The business situation.
REVISED (45-day) estimates show that real GNP increased at an annual rate of 2 percent in the third quarter of 1984 (table 1). Preliminary (15-day) estimates, published a month ago, had shown a 2 1/2-percent increase.1 The only sizable revisions were an upward revision of $3 1/2 billion in nonresidential fixed investment (mainly due to a revision in producers' durable equipment) and a downward revision of $4 billion in net exports (due to a downward revision in exports and an upward revision in imports). A small upward revision in personal consumption expenditures was more than accounted for by services. Small downward revisions were in residential investment, change in business inventories (due to nonfarm inventories), and government purchases (more than accounted for by national defense purchases). The GNP fixed-weighted price index, which registered a 4-percent increase in the third quarter, was revised little.
1. Quarterly estimates in the national income and product accounts are expressed at seasonally adjusted annual rates, and quarterly changes in them are differences between these rates. Quarter-to-quarter percent changes are compounded to annual rates. Real, or constant-dollar, estimates are expressed in 1972 dollars.
Overall, the economic picture presented in the October "Business Situation' has not changed significantly. The third-quarter increase in real GNP was a marked slowdown from increases of 7 percent and 10 percent in the second and first quarters, respectively. A swing in final sales--to a small decline after a sharp increase in the second quarter--more than accounted for the third-quarter deceleration in GNP; an increase in inventory investment provided only a partial offset. Within final sales, all components contributed to the third-quarter swing; personal consumption expenditures contributed nearly onehalf and net exports more than onefourth.
Profits from current production-- profits with inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj)--declined $9 1/2 billion in the third quarter, to $281 1/2 billion, following a $13 1/2 billion increase in the second quarter. Domestic profits of financial corporations were down $2 billion; those of nonfinancial corporations, $7 billion; and profits from the rest of the world, $1/2 billion. Occasional dips in profits are not uncommon as expansions mature; therefore, it is too early to say whether profits have peaked yet for this expansion. Even after a peak in profits, however, GNP has typically continued to expand for several quarters.
The decline in profits follows six quarters of consecutive increases and reflects the progressive slowing of real GNP in 1984. Real corporate product also slowed. In the third quarter, it increased 1/2 percent, following six quarters of growth that ranged from 4 1/2 to 15 percent.
Per unit profits declined, more than offsetting the slight increase in real product. Costs incurred and prices received by corporations per unit of real product were up, but the increase in costs exceeded that in prices. Both labor and nonlabor costs increased-- labor costs by more than twice as much as nonlabor costs.
Adjustments to profits.--Profits before tax--profits without IVA and CCAdj--declined $22 1/2 billion to $223 1/2 billion, following a $2 1/2 billion increase in the second quarter. The IVA and CCAdj convert inventories and depreciation reported by business to those used in the national income and product accounts (NIPA's). The CCAdj was up $6 billion, following a $4 1/2 billion increase; the increases mainly reflected the effect of shorter service lives for depreciation of capital permitted under the Economic Recovery Tax Act of 1981. The IVA again increased, by $7 billion, reflecting smaller increases in inventory prices. In the second quarter, it had increased $6 billion.
Disposition of profits before tax.-- Corporate profits tax liability declined $11 1/2 billion, to $84 1/2 billion, following a $3 billion increase. The 1984 quarterly estimates incorporate the effects of the tax changes resulting from the Deficit Reduction Act of 1984. (For a detailed explanation of the changes and their effects, see the August 1984 issue of the SURVEY.) The third-quarter decline in tax liability reflected the decline in profits before tax. Dividends were up $1 1/2 billion, to $81 1/2 billion, following a $2 billion increase. Undistributed profits were down $12 billion, to $58 billion, following a $2 1/2 billion decline.
Profits by industry.--Profits with IVA but without CCAdj--the variant of profits available by industry--declined $15 1/2 billion in the third quarter, to $223 1/2 billion, following a $9 billion increase in the second quarter.
Domestic profits of financial corporations were down $2 billion, to $27 billion, following no change. Savings and loan associations' profits more than accounted for the decline.
Domestic profits of nonfinancial corporations declined $13 billion, to $176 billion, following a $13 billion increase. Manufacturers' profits accounted for about three-fourths of the decline. Within profits of manufacturers of nondurable goods, declines were widespread; profits of manufacturers of petroleum and coal products and of chemicals and allied products accounted for most of the decline. Profits of durable goods manufacturers changed little.
In nonmanufacturing industries, decreases in trade and in the transportation, communication, and utilities group more than offset a small increase in other nonmanufacturing industries. Within trade, retail trade more than accounted for the decline. The change in these profits is consistent with the third-quarter slowing in personal consumption expenditures.
The fiscal position of the government sector in the national income and product accounts (NIPA's) deteriorated in the third quarter, as the combined deficit of the Federal Government and of the State and local governments increased $24 billion. The deterioration occurred at both levels of government: The Federal Government deficit increased, and the State and local government surplus declined. However, at $131 billion, the combined deficit was lower than a year earlier. This improvement was more than accounted for by a $4 billion decline in the Federal deficit.
The Federal sector
The Federal Government deficit increased $13 billion in the third quarter to $177 billion, as expenditures increased more than receipts. Receipts increased $3 billion, compared with $18 billion in the second quarter. The slowing was largely due to corporate profits tax accruals, which declined $9 billion--reflecting the drop in corporate profits--after a moderate increase. Personal tax and nontax receipts again increased $9 billion. Contributions for social insurance increased $3 billion, and indirect business tax and nontax accruals increased about $1/2 billion, both somewhat less than in the second quarter. In the latter, a $1 billion increase in customs duties and nontaxe was partly offset by a decline in windfall profit taxes.
Expenditures increased $16 1/2 billion, compared with $20 1/2 billion in the second quarter. Net interest paid increased $11 billion, accounting for over two-thirds of the increase in total expenditures. Nondefense purchases increased $7 billion: Purchases by the Commodity Credit Corporation (CCC) increased $5 1/2 billion, and all other purchases increased $1 1/2 billion. The increase in CCC purchases was largely the result of regular operations; PIK transactions accounted for less than $1 billion. Transfer payments to persons increased $2 1/2 billion; a $3 billion increase in Social Security benefits was partly offset by a $1/2 billion decline in unemployment benefits.
All other categories of expenditures declined. Subsidies less the current surplus of government enterprises declined $2 1/2 billion, reflecting declines in the CCC deficit ($1 1/2 billion) and in agricultural subsidies ($1/2 billion). Grants-in-aid to State and local governments declined $1 billion, and transfer payments to foreigners and national defense purchases declined $1/2 billion each. The decline in national defense purchases was more than accounted for by a significant falloff in the delivery of all types of military equipment (see table 2 on page 9).
Cyclically adjusted budget.--When measured using cyclical adjustments based on middle-expansion trend GNP, the Federal fiscal position moved from a deficit of $165 billion in the second quarter to a deficit of $173 billion in the third (see table 3 on page 10). The cyclically adjusted deficit as a percentage of middle-expansion trend GNP increased from 4.5 percent in the second quarter to 4.7 percent in the third--a move toward a more expansionary fiscal position.
Fiscal year 1984.--For fiscal year 1984, which ended September 30, the Federal Government deficit (on the NIPA basis) amounted to $171 billion, slightly higher than the deficit projected in the mid-session review of the unified budget (see the August SURVEY for details of the midsession review). Receipts were $6 billion lower, and expenditures were $5 billion lower, than previously estimated.
The State and local sector
The State and local government surplus declined $8 1/2 billion in the third quarter to $46 billion, as expenditures increased significantly more than receipts. A large decline in the surplus of "other' funds was partly offset by an increase in the surplus of social insurance funds.
Receipts increased $2 1/2 billion, compared with $11 billion in the second quarter. The slowing was largely due to declines in corporate profits tax accruals ($2 billion) and in federal grants-in-aid ($1 billion). Indirect business tax and nontax accruals increased $3 1/2 billion; property taxes and sales taxes contributed $2 billion and $1 1/2 billion, respectively, to the increase. Personal tax and nontax receipts and contributions for social insurance increased $1 billion each.
Expenditures increased $11 1/2 billion, slightly more than in the previous quarter. Purchases of goods and services more than accounted for the increase; all other expenditures, on balance, declined $1/2 billion. Within purchases, compensation increased $4 1/2 billion, construction increased $4 billion, and all other purchases increased $3 billion. More than one-half of the increase in construction was accounted for by highway construction, which has increased sharply--$5 billion --since the first quarter of 1984.
Alternative measure of fiscal position. --Table 2 updates the alternative measure of the State and local government fiscal position introduced in the March 1984 SURVEY. The update incorporates the NIPA revisions of July 1984, recent flow-of-funds revisions by the Federal Reserve Board, and preliminary 1982-83 Governmental Finances data from the Census Bureau. The basic fiscal position of State and local governments as shown by the alternative measure is the same as shown in the March presentation: State and local governments recorded deficits in 1981 and 1982 and then swung to surplus in 1983. However, the fiscal position in 1981 looks better than previously estimated, but the deficit in 1982 is $6 1/2 billion higher, and the surplus in 1983 is $5 1/2 billion lower, than previously estimated.
November ballot highlights.--A number of state and local tax and expenditure issues were up for voter consideration in November. Major limitations on taxes, expenditures, or both, appeared on ballots in California, Michigan, Nevada, and Oregon; all were defeated. Proposals to increase general sales taxes were defeated in Arkansas and West Virginia, as was a proposal to exempt grocery food from sales tax coverage in Idaho. In contrast, voters approved several bonded debt issues and lotteries.
Bond issues on the ballots totaled almost $5 billion, the largest volume of issues offered for approval since 1975. The largest issues approved were $2 1/2 billion in California for water conservancy and pollution control, schools, veterans' loans, and hazardous waste cleanup, and over $1/2 billion in Alaska for financing veterans' housing. Over $1/2 billion in new issues were rejected; major turndowns were in Arkansas (for waste disposal) and West Virginia (for a variety of projects). Four States--California, Missouri, Oregon, and West Virginia --approved new lotteries. When the new lotteries are in full operation (probably in the fiscal year beginning July 1986), it is estimated that they will add a total of $1/2 billion annually to state revenues.
Table: 1.--Revisions in Selected Component Series of the NIPA's, Third Quarter of 1984
Table: 2.--Derivation of an Alternative Measure of the State and Local Government Fiscal Position, 1980-83
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|Title Annotation:||3d quarter 1984|
|Publication:||Survey of Current Business|
|Date:||Nov 1, 1984|
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