The business situation.
REAL GNP increased at an annual rate of 4 percent according to preliminary estimates, following a modest increase of 1 1/2 percent in the third quarter. The two quarters taken together reflect slower economic growth in the second half of 1984 than in the first half (table 1). GNP prices, as measured by the fixed-weighted price index, increased at an annual rate of 3 1/2 percent in the fourth quarter, continuing the recent moderation of inflation.1
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.
The fourth-quarter GNP estimates are based on the following major source data: For personal consumption expenditures (PCE), retail sales through December, and unit auto and truck sales through December; for nonresidential fixed investment, the same information for autos and trucks as for PCE, October and November construction put in place, October and November manufacturers' shipments of machinery and equipment, and investment plans for the quarter; for residential investment, October and November construction put in place, and October and November housing starts; for change in business inventories, October and November book values for manufacturing and trade, and unit auto inventories through December; for net exports of goods and services, October and November merchandise trade, and fragmentary information on investment income for the quarter; for government purchases of goods and services, Federal unified budget outlays for October and November, and State and local employment through December; and for GNP prices, the Consumer Price Index for October and November, the Producer Price Index for October and November, and unit-value indexes for exports and imports for October and November. Some of the source data are subject to revision.
Final sales swung from a small decline to a large fourth-quarter increase, and inventory investment swung from an increase to a decline. One-fourth of the swing in final sales is traceable to personal consumption expenditures (PCE), which increased $10 1/2 billion, following an increase of $1 1/2 billion in the third quarter (chart 1). The remaining three-fourths came from a swing in net exports, from a decline of $15 1/2 billion in the third quarter to an increase of $12 billion in the fourth. The third-quarter decline and fourth-quarter increase were more than accounted for by imports.
Because changes in imports have been large in recent quarters, it is tempting to try to relate changes in imports to changes in GNP. However, care must be exercised. The reason is related to how imports are treated in estimating GNP. GNP is estimated as the sum of product-side components, one of which is net exports--that is, exports less imports. Because the other components include expenditures on foreign-produced goods and services (as well as on U.S.-produced goods and services), imports must be subtracted to get GNP, a measure of U.S. production. Therefore, an increase (decrease) in imports has no effect on GNP because it is offset by increases (decreases) in expenditures on foreign products included in other product-side components. Accordingly, it would be a mistake to subtract--as might appear tempting--the change in imports from the change in GNP with the intent of deriving a useful analytical measure.
What has just been said about GNP--that an increase (decrease) in imports has no effect--applies also to final sales of GNP. All imports are treated as going into final sales, rather than being split between final sales and the change in business inventories; data are not available to make the split. Thus, final sales of GNP as a measure of worldwide final sales of U.S. production is likely to be misstated because some imports, such as consumer goods and industrial supplies, go into inventory in the period in which they are brought into this country. That some imports go into inventory is consistent with the positive correlation of changes in inventory investment and changes in imports, especially in recent quarters: Inventory investment and imports increased sharply in the third quarter, and both declined sharply in the fourth. A further result of this treatment of imports is that inventory-sales relationships as measured by the ratio of total business inventories to total final sales is overstated to the extent that imports go into inventories. In that ratio, all imports have been removed from the denominator.
One measure that may help answer some of the questions being asked about the impact of imports, and also exports, is final sales to domestic purchasers. This measure can be viewed in two ways: either as final sales of GNP less exports plus imports, or as the sum of personal consumption expenditures, gross private domestic fixed investment, and government purchases (table 2). It represents final demand in the United States for goods and services, wherever produced. In the fourth quarter, real final sales to domestic purchasers increased 5 percent, indicating that final demand in the United States was weaker than real final sales of GNP, which increased 8 1/2 percent. In the third quarter, final sales in the United States increased 3 percent and final sales of GNP declined 1 percent.
Productivity and costs.--Table 3 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, increased 2 percent in the fourth quarter, following a 1-percent decline in the third. The increase reflected an acceleration in real product; hours increased at their third-quarter rate. The two quarters' performance was weaker than earlier in this recovery and expansion, when both real product and hours had increased strongly.
Unit labor cost increased 1 1/2 percent in the fourth quarter--much less than the 5-percent rate registered in the third. Low rates of increase in unit labor cost have contributed substantially to the moderation in prices in recent quarters.
Prices.--GNP prices, as measured by the fixed-weighted price index, increased 3 1/2 percent in the fourth quarter after increasing 4 percent in the third (table 4). Prices paid by domestic purchasers for the goods and services they buy--which include imports and exclude exports--also decelerated to a 3 1/2-percent increase in the fourth quarter from 4 percent in the third. The increase in PCE prices was unchanged at 4 percent; low rates of increase in PCE food and energy prices again held down the increase in the total. Prices paid by investors for residential and nonresidential structures and producers' durable equipment decelerated in the fourth quarter, as did prices paid by government. Increases in these components ranged from negligible (nonresidential structures) to 3 1/2 percent (government purchases).
Employment and unemployment.-- Labor market conditions improved in the fourth quarter: Employment increases more than offset a slight shortening in the average workweek, and unemployment fell further. The fourth-quarter civilian unemployment rate was the lowest in almost 5 years (chart 2). In the fourth quarter, the unemployment rate declined 0.2 percentage point, to 7.2 percent, following a decline of 0.1 percentage point in the third.
Employment increases, as measured by both the household and establishment surveys, picked up in the fourth quarter after slowing in the third, but did not regain the rates of increase in the first half of 1984. The household measure of employment increased 0.6 million, or 2 1/2 percent at an annual rate, in the fourth quarter, and the payroll measure increased 0.9 million, or 4 percent.
Average weekly hours for private nonfarm production workers declined 0.1 hours to 35.2 hours in the fourth quarter, after remaining unchanged in the preceding two quarters. The fourth-quarter decline reflected widespread declines among industry groups in October; hours picked up in November and again in December.
Components of Real GNP
Among the components of real GNP, change in business inventories and net exports registered sharply divergent movements in the third and fourth quarters. Change in business inventories fell in the fourth quarter after increasing in the third, and net exports increased after a decline. Personal consumption expenditures increased much more in the fourth quarter than in the third. Fixed investment increased less, and government purchases increased more, than in the third quarter. The following sections discuss developments in these components and measures related to them.
Personal consumption expenditures
Real PCE increased 4 percent in the fourth quarter, following a slight increase in the third. On a monthly basis, PCE declined in October, but increased strongly in November and December. Gains in employment and continued increases in disposable personal income, along with recent drops in interest rates, have supported consumer confidence and encouraged spending. Moreover, consumers have maintained increases in spending without reducing personal saving.
The fourth-quarter pickup in PCE was strongest in durable goods, which increased 12 percent, after decreasing 3 1/2 percent in the third quarter. The swing in durables was evident in all major categories. Purchases of motor vehicles--which had decreased sharply in the third quarter--increased in the fourth, especially toward the end of the quarter. Furniture and household equipment registered a sharp increase, following a small increase in the third quarter.
Purchases of nondurable goods increased 2 percent in the fourth quarter, after decreasing 1 percent in the third. The swing was more than accounted for by purchases of clothing and shoes, which have been unusually erratic over the past several quarters. Food purchases registered a smaller increase than in the third quarter.
Services increased 2 1/2 percent, after increasing 4 percent in the third quarter. The deceleration was largely due to a decline after an increase in expenditures for personal business services, which include brokerage services, bank services, and the imputed services of financial intermediaries. Electricity and natural gas purchases again declined, due to continued mild weather in the Eastern part of the country.
Real residential investment slipped 1 1/2 percent in the fourth quarter, after declining 4 1/2 percent in the third. In both quarters, increases in multifamily construction were more than offset by declines in single-family construction. Increased multifamily construction in the fourth quarter reflected high levels of multifamily starts in the first three quarters of the year, and the fourth-quarter decline in single-family construction largely reflected the drop--to an annual rate of less than 1 million units--in single-family starts in the third quarter. Single-family starts dropped in October before increasing in November and December (chart 3). The increases reflected continued declines in interest rates, which, in turn, stimulated increased mortgage and sales activity.
Both the commitment rate for conventional fixed-rate mortgages and the prime rate--an indicator of the rate on construction loans--had peaked in July, at 14.7 percent and 13.0 percent, respectively (chart 4). By December, the commitment rate was down 1 1/2 percentage points, to 13.2 percent, and the prime was down 2 points, to 11.0 percent. Mortgage commitments made by federally insured thrift institutions increased in October and November--October's increase was the first since May; in November outstanding commitments increased. Sales of new and existing single-family residences edged up 2 percent in October-November (not an annual rate), after declining 9 1/2 percent in the third quarter.
Real nonresidential fixed investment increased 11 percent in the fourth quarter, following a 13 1/2-percent increase in the third, as structures accelerated and producers' durable equipment (PDE) decelerated. Structures increased 18 1/2 percent, following a 2-percent increase in the third quarter. Commercial buildings-- which account for less than two-fifths of nonresidential structures--accounted for most of the fourth-quarter increase.
PDE increased 8 1/2 percent, following an 18 1/2-percent increase in the third quarter. Imports of capital goods increased sharply in the third quarter and declined in the fourth, suggesting that a major part of the deceleration in PDE was in imported equipment. Motor vehicle PDE, which had increased 9 1/2 percent in the third quarter, was unchanged in the fourth, as increased truck purchases offset reduced auto purchases. Other PDE, which had increased 21 percent in the third quarter, increased only one-half as much in the fourth. Two-thirds of the fourth-quarter increase was accounted for by office, computing, and accounting machinery; this category, which consists mainly of computers, accounts for one-third of other PDE.
Change in business inventories
Real business inventories increased $14 billion in the fourth quarter, after increasing $30 1/2 billion in the third (table 5). The showdown was more than accounted for by nonfarm inventories; farm inventories were up slightly more than in the third quarter. Within nonfarm inventories, manufacturing inventories declined slightly after a substantial increase. Manufacturing durables inventories were up less than in the third quarter; the slowdown was spread across most major industry groups. A swing from an increase to a decline in manufacturing nondurables inventories was centered in food and chemicals. Wholesale inventories--both durables and nondurables--were up considerably less than in the third quarter. A step-up in retail inventory investment was entirely due to a rebuilding of stocks by auto dealers following strikes against automakers and extensive plant closings; other retail inventories were up less than in the third quarter.
Reflecting variable rates of inventory accumulation and fluctuations in final sales from quarter-to-quarter, the ratio of total inventories to total final sales fluctuated throughout 1984 within a range of 3.01 to 3.09, but remained well below its average for 1972-82. In the fourth quarter, its decline reflected the slower rate of increase in inventory accumulation and the higher rate of increase in final sales.
Real net exports increased $12 billion --to negative $15 billion--in the fourth quarter, following a $15 1/2 billion decline in the third. The $27 1/2 billion swing was almost entirely in merchandise trade, specifically in merchandise imports; services, on balance, changed little over the past two quarters.
Merchandise imports behaved erratically in the past two quarters-- surging $16 1/2 billion in the third quarter and backtracking $11 1/2 billion in the fourth. This pattern was discernible in nearly all of the major end-use categories except petroleum, and was particularly pronounced in capital goods, in consumer goods, and in industrial supplies and materials. To some extent, the third-quarter surge--which was concentrated in July--may have reflected producers' and retailers' needs to replenish supplies after strong sales in the first half of 1984. The fourth-quarter decline was only a partial offset; merchandise imports were up 9 percent (annual rate) from the second quarter to the fourth.
Merchandise exports increased $1/2 billion, following a $1 1/2 billion increase in the third quarter. The fourth-quarter increase was more than accounted for by agricultural products; other major categories changed little. The weakness in merchandise exports and the strength in merchandise imports continue to reflect the effects of cumulative dollar appreciation.
Imports of services and exports of services both increased in the third quarter and declined in the fourth. The pattern reflected, in part, the impact of changes in interest rates on returns on portfolio investment.
Real government purchases increased 6 1/2 percent in the fourth quarter following an increase of 5 1/2 percent in the third. Federal purchases accounted for most of the fourth-quarter increase.
In Federal purchases, national defense purchases were up sharply following a small decline in the third quarter. Nondefense purchases, which had reflected sharp changes in Commodity Credit Corporation inventories earlier in the year, were up strongly, but not as much as in the third quarter.
State and local purchases were up 2 percent in the fourth quarter following a 5-percent increase in the third. The increases were largely accounted for by highway construction. As discussed in the article "State and Local Government Fiscal Position in 1984,' highway construction rebounded in 1984, reflecting increases in Federal grants-in-aid in 1983 and 1984.
The Federal sector.--Changes in current-dollar Federal receipts and expenditures on a national income and product accounts (NIPA) basis are shown in table 6. Among expenditures, all components registered strong fourth-quarter increases. Purchases were up $14 billion, much more than in the third quarter; defense accounted for most of the increase. Transfer payments were up $4 billion, the same increase as in the third quarter. Grants-in-aid to State and local governments increased $3 1/2 billion following a decline. Net interest paid increased $4 1/2 billion--down from an unusually strong third-quarter increase, but in line with earlier increases. A $5 billion increase in subsidies less the current surplus of government enterprises was more than accounted for by increased agricultural subsidies, primarily wheat deficiency payments. Changes in these components, along with a small change in wage accruals less disbursements, sum to a fourth-quarter increase in expenditures of $30 1/2 billion.
Among receipts, a $7 1/2 billion increase in personal tax and nontax payments was due to the increase in the tax base. Indirect business taxes were up $1/2 billion, and contributions for social insurance were up $3 1/2 billion. Estimates of corporate profits, and thus of corporate profits tax accruals, are not yet available Corporate profits tax accruals can be approximated by using a residual calculation of corporate profits that assumes that the statistical discrepancy in the NIPA's was the same as in the preceding quarter. On the basis of this calculation of corporate profits tax accruals, total receipts increased about $11 billion in the fourth quarter.
An increase of this size in receipts would be about $20 billion less than the increase in expenditures, so the deficit on a NIPA basis would approach $200 billion in the fourth quarter.
Personal income increased $53 billion in the fourth quarter, down about $10 billion from the increases registered in the preceding two quarters (table 7). The deceleration is attributable to a slowing in personal interest income after two quarters of strong increases.
Wage and salary disbursements were up $26 1/2 billion in the fourth quarter, the same increase as in the third. Wages and salaries in each of the major private industry groups increased roughly as much in the fourth quarter as they did in the third: Manufacturing and service industries were up a little more, and other commodity-producing and distributive industries were up a little less. The increases in wages and salaries were due to continued increases in employment and average hourly earnings; average weekly hours declined. Government wages and salaries increased slightly less than in the third quarter.
Farm proprietors' income was up $2 1/2 billion, somewhat less than the increase in the third quarter. The volume of both crop and livestock marketings increased less than in the third quarter, and crop prices dropped even more sharply. Farm income was boosted by the $5 1/2 billion increase in agricultural subsidies in the fourth quarter. Nonfarm proprietors' income increased $4 billion after no change. The pickup was largely in retail trade, real estate, and construction.
Personal interest income increased $11 billion, about one-half as much as in the preceding two quarters. The deceleration largely reflected the widespread decline in interest rates, particularly on short-term government securities, money market funds, and money market accounts.
Transfer payments were up $4 billion, about the same increase as in the third quarter. Within transfers, social security benefit payments were up twice as much as in the third quarter due to a $3 billion step-up in retroactive payments; these payments result largely from the recalculation of the earnings base underlying benefits for retirees whose post-retirement work adds to that base. This step-up was more than offset by a reduction of $5 1/2 billion in military retirement benefits, due to a shift in the date of payment from December 31, 1984 to January 1, 1985; subsequently, benefits will be paid on the first day of each month. Without these two special factors, transfer payments would have increased $6 1/2 billion in the fourth quarter.
Largely reflecting the continued growth in the taxable wage base, personal tax and nontax payments increased $10 billion, about the same as in the third quarter. Disposable personal income (DPI)--personal income less taxes--increased $43 billion, or 7 percent, in the fourth quarter. It had increased 8 1/2 percent in the third. In contrast to current-dollar DPI, real DPI increased at the same rate--4 percent--in both quarters. The better quarter-to-quarter performance of real DPI reflected a slowing in the PCE implicit price deflator (which is used to deflate current-dollar DPI) from a 4 1/2-percent increase in the third quarter to a 2 1/2-percent increase in the fourth.
Personal outlays increased only a little less than did current-dollar DPI in the fourth quarter, so personal saving was up only slightly. The personal saving rate was unchanged at 6.3 percent in the fourth quarter.
Table: CHART 1 Real Product: Change From Preceding Quarter
Table: 1.--Real GNP: Change From Preceding Quarter
Table: 2.--Measures of Production and Final Sales
Table: 3.--Real Gross Product, Hours, and Compensation in the Nonfarm Business Economy Less Housing: Change From Preceding Quarter
Table: CHART 2 Unemployment Rate
Table: 4.--Fixed-Weighted Price Indexes: Change From Preceding Quarter
Table: CHART 3 Housing Starts
Table: 5.--Change in Business Inventories
Table: CHART 4 Selected Interest Rates
Table: 6.--Federal Government Receipts and Expenditures, NIPA Basis: Change From Preceding Quarter
Table: 7.--Personal Income and Its Disposition: Change From Preceding Quarter
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|Title Annotation:||third quarter 1984|
|Publication:||Survey of Current Business|
|Date:||Jan 1, 1985|
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