The business situation.
The "flash" estimate of real GNP includes another large change in net exports--a decline, following an increase of $13-1/2 billion in the fourth quarter. Based on merchandise trade data for only 1 month of the quarter, imports swung to a large increase, and exports again declined slight. sup.2 Accordingly, gross domestic purchases, which includes imports but excludes exports, increased more in the first quarter than did GNP. As explained in table 2, gross domestic purchases is a measure of U.S. demand for goods and services--wherever produced--by persons, investors, and government, and GNP is a measure of U.S. production. Except in the fourth quarter, U.S. demand recently has increased more than has U.S. production. Over the year from the first quarter of 1984, U.S. demand increased about 4-1/2 percent and U.S. production increased 3-1/2 percent. The corresponding final sales measures also show a difference of 1 percentage point. Final sales to domestic purchasers increased about 5-1/2 percent over the last year, and final sales of GNP increased about 4-1/2 percent.
The first-quarter increase in U.S. demand was largely accounted for by personal consumption expenditures (PCE). Changes in fixed investment, government purchases, and inventory investment were small to moderate, and partly offsetting. U.S. demand had increased much less--only 1 percent--in the fourth quarter, as a sharp decline in inventory investment almost offset increases in the other components.
First-quarter developments in the components of real GNP, in GNP prices, and in personal income are sketched below on the basis of data available as of mid-March.
* PCE increased more than the 3-1/2 percent registered in the fourth quarter. Although durable goods increased less than in the fourth quarter, non-durable good swung from a small decline to a sizable increase, and services increased slightly more than in the fourth quarter. In durables, motor vehicles--largely due to trucks--were up more than in the fourth quarter, but furniture and equipment were up substantially less than in that quarter. In nondurables, the swing was largely due to an increase in food following a decline in the fourth quarter; swings in energy--gasoline as well as fuel oil and coal--also contributed. In services, electricity and gas increased after a slight decline in the fourth quarter, reflecting the effects of unseasonable weather on heating ependitures. In the fourth quarter, the weather was mild in the Eastern part of the country; in the early part of the first quarter, severe cold was widespread.
* Nonresidential fixed investment was flat after an 8-1/2-percent increase in the fourth quarter. Structures increased, although slightly less than the 17-percent increase in the fourth quarter. This pattern largely reflected that of commercial structures; other types of structures have registered smaller, and partly offsetting, changes in recent quarters. A decline in producers' durable equipment was more than accounted for by equipment other than motor vehicles. A decline in equipment other than motor vehicles--the first in over 2 years--was largely due to a sharp drop in computers.
* Residential investment was unchanged following two consecutive quarters of decline. Construction of multifamily housing, which had held up earlier, slipped in the first quarter. Single-family housing stabilized, reflecting the lagged effect of the decline in mortgage rates since last July. The "other" component (largely additions and alterations, mobile homes, and commisssions on house (sales) again changed little.
* Business inventories appear to have accumulated at a moderately faster rate than in the fourth quarter. Motor vehicle inventories--the only part of inventories based on more than 1 month of source data for the first quarter--registered another substantial increase, as automakers continued to build inventories from a low level at the beginning of the 1985 model year. Only fragmentary information is available about farm inventories; it appears that accumulation continued in the first quarter. Nonfarm inventories other than motor vehicles appear to have increased somewhat more than the $5-u/2 billion registered in the fourth quarter. It is likely that the ratio of total business inventories to total final sales moved up in the first quarter, but remained in the 3.01-3.09 range within which it has fluctuated for the past 2 years. * Net exports, as mentioned earlier, appear to have declined substantially. Imports registered a large increase, and exports registered another slight decline. In merchandise imports, which more than accounted for the increase, most nonpetroleum enduse commodity categories increased after declining in the fourth quarter; petroleum imports declined. Investment income payments appear to have declined again, partly reflecting lopwer interest rates on portfolio investment. In exports, a decline in investment income receipts more than offset in increase in merchandise trade.
* Government purchases increased less than the 6 percent registered in the fourth quarter. The slowing was in Federal purchases, both defense and nondefense. Defense purchases, which tend to be erratic, had increased 17-1/2 percent in the fourth quarter; a much smaller increase in the first reflected smaller increases in purchases of durable goods and services. Nondefense purchases showed little change across the several categories of purchases, including those of the Commodity Credit Corporation. State and local purchases increased slightly, reflecting slight increases in the several categories, except structures. In the fourth quarter, a decline in structures had offset slight increases in the other categories.
* The GNP fixed-weighted price index increased 4 percent, up from 3-1/2 percent in the fourth quarter. The first-quarter increase was boosted 0.5 percentage point by a Federal pay raise in January, which is reflected in the prices of employee services purchased by the Federal Government. Thus, other GNP prices in total increased about as much as in the fourth quarter. Among them, prices of fixed investment--especially residential--accelerated slightly; PCE prices--largely due to energy prices, which declined--decelerated slightly.
* Personal income increased about $47-1/2 billion, only slightly less than the $49 billion registered in ther fourth quarter. A number of special factors contributed to substantially different movements in several components in the two quarters. Without these special factors, personal income would have increased $40-1/2 billion, compared with $52 billion in the fourth quarter.
Wages and salaries in government and government enterprises in the first quarter included the Federal pay raise, which added $3 billion, and a retroactive payment and pay raise for Postal Service employees, which added $1-1/2 billion. Farm proprietors' income included a small decline in subsidies after a $5 billion increase in the fourth quarter. Among transfer payments, military retirement pay included a $5-1/2 billion increase, following a decline in the fourth quarter of the same amount, because the Deficit Reduction Act of 1984 shifted the payment of benefits scheduled for December 31, 1984 to January 1, 1985. The impact on transfer payments of this shift was partly offset by a decline in retroactive Social Security benefit payments of $2-1/2 billion, following an increase of the same amount in the fourth quarter. These payments result largely from the recalculation of the earnings base underlying benefits for retirees whose post-retirement work raises the base. Finally, cost-of-living adjustments added a total of $8-1/2 billion to benefit payments under Social Security and several other retirement and income-support programs. A change in the Social Security wage base and tax rate added $8-1/2 billion to the increase in contributions for social insurance, which are deducted in deriving personal income.
With the exception of personal interest income, other components of personal income increased roughly as much as they had in the fourth quarter. Personal interest income again decelerated, reflecting the widespread decline in interest rates. The first-quarter increase was less than the $6-1/2 billion increase in the fourth quarter, which, in turn, was down from increases that had exceeded $20 billion in the second and third quarters.
Beginning in the first quarter, personal taxes reflected the indexing of Federal income taxes under the Economic Recovery Tax Act of 1981. Indexing lowered personal taxes $7 billion, so--despite a slightly larger increase in the tax base than in the fourth quarter--they increased less than in the fourth quarter. Thus, the increase in disposable personal income was about the same in both quarters. In real terms, however, the increase was less than the 3-1/2 percent registered in the fourth quarter, because prices--as measured by the implicit price deflator for PCE--increased more. The first-quarter increase in personal outlays--in which PCE predominates--was large. Accordingly, after a small decline in the fourth quarter, personal saving dropped sharply in the first. The saving rate, which had been 6.2 percent in the fourth quarter, fell several tenths of a percentage point.
The Fourth Quarter: Corporate Profits and the Government Sector
Preliminary estimates of corporate profits for the fourth quarter of 1984 have been completed. Their compilation makes it possible to estimate corporate profits tax accruals for the fourth quarter, rounding out the estimates of receipts and expenditures of the government sector.
The 75-day revisions of the national income and product accounts for the fourth quarter are shown in table 3.
Profits from current production--profits with inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj)--increased $10-1/2 billion, to $293-1/2 billion, in the fourth quarter, following an $8 billion decline in the third. Domestic profits of financial corporations were unchanged in the fourth quarter; those of nonfinancial corporations were up $14 billion; and those from the rest of the world were down $3-1/2 billion.
Real gross product of domestic0 nonfinancial corporations had remained unchanged in the third quarter and increased 5-1/2 percent in the fourth. The larger product and increased profits per unit of product together boosted total profits of nonfinancial corporations in the fourth quarter. Unit prices received by corporations and unit costs paid by them both increased, but prices increased more. Labor and nonlabor costs increased at about the same rate.
Adjustment and disposition of profits its before tax.--Profits before tax--profits without IVA and CCAdj--increased $6 billion, to $230-1/2 billion, following a $21-1/2 billion decline. The IVA and CCAdj convert inventories and depreciation reported by business for tax purposes to those used in the national income and product accounts (NIPA's). The CCAdj was up $6 billion, to $64-1/2 billion, in the fourth quarter, matching the third-quarter increased and somewhat above the increases in the first two quarters. The steady increases reflect mainly the effect of shorter service lives for depreciation of capital permitted by the Economic Recovery Tax Act of 1981 (ERTA). The effects of ERTA have become more pronounced as proportionately more investments have become eligible for shorter service lives. The CCAdj accounted for about 20 percent of profits from current production in the third and fourth quarters.
In the fourth quarter, the IVA declined $1-1/2 billion. In the third quarter, it had increased $7 billion. The fourth-quarter IVA reflects relative stability of inventory prices during the quarter.
Corporate profits tax liability increased $5 billion in the fourth quarter, to $88-1/2 billion, following a $12-1/2 billion decline. The fluctuation in tax liability reflects that in profits before tax. Dividends increased $2 billion, to $83 billion, matching the previous increase. Undistributed profits declined $1 billion, to $59 billion, following a $10 billion decline.
Profits by industry.--Profits with IVA but without CCAdj--the variant of profits available by industry--increased $4-1/2 billion in the fourth quarter, to $229 billion, following a $14 billion decline.
Domestic profits of financial corporations were unchanged, at $26-1/2 billion, following a $2-1/2 billion decline. Domestic profits of nonfinancial corporations increased $8 billion, to $181-1/2 billion, following a $15 billion decline. Manufacturing and trade accounted for most of the increase. Widespread increases in durable goods manufacturing more than offset a decline in nondurable goods manufacturing--largely in petroleum and food. Both wholesale and retail trade profits were up.
The fiscal position of the government sector in the national income and product accounts deteriorated in the fourth quarter; the combined deficit of the Federal Government and of the State and local governments increased $8-1/2 billion to $141-1/2 billion. A $16-1/2 billion increase in the Federal deficit was partly offset by an $8 billion increase in the State and local government surplus. However, for the year 1984, the fiscal position of the government sector improved; the combined deficit, at $122-1/2 billion, was $12 billion lower than in 1983. This improvement was largely accounted for by an increase in the State and local government surplus.
The Federal sector.--The Federal Government deficit increased $16-1/2 billion in the fourth quarter to $197-1/2 billion, as expenditures increased more than receipts. For the year 1984, the deficit was $175-1/2 billion, down $3 billion from 1983.
Receipts increased $16 billion, compared with $2 billion in the third quarter; the acceleration was accounted for by corporate profits tax accruals, which increased $4-1/2 billion following a $10-1/2 billion decline in the third quarter. Personal tax and nontax receipts increased $8-1/2 billion, contributions for social insurance increased $4 billion, and indirect business tax and nontax accruals were unchanged.
Expenditures increased $33 billion, compared with $19 billion in the third quarter; the acceleration was largely accounted for by national defense purchases of goods and services, which increased $11-1/2 billion following a $1/2 billion decline in the third quarter. The acceleration in defense purchases was attributable to a strong rebound in the delivery of military equipment, which declined sharply in the third quarter. Third-quarter deliveries were depressed by several factors; a major one was the postponement of deliveries while quality control problems were resolved. The fourth-quarter rebound also reflected the delivery of the first B1 bomber (over $i billion at an annual rate). Transfer payments to foreigners increased $5-1/2 billion as the result of a large payment to Israel. Grants-in-aid to State and local governments increased $5 billion and included increases in medicaid, highways, and education. Net interest paid and subsidies less the current surplus of government enterprises increased $4-1/2 billion each; the latter was largely for subsidies to farmers. All other expenditures increased $2-1/2 billion.
Cyclically adjusted Federal budget.--When measured using cyclical adjustments based on middle-expansion trend GNP, the Federal fiscal position moved from a deficit of $180 billion in the third quarter to a deficit of $202 billion in the fourth (see table 3 on page 17). The cyclically adjusted deficit as a percentage of middle-expansion trend GNP increased from 4.9 percent in the fourth--a move toward a more expansionary fiscal position.
The State and local sector.--The State and local government surplus increased $8 billion, to $56 billion, as receipts increased more than expenditures. Most of the increase--$6-1/2 billion--was in the surplus of "other" funds, that is, other than social insurance, funds. For the year 1984, the surplus was $53 billion, up $9 billion from 1983. Of that increase, $5 billion was in the social insurance fund surplus and $4 billion was in the other funds surplus.
Receipts increased $15 billion, compared w with $4 billion in the third quarter. The acceleration was largely accounted for by Federal grants-in-aid and by corporate profits tax accruals. Federal grants, as mentioned, increased $5 billion; corporate profits taxes increased $1 billion, following a $2-1/2 billion decline in the third quarter. Indirect business tax and nontax accruals increased $6 billion, of which $3 billion was in sales taxes. Personal tax and nontax receipts increased $2-1/2 billion, and contributions for social insurance increased $1 billion.
Expenditures increased $7 billion, compared with $11 billion in the third quarter; this deceleration was accounted for by a substantial slowdown in purchases of goods and services. Purchases increased $6 billion in the fourth quarter, compared with $11-1/2 billion in the third quarter. This decelaration was largely attributable to the purchase of structures, which declined $1-1/2 billion, following a $3 billion increase; highways accounted for the shift. All other expenditures increased $1 billion in the fourth quarter.
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|Title Annotation:||first quarter 1985|
|Publication:||Survey of Current Business|
|Date:||Mar 1, 1985|
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