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The business situation.

THE pace of U.S. production picked up again in the third quarter. Real GNP increased at an annual rate of 3-1/2 percent, following an increase of 2 percent in the second quarter (table 1). Inflation, as measured by the GNP fixed-weighted price index, slowed. At an annual rate of 3 percent, down from 4 percent in the preceding quarter, inflation was at its lowest rate in more than 10 years.

Several noteworthy aspects of the third quarter can be viewed in terms of developments in the farm, rest-of-theworld, and personal sectors.

Faced with depressed prices reflecting bumper harvests and low foreign demand, farmers placed large amounts of crops under Commodity Credit Corporation (CCC) loan, rather than in business inventories. CCC loans are treated as government purchases in the national income and product accounts (NIPA's); as a result, a net increase in the amount of crops under CCC loan leads to an increase in the final sales. In the third quarter, final sales of GNP increased 6 percent, following a 4-1/2-percent increase. CCC loans more than accounted for this acceleration: Final sales exclusive of CCC purchases increased 4-1/2 percent in the third quarter, following a 5-percent increase in the second.

Second, net exports changed little in the third quarter. As a consequence, U.S. production (measured by real GNP) increased about as much as U.S. deamnd (measured by real gross domestic purchases). In the past several quarters, demand typically increased more than production, as net exports declined. (As explained in the box on page 3, new information indicates that there is a problem with the merchandise import data.)

Third, in the personal sector, real personal consumption expenditures (PCE) increased 5 percent. This substantial increase, which was concentrated in motor vehicles, occurred despite weakness in real disposable personal income (DPI). This weakness can be traced to a drop of $14 billion in current-dollar DPU. Reflecting the increase in eprsonal outlays and the decline in DPI, personal saving fell. The personal saving rate, which had increased to 5.1 percent in the second quarter, dropped to 2.9 percent in the third.

Productivity and costs.--Table 2 shows changes in real gross product, aggregate hours, and compensation in the business economy other than farm and housing. Real gross product increased 3 percent, reflecting a 2-1/2-percent increase in hours and a 1/2-percent increase in productivity (as measured by real gross product per hour). The productivity increase moderated the impact of increased hourly compesantion on unit albor costs; compensation per hour was up 3 percent, but unit labor cost was up 2-1/2 percent. The third-quarter increase in unit labor cost, although larger than the second-quarter increase, was 1-1/2 percentage points lower than the increase over the preceding four quarters.

Pricess.--GNP prices, as measured by the fixed-weighted price index, increased 3 percent in the third quarter, somewhat less than the increases in the past several quarters, which ranged from 3-1/2 to 4-1/i percent (table 3). The price of gross domestic purchases also increased 3 percent, following a 4-percent increase in the second quarter. The third-quarter deceleration in the prices of both GNP and gross domestic purchases reflected a swing in energy prices from a sharp increase to a small decline.

Largely due to energy prices, prices paid by consumers--PCE prices--decelerated 1-1/2 percentage points to a 2-1/2-percent increase in the third quarter. Other PCE prices also contributed to the deceleration by slowing to 3-1/2 percent from 4-1/2 percent; food prices, however, were up slightly after a slight decline. For the most part, prices paid by investors and by government continued to increase in the moderate ra nges registered in the past several quarters.

Employment and hours.--Employment increased and the unemployment rate edged down in the third quarter.

Accordrding to the household survey, employment of adult men and adult women increased, while teenage employment was unchaged. The combined increase in employment, 0.4 million, was slightly larger than the increase in the albor force, 0.3 million. As a result, the unemployment rate moved down to 7.2 percent, and employment as a percent of the working-age population moved back up to a record-tying 60.1 percent (table 4 and chart 2).

According to the establishment survey, nonfarm employment increased 0.6 million. All of the increase occurred in distribution, services, and government; employment in goods-producing industries fell slightly. Average weekly hours in the private nonfarm enocomy were unchaged again in the third quarter, but in manufacturing, average weekly hours increased by 0.2, to 40.5, and overtime hours increased by 0.1, to 3.3

Personal Income

Personal income increased $24-1/2 billion in the third quarter, $6-1/2 billion less than in the second (table 5). The slowdown as more than accounted for by a sharp drop in farm proprietors' income.

Wage and salary disbursements were up $24-1/2 billion in the third quarter, $3-1/2 billion less than in the second. The slowdown reflected smaller increases in distributive industries, commodity-producing industries other than manufacturing, and government and government enterprises. The pattern of increase in government and government enterprises i recent quarters has been affected by Federal Gvoernment and Postal Service pay adjustments, which added to the increases in wages in the first and second quarters, but had a sligth negative effect on the third-quarter increase. Manufacturing increased after no change in the second quarter; services increased slightly more than in the second quarter.

Proprietors' income declined $6-1/2 billion in the third quarter, following a small increase in the second. Nonfarm proprietors' income increased slightly mroe in the third quarter than in the second, but farm proprietors' income plummeted $11 billion, as a continued decline in crop and livestock prices and a large drop in agricultural subsidy payments more than offset the effect of an increase in real farm product. Subsidy payments--which had accounted for about one-half of farm proprietors' income in the second quarter--fell $8-1/2 billion in the third. The decline largely reflected a decrease in "deficiency payments"; these payments to farmers who reduced planted acreage are based on the difference between legislated "target prices" and market prices. Deficiency payments had been unusually large in te second quarter reflecting payments on the 1984 corn crop as well as some advance payments on 1985 crops. (Farm subsidies are expected to increase in the fourth quarter when the balance of deficiency payments on the 1985 wheat crop are made.)

Personal interest income declined $3 billion, the same as in the second quarter, due to the continued decline in the rate of interest paid on personal assets.

Transfer payments increased about $5-1/2 billion in the third quarter, after changing little in te second. About one-half of the step-up was accounted for by retroactive Social Security payments, which swung to a $2 billion increase from a $1 billion decline in the second quarter. These payments result largely from the recalculation of the earnings base underlying benefits for recent retirees.

Other income increased $5-1/2 billion, about $1-1/2 billion less than in the second quarter. The slowdown was in rental income, which fell $6 billion in September as a result of damage caused to residential properties by two hurricanes that swept the Gulf and Atlantic coasts.

Personal contributions for social insurance, which are subtracted in deriving the personal income total, increased $2 billion, about the same as in the second quarter.

Personal tax and nontax payments, increased $38-1/2 billion after dropping $41 billion in the second quarter. The swing reflected the unusual pattern of Federal income tax refunds, which were delayed in the first quarter but were caught up in the second. The pattern of tax refunds did not affect the level of personal tax payments in the third quarter, but did increase the third-quarter change by $27-1/2 billion (table 6).

Largely due to the erratic pattern of personal taxes, DPI dropped $14 billion after a huge--$17-1/2 billion--increase. If the effect of the timing of income tax refunds is excluded, DPI would ahve increased $13-1/2 in the third quarter and $16-1/2 billion in the second. Real DPI decreased 4 percent after increasing 8 percent in the secnd quarter. If the effect of the timing of income tax refunds is excluded, real DPI would have shown no change after decreasing 1/2 percent.

The decline in DPI, coupled with an increase in personal outlays, led to a substantial drop in the personal saving rate, from 5.1 percent in the second quarter to 2.9 percent in the third. Undoubtedly, many factors were involved in the saving rate's sharp drop; three ar mentioned below. First, changes in farm poprietors' income have, historically, had relatively little impact on personal outlays. If it is assumed that the third-quarter decline in farm income had no effect on personal outlays, the income change by itself would have lowered the saving rate by about 0.4 percentage point. Second, some part of the record consumer purchases of motor vehicles in the third quarter (discussed under PCE) may represent an alternative kind of saving--an accumulation of physical capital as opposed to financial capital. In the past, large changes in consumer purchases of motor vehicles have been associated with changes in the opposite direction in the saving rate. Third, income tax refunds boosted second-quarter DPI (and probably personal saving), and thereby caused the third-quarter drop in the saving rate to be larger than it otherwise would have been.

Components of Real GNP

Among the components of real GNP, PCE and inventory investment registered changes in the third quarter similar to their second-quarter changes--PCE up and inventory investment down. Other components registered divergent movements between the two quarters. Government purchases increased sharply in the third quarter, following a moderate increase in the second; fixed investment slipped slightly, following an increase; and net exports were flat, following a decline.

Personal consumption expenditures

Real PCE incrased 5 percent in the third quarter, the same as in the second; a strong increase in durable goods was accompanied by smaller increases in nondurable goods and in services.

Expenditures for durable goods increased 20-1/2 percent in the third quarter, following a 7-percent increase in the second. The increase reflected a large jump, 54 percent, in the motor vehicles component; this component had been increasing in recent quarters, but at more moderate rates. The third-quarter strength in motor vehicles reflected record sales of new cars and trucks in late August and September, in response to attractive financing pacages offered by manufacturers. Furniture and household equipment slipped 1/2 percent in the third quarter, after a 10-1/2-percent increase in the second; other durable goods increased 2-1/2 percent, after a 1-percent increase.

Nondurable goods increased slightly, 1/2 percent, in the third quarter, following a 4-1/2-percent ncrease in the second. Expenditures for food and for clothing and shoes, which together represent about three-fourths of total nondurables, accounted for the deceleration. Food decelerated from a 6-1/2-percent increase to a 2-percent increase, and clothing and shoes swung from an 8-percent increase to a 3-1/2-percent decline. Energy expenditures increased 7-1/2 percent in the third quarter, following a 6-percent decline in the second. Other nondurable goods increased little, as they had in the second quarter.

Expenditures for services increased 2-1/2 percent in the third quarter, following a 4-percent increase in the second. Among services, electricity and gas declined in both quarters, and a slowdown in other services was centered in spending on medical care and net foreign travel.


Residential investment.-- Real residential investment increased 11 percent in the third quarter, following a 6-1/2-percent increase in the second. Single-family construction was unchanged, but multifamily construction and the "other," nonconstruction, component increased. (The nonconstruction component includes additions and alterations, brokers' commissions on the sale of residences, and mobile homes.)

The pattern of the construction components follows that of housing starts, with a shorter lag in single-family than in multifamily units. Single-family starts were roughly the same in the second quarter as they had been in the first; multifamily starts had increased sharply in the fist quarter (chart 3).

An increase in brokers' commissions accounted for much of the increase in the nonconsruction component, and reflected increased sales of new and existing residences. From the second quarter to July-August, sales of new residences increased 6.8 percent, and sales of existing residences, 7.9 percent (not annual rates). These increases continue the pattern of recent quarters and reflect the continued downtrend in mortgage rates (chart 4). The mortgage rate hovered just above 12 percent in the third quarter, 64 basis points below its second-quarter level and 235 basis points below its level in the third quarter of 1984.

Nonresidential fixed investment. --Real nonresidential fixed investment declined 4-1/2 percent in the third quarter, following a 14-1/2-percent increase in the second. Both structures and producers' durable equipment (PDE) contributed to the third-quarter swing.

Structures declined 7-1/2 percent, following a 9-percent increase. Commercial structures and industrial structures declined by about equal amounts; other categories of structures changed little.

PDE declined 3-1/2 percent, following a 16-1/2-percent increase. The change in PDE was again dominated by the volatile information processing category, computers in particular (table 7). The transportation category, largely due to strong auto sales, again changed in the opposite direction from the information processing category and moderated the swing in total PDE.

Change in business inventories. --Real business inventories decreased $2 billion in the third quarter, following an $8-1/2 billion increase in the second (table 8). In both quarters, the change in inventory investment contributed negatively to the change in GNP--minus $10-1/2 billion in the third quarter and minus $11 billion in the second. The third-quarter swing in inventory investment was largely accounted for by farm and trade inventories. Farm inventoies increase little, following a $3-1/2 billion increase in the second quarter; faced with good harvests, low foreign demand, and low prices, farmers place substantial amounts of crops under CCC loan. In retail trade, sharper decumulation in inventories was more than accounted for by autos. As was mentioned earlier, auto sales jumped in the third quarter in response to attractive financing packages offered by manfacturers; as a result, auto inventories were run down to levels below those considered desirable by the industry. (The raio of unit auto inventories to auto sales fell to 1.3 in September 1985--the lowest level since the beginning of this series in 1967.)

Reflecting the decline in inventories and the increase in final sales, the constant-dolla ratio of total invetories to total final sales declined to 3.02, approaching the lower end of the 3.01-3.09 range within which it has fluctuated over the last 2 years.

Net exports

Real net exports were flat in the third quarter, following a $5-1/2 billion decline in the second. Exports and imports both increased by less than $1/2 billion in the third quarter; in the second they had both declined--exports by $6 billion and imports by less than $1/2 billion. Within exports, agricultural products declined in the face of ample worldwide supplies, but this decline was more than offset by increases in services and nonagricultural exports. Within imports, although services remained flat, merchandise imports registered a smll increase. The increase in merchandise imports, in which a decine in petroleum was more than offset by an increase in nonpetroleum, was estimated using the Census Bureau's import data on a revised statistical month basis. See the box on page 3 for a description of these new data and their use in preparing the third-quarter aestimates.

Government purchases

Real government purchases were up 16 percent in the third quarter, following a moderate increase in the second. The step-up was in Federal purchases, which jumped 33-1/2 percent after a slight decline. Defense purchases, which often fluctuate sharply from quarter to quarter, were up considerably more than in the second quarter. The larger increase was due to a step-up in the delivery of military equipment. Nondefense purchases increased sharply after a decline; changes in both quarters were due to operations of the CCC. As noted earlier, farmers stepped up placements of crops with the CCC under the commodity loan program in the third quarter. State and local government purchases were up 5 percent, somewhat less than in the second quarter. The increases were largely in highway construction.

Th Federal secto. --Changes in current-dollar Federal receipts and expenditures on a NIPA basis are shown in table 9. Expenditures increased $22 billion in the third quarter, about double the increase in the second. The step-up was more than accounted for by purchases; defense purchases were up more than in the second quarter, and nondefesen purchases increased after a decline. Transfer payments increased after a decline, largely refecting the pattern of retroactive Social Security payments. Ne interest paid and grants-in-aid to State and local governments increased again, but the composition of the increase in the grants changed sharply. In the second quarter, highways had fully accounted for the increase; in the third, education accounted for the largest share. Subsidies less the current surplus of government enterprises declined sharply, mainly due to the drop in agricultural subsidy payments. Changes in wage accruals less disbursements--which are substracted from expenditures--reflected a retroactve payment to Postal Service employees in the second quarter.

Among receipts, recent sharp fluctuations in personal tax receipts were mainly due to the delay and catchup in income tax refund payments. Changes in indirect business taxes in the past two quarters reflected a onetime fee levied in the second quarter on the nuclear power industry for existin stocks of nuclear waste. Contributions for social insurance again increased moderately. Estimates of corporate profits, and, thus, of 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 is the same as in the preceding quarter. On the basis of this calculation, total receipts increased about $40 billion in the third quarter.

The Federal deficit on a NIPA basis had inceased $49 billion to $214 billion in the second quarter and is likely to decline about $18 billion in the third. These changes largely reflect the impact of the timing of tax refunds.
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Title Annotation:with related note on merchandise trade data; third quarter, 1985
Publication:Survey of Current Business
Date:Oct 1, 1985
Previous Article:Constant-dollar inventories, sales, and inventory-sales ratios for manufacturing and trade.
Next Article:An advance overview of the comprehensive revision of the national income and product accounts.

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