--over the current recovery was smaller than the 10-percent increase registered in the 1975-77 recovery. The better performance of real income in 1982-84 is accounted for by the lower rate of inflation in the PCE implicit price deflator; it increased 3-1/2 percent in the current recovery, about 2 percentage points less than in the 1975-77 recovery.
The sharp deceleration in personal outlays in the third quarter, coupled with the slight deceleration in disposable income, resulted in a swing in personal saving from a decline to a substantial increase. The personal saving rate increased to 6.3 percent in the second (chart 5). Except for a dip of one-half percentage point in the second quarter of 1984, the personal saving rate has increased - steadily since the second quarter of 1983, when it was only 4 percent--the lowest rate in more than 30 years. In contrast, in the 1975-77 recovery, the rate had declined steadily except in the initial quarter.
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|Title Annotation:||3d quarter 1984|
|Publication:||Survey of Current Business|
|Date:||Oct 1, 1984|
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