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The business situation.

The pace of U.S. production slowed in the first quarter of 1985. Real GNP increased at an annual rate of 1-1/2 percent, following an increase of 4-1/2 percent in the fourth quarter of 1984. In the third quarter, GNP had increased 1-1/2 percent. Increases in real GNP in these three quarters averaged 2-1/2 percent, a considerably lower growth rate than earlier in 1984 and in 1983. Inflation remained moderate. The GNP fixed-weighted price index increased 4-1/2 percent at an annual rate in the first quarter.

The recent variation in the quarterly increases in real GNP reflected sharp changes in several components, particularly net exports and change in business inventories (chart 1). In the first quarter, when the increase in GNP slowed, net exports swung sharply: Imports registered a large increase following a large decline in the fourth quarter. The swing in net exports was largely offset by a swing in the opposite direction in inventory investment, which increased moderately after a large decline. To some extent, changes in inventory investment and changes in imports are positively correlated because some merchandise imports go into inventory, rather than being sold, in the period in which they are brought into this country. (See the "Business Situation" in the January 1985 SURVEY OF CURRENT BUSINESS for a discussion of this relationship, as well as a discussion of how imports are treated in estimating GNP and why care must be taken in relating changes in imports to changes in GNP.)

In the three most recent quarters, increases in real gross domestic purchases, which includes imports but excludes exports, averaged 3-1/2 percent. As was the case for GNP, the average was considerably lower than increases in earlier quarters. However, in contrast to GNP, this measure--which is a measure of U.S. demand for goods and services, whether produced in the United States or abroad--increased more in the first quarter than it had in the fourth (table 1).

With the exception of the fourth quarter of 1984, increases in U.S. demand have exceeded those in U.S. production in every quarter since the fourth quarter of 1981. Over the entire period, gross domestic purchases increased 16 percent, while GNP increased 11 percent. The difference reflects two developments: An increasing portion of U.S. demand has been met by imports; a decreasing portion of U.S. production has been for export. The share of gross domestic purchases accounted for by imports had been 8 percent in the fourth quarter of 1981; by the first quarter of 1985, the import share was up to 10 percent. The increased share was mostly due to a sharp increase in merchandise imports. The share of GNP that is exported had been 10-1/2 percent in the fourth quarter of 1981; by the first quarter of 1985, the export share was down to 8-1/2 percent. Again, the change in share was mostly due to merchandise.

Productivity and costs. -- Table 2 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, has declined in two of the past three quarters; the poor performance can generally be related to the weakening in real product. Compensation and compensation per hour accelerated in the first quarter; increases in Social Security tax rates and taxable wage base--effective January 1--contributed about 1/2 percentage point to the acceleration. The step-up in compensation, coupled with the falloff in real product, led to a sharp acceleration in unit labor cost in the first quarter.

Prices. -- GNP prices, as measured by the fixed-weighted price index, increased 4-1/2 percent in the first quarter, somewhat more than in the fourth, but within the range of 3-1/2-4-1/2 percent registered in the past several quarters (table 3). A Federal pay raise, which in the national income and product accounts (NIPA's) is treated as an increase in the price of employee services purchased by the Federal Government, accounted for 0.4 percentage point of the first-quarter acceleration in GNP prices.

Changes in the price of GNP, which is U.S. production of goods and services, may be contrasted with changes in the price of gross domestic purchases, which is goods and services bought by U.S. consumers, investors, and government. The exclusion of exports and the inclusion of imports in the price of gross domestic purchases makes this measure useful in analyzing inflation in the United States. (For example, an increase in the price of imported cars that is passed on to the final purchaser will affect the measure of purchases prices, but will be excluded from the measure of production prices.) Over the past 2 years, quarterly increases in the price of gross domestic purchases have been about 1/2 percentage point below increases in GNP prices.

Prices paid by consumers--PCE prices--were up less than in the fourth quarter. The deceleration was due to a slowdown in the increase in food prices and to a swing to a decline in energy prices, particularly gasoline prices. The small step-up in other PCE prices can be attributed, in part, to a jump in new car prices. Prices paid by investors for structures--both nonresidential and residential--and for equipment increased more than in the fourth quarter, but remained moderate. Most of the step-up in prices paid by government was accounted for by the Federal pay raise.

Employment and hours. -- Employment registered strong gains again in the first quarter--over 700,000 in both the household and the establishment surveys (table 4). Employment as a percent of the working-age population increased to a record 60.1 percent. Adult women accounted for most of the first-quarter increase in employment, as their labor force participation rate set another record. The distributive (largely wholesale and retail trade) and services industries continued to register the largest increases in employment; manufacturing employment was flat.

The recent gains in employment have been accompanied by large increases in the civilian labor force. The civilian unemployment rate edged up to 7.3 percent in the first quarter. It has fluctuated between 7.1 and 7.5 percent for almost a year (chart 2).

Private nonfarm average weekly hours slipped another 0.1 hour in the first quarter. In manufacturing, the decline was 0.2 hour, following no change in the fourth quarter.

Pesonal Income

Personal income increased $45-1/2 billion in the first quarter, following a $49 billion increase in the fourth. The special factors that are shown in table 5 significantly affected personal income in the two quarters. Without these special factors, the slowdown in personal income would have been considerably larger--to a $36-1/2 billion increase in the first quarter from a $47-1/2 billion increase in the fourth.

Wage and salary disbursements were up more in the first quarter than in the fourth; about one-half of the step-up was attributable to the $3-1/2 billion pay rise for Federal employees. Private wages and salaries picked up due to stronger increases in employment and average hourly earnings; average weekly hours again declined. Manufacturing, distributive, and services industries increased roughly as much as they had in the fourth quarter. A step-up in other commodity-producing industries was concentrated in construction.

Farm proprietor's income dropped sharply after a small increase. The swing was largely due to subsidy payments for wheat. Subsidies increased $5 billion in the fourth quarter and fell $1-1/2 billion in the first. Farm income excluding subsidies was down in both quarters. Nonfarm proprietor's income was up more than in the fourth quarter; retail trade increased after no change.

Personal interest income registered no change, after a sharp slowdown in the fourth quarter. This progressive deceleration reflected the continued effects of a decline in short-term interest rates in the second half of 1984.

Transfer payments were up sharply--$18 billion--in the first quarter. Military retirement pay included an increase of $5-1/2 billion, following a decline of the same amount in the fourth quarter, due to a provision of the Deficit Reduction Act of 1984. This provision shifted the payment of benefits scheduled for December 31 to January 1. The impact of this shift on transfer payments was partly offset by a decline in retroactive Social Security benefit payments of $1 billion, following an increase of $2-1/2 billion in the fourth quarter. Finally, cost-of-living adjustments added $8-1/2 billion to benefit payments under Social Security and several other retirement and income-support programs.

Personal contributions for social insurance, which are subtracted in deriving the personal income total, were boosted $6-1/2 billion by increases in Social Security tax rates and taxable earnings bases. These increases included an increase in the rate for employees from 6.7 percent to 7.05 percent and in the taxable wage base from $37,800 to $39,600.

Personal tax and nontax payments were up sharply--$37-1/2 billion--in the first quarter, largely due to delays in February and March in refund payments of Federal income taxes (table 6). As a result of these delays, refunds--which are deducted in calculating personal tax and nontax payments--were unusually small. Based on preliminary information, the delays amounted to $27 billion (when put at an annual rate) in the first quarter. Partly offsetting the impact of the refund delays, personal taxes were lowered $7 billion due to the indexing of Federal income taxes, effective January 1. (For estimates of the impact of the indexing and other provisions of the Economic Recovery Tax Act of 1981, see "Impact of Recent Tax Law Changes" in this issue.) The increase in personal taxes due to growth in the taxable earnings base, shown as "other" in table 6, was roughly the same as in the past several quarters.

Largely due to the slowdown in tax refunds, disposable personal income increased only $8 billion in the first quarter, following a $38 billion increase in the fourth. Without the special factors affecting personal income and taxes, disposable income still would have decelerated sharply--to a $19-1/2 billion increase from a $36-1/2 billion increase.

The small increase in disposable personal income, coupled with a sizable one in personal outlays, led to a substantial drop in personal saving in the first quarter. The personal saving rate fell sharply to 4.6 percent from 6.2 percent in the fourth quarter.

The deceleration in disposable personal income carried through to real income. Real disposable personal income decline 2 percent in the first quarter, following an increase of 3-1/2 percent in the fourth. Without the special factors, real income would have been flat in the first quarter, following a 3-percent increase.

Components of Real GNP

Final sales of GNP decelerated more in the first quarter than did GNP (table 7). Changes in most of the components of final sales were affected by factors that may be viewed as transitory. PCE continued to increase, but weakened late in the quarter; part of this weakness may have reflected the effect of the slowdown in tax refunds. A deceleration in nonresidential fixed investment was largely due to a drop in computer purchases, which tend to be erratic. Changes in net exports have been particularly sharp in recent quarters, primarily due to imports; part of the large first-quarter increase in imports may have been a rebound from the unexpected drop in the fourth quarter. A pause in government purchases was largely in national defense purchases, which tend to fluctuate sharply.

Business inventories continued to register substantial increases. Despite these increases, from an historical perspective inventory-sales ratios do not appear to be out of line.

Personal consumption expenditures

Real PCE increased 4-1/2 percent in the first quarter, about 1 percentage point more than in the fourth. The strength was in the first part of the quarter; PCE slipped in March. The slip may have reflected, to some extent, the slowdown in disposable income due to the delay in tax refunds. Some other indicators related to PCE were favorable in the first quarter; for example, the Conference Board's consumer confidence index rebounded to high levels in January and February after a drop in December, and employment increased strongly.

All of the major components of PCE-durables, nondurables, and services--contributed to the first-quarter increase. The slight acceleration was largely attributable to nondurables, which increased moderately after changing little in the fourth quarter.

Durables again increased, but less than in the fourth quarter. Motor vehicles and parts were up more in the first quarter than in the fourth, due to an acceleration in truck purchases. Furniture and household equipment and other durables increased much less than in the fourth quarter.

Nondurables increased after a slight decline in the fourth quarter. Each category increased: Food and energy, after declines; clothing and shoes, after an increase; and other nondurables, after changing little.

Services were up slightly more than in the fourth quarter. Electricity and gas purchases increased sharply following a decrease; the pattern reflected the effects of unseasonable weather on heating expenditures. 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. Other services continued to increase moderately.

Nonresidential fixed investment

Real nonresidential fixed investment (NRFI) increased 3-1/2 percent in the first quarter, following an 8-1/2-percent increase in the fourth, as a small decline in producers' durable equipment (PDE) was more than offset by another strong increase in structures.

Structures increased 16 percent in the first quarter, about the same increase as in the fourth. As in the fourth quarter, most of the strength was in commercial buildings, both offices and other commercial.

PDE, which had slowed sharply, to a 5-1/2-percent rate of increase in the fourth quarter, declined 1 percent--the first decline since the recession trough at the end of the 1982. The first-quarter decline was in PDE other than motor vehicles, especially computers.

Recent sharp changes in imports of capital goods have raised concerns that quarterly estimates of PDE, which include imported equipment, may fail to capture imports fully. An analysis of the first-quarter change in PDE that was carried out at a greater than usual level of detail showed that the change in imports included in it is consistent with the change in imports of capital goods, an end-use commodity category, in net exports. This result indicates that the first-quarter change in PDE is not understated because of imports.

In the first quarter, as an occasion in the past, BEA used two, largely independent, procedures in estimating NRFI. The use of the two procedures helped ensure that the estimate captured fully both domestic and imported PDE, although that was not the only reason the two procedures were used.

The first procedure measures activities of the suppliers of capital goods. Construction is measured as the value put in place. PDE other than motor vehicles is measured using an abbreviated version of what is often called the commodity flow procedure. In this procedure, manufacturers' shipments of capital goods are adjusted to exclude exports and purchases by government, and imports are added. The estimate of imports is prepared in two parts. The first is for a group of PDE categories for which imports are a sizable share of purchases. For this group, the percentage of the corresponding import end-use commodity category that is capital equipment is assumed to have remained constant within each category since 1972. For example, the content of, say, the communications equipment category is assumed to have remained constant in terms of equipment, which is to be included in PDE, and parts, which are to be excluded because they are to be used in further production. The second part is for a group of PDE categories for which imports are a smaller share of purchases. For this group, imports are assumed to increase at the same rate as manufacturers' shipments. To the extent that these assumptions are incorrect, estimates based on this procedure may miss the mark.

The second procudure, based on BEA's plant and equipment (P&E) survey, measures expenditures by purchasers of capital, regardless of whether the items purchased are domestically produced or imported. However, the first-quarter P&E expenditure estimates (described elsewhere in this issue) are businesses' planned, not actual, expeditures; to the extent that an assumption that plans will be realized as incorrect, estimates based on this procedure may miss the mark.

For the first quarter, the first procedure implies that NRFI changed little; the second procedure implies a strong increase. Presumably, this difference reflects, among other things: time lags between shipments (in the commodity flow procedure) and expenditures (in the P&E survey); differences in the coverage of the data sources on which the two procedures are based; changes over time in the capital goods content of various import categories; and expenditures that were planned for the first quarter, but not made.

Residential investment

Real residential investment was flat in teh first quarter, following declines averaging 5 percent in the second half of 1984. A drop in multifamily construction offset increases in single-family construction and in the group of components that includes additions and alterations, brokers' commissions on the sales of new and existing residences, and mobile home sales.

Starts of one-family structures had turned up in September and continued to move irregularly higher through March (chart 3). Starts were spurred by improving sales--especially sales of existing singe-family homes, which increased 7 percent (not an annual rate) from September to February. Improved sales, in turn, reflected declining mortgage interest rates; the commitment rate dropped 1.75 percentage points from July to February before moving slightly higher in March (chart 4).

The first-quarter decline in multi-family construction reflected the general decline in multifamily starts in the second half of last year. Starts increased sharply--23 percent (not an annual rate)--in the first quarter, but, because construction lags starts, first-quarter multifamily construction was affected little.

The size of the first-quarter increase in multifamily starts is somewhat surprising. Rental vacancy rates had increased markedly in the last half of 1984; at 6.3 percent in the fourth quarter, the rate was higher than at any time in almost 10 years. Also indicative of possible excess capacity in the multifamily sector, the percentage of new apartments that were rented within 3 months of completion had dropped rather steadily to 63 percent in the third quarter. Moreover, the possibility of tax law changes added uncertainty to the multifamily market.

Change in business inventories

Real business inventories again accumulated at a substantial pace in the first quarter--up $20-1/2 billion, following an increase of $17 billion in the fourth quarter (table 8). More than one-third of both increases were accounted for by motor vehicle inventories, which were up $6-1/2 billion in the fourth quarter and $8 billion in the first, as automakers continued to build inventories from a low level at the beginning of the 1985 model year. Farm inventories also accumulated in both quarters, but were up a little less in the first.

Nonfarm inventories other than motor vehicles increased $9-1/2 billion in the first quarter, compared with $5-1/2 billion in the fourth. The step-up was mainly accounted for by a swing in nondurable manufacturing from a decline to an increase. Also, nondurable retail inventories, particularly apparel, were up more than in the fourth quarter. The rate of inventory accumulation in both durable and nondurable wholesale inventories continued to drop.

Largely due to the first-quarter slowdown in final sales, the ratio of total inventories to total final sales moved up from 3.05 to 3.09. Although at the upper end of the range within which it has fluctuated over the past 2 years, the ratio remained well below its average for 1972-82.

Net exports

Real net exports registered a sharp decline--$12-1/2 billion--to negative $26 billion, following an increase of $13-1/2 billion in the fourth quarter. The swing was concentrated in merchandise trade, primarily in imports; services changed little, following a decline.

Exports declined $3 billion, following a slight decline in the fourth quarter. The deterioration was mainly accounted for by agricultural exports, which declined $1 billion after a $2 billion increase; nonagricultural merchandise exports changed little after a small increase. In services, investment income receipts declined a little less than in the fourth quarter, reflecting lower interest rates and some reduction in bank lending abroad.

Imports increased sharply--$9-1/2 billion--after a $14 billion decline. Nonpetroleum merchandise imports continued to register large changes, recouping practically all of a $13 billion drop in the fourth quarter. The pattern was discernable in all of the major end-use categories: Autos, consumer goods, and foods, feeds, and beverages more than made up fourth-quarter declines; capital goods other than autos, industrial materials and supplies, and other goods made up much of their declines. Petroleum imports fell sharply in the first quarter, following little change in the fourth. In services, investment income payments declined more than in the fourth quarter, reflecting lower interest rates.

Government purchases

Real government purchases registered no change, following a strong increase in the fourth quarter. The slowdown was concentrated in Federal defense purchases, which had increased sharply in the fourth quarter. National defense purchases often fluctuate sharply from quarter to quarter, partly because these purchases--which include such large-ticket items as aircraft and missiles--are recorded in the NIPA's on a delivery basis, that is, when goods and services are delivered to the military. The timing of these deliveries tends to be erratic. Federal nondefense purchases were up a little less than in the fourth quarter. State and local government purchases again changed little.

The Federal sector.--Changes in current-dollar Federal receipts and expenditures on a NIPA basis are shown in table 9. Among expenditures, purchases--mainly defense purchases--were up much less than in the fourth quarter. Interst paid increased less than in the fourth quarter, reflecting the continued effects of the earlier decline in interest rates. Grants-in-aid to State and local governments also increased less than in the fourth quarter. Transfer payments were up considerably more in the first quarter, mainly due to the shift in the timing of military retirement pay and the cost-of-living increases. A swing from an increase to a decline in subsidies less the current surplus of government enterprises can largely be traced to agricultural subsidies. Changes in these components, along with a small change in wage accruals less disbursements, sum to an increase of $15-1/2 billiion in total expenditures, about one-half as much as the increase in the fourth quarter.

Among receipts, the jump in personal tax and nontax payments was largely due to the delays in income tax refund payments. The sizable increase in contributions for social insurance reflected the changes in the tax rate and taxable earning base. Indirect business taxes again changed little. 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 than the statistical discrepancy in the NIPA's was the same as in the preceding quarter. On the basis of this calculation, total receipts increased about $50 billion in the first quarter.

An increase of this size in receipts would substantially exceed that in expenditures, and the deficit on a NIPA basis would be about $35 billion lower than the $198 billion deficit in the fourth quarter. If the delay in refunds is excluded from this calculation, the deficit would be about $10 billion lower than in the fourth quarter.
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Title Annotation:1st quarter 1985
Publication:Survey of Current Business
Date:Apr 1, 1985
Previous Article:An introduction to national economic accounting.
Next Article:Gross product by industry, 1984.

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