Printer Friendly

The business situation.

the BUSINESS SITUATION THE pace of U.S. production slowed in the second quarter of 1986, and the rate of inflation edged down. Real GNP increased at an annual rate of 1 percent, following an increase of 4 percent in the first quarter (chart 1 and table 1). The GNP price index (fixed weights) increased at an annual rate of 2 percent, following a 2 1/2-percent increase. The first-quarter estimates of real GNP and GNP prices are among the revised national income and product account (NIPA) estimates presented later in this issue.

Developments in recent quarters related to energy, farming, and motor vehicles strongly influenced the economy as pictured in the NIPA's. A sharp drop in petroleum prices not only affected the price picture but also was at least partly responsible for a sharp pickup in real personal consumption expenditures on gasoline in the second quarter, for cutbacks in petroleum exploration and drilling that affected nonresidential structures in the first and second quarters, and for sharp fluctuations in petroleum imports. Difficulties in the farm sector, partly related to continued weakness in farm prices, have led to substantial income and price-support assistance under Federal programs. Farmers placed a record amount of crops under loan with the Commodity Credit Corporation (CCC) in the fourth quarter of 1985; by the second quarter of 1986, placements were back to a more normal level. (Such transactions are treated in the NIPA's as a purchase by the CCC with an offset in farm inventories.) Farm subsidies, largely in the form of deficiency payments, increased substantially in the second quarter. Motor vehicle output has declined steadily for three quarters; for both autos and trucks, final sales and inventories have swung sharply from quarter to quarter (table 2). These developments are mentioned in discussing GNP prices, the components of GNP, and personal income in the following sections.

GNP prices.--The 1/2-percentage point deceleration in the GNP price index to a 2-percent increase in the second quarter was due to energy prices. Reflecting the steep drop in petroleum prices, the price of the energy components of GNP fell 14 percent in the second quarter after a small increase in the first. The price of GNP less energy components increased 2 1/2 percent in both quarters (table 3).

PCE prices declined 1/2 percent, following a 1 1/2-percent increase in the first quarter. This difference was also due to energy prices, particularly gasoline prices; food prices were up a little more than in the first quarter, and other PCE prices continued to increase at a moderate pace.

Amonth the other components of final sales, prices paid for nonresidential structures and equipment increased moderately after small changes in the first quarter. The pickup in equipment prices largely reflected computer prices, which declined less than in the first quarter. Prices paid for residential structures and by government again registered moderate increases. Export prices declined after an increase; the swing was largely due to prices of raw materials. Import prices registered an even sharper declined than in the first quarter, as petroleum prices again plummeted. The price of imports of merchandise other than petroleum increased in both quarters--6-1/2 percent in the first and 5-1/2 percent in the second.

Personal consumption expenditures

Real PCE increased 6 percent in the second quarter, following a 3-1/2-percent increase in the first. The stronger increase was largely attributable to expenditures for durable goods, which increased sharply after a small decline in the first quarter.

Durable goods increased 15 percent, rebounding sharply after two quarters of decline. Although all of the major categories of durables--motor vehicles and parts, furniture and equipment, and other durable goods--contributed to the rebound, the swing in motor vehicles and parts was the most pronounced. Large increases followed first-quarter declines in used cars and in trucks; new cars increased only slightly more than in the first quarter.

Nondurable goods increased 7 percent in the second quarter, after a slightly smaller increase in the first. Within nondurables, the composition of change was very different in the two quarters. In the first quarter, the increase in nondurables was largely in food, in clothing and shoes, and in other nondurables. The second-quarter increase was primarily in the energy components.

Services increased 2-1/2 percent in the second quarter, following a slightly larger increase in the first. Expenditures for electricity and gas, which had dropped sharply in the first quarter due to unusually mild weather in many parts of the country, increased moderately in the second. Other services increased less than in the first quarter, largely due to brokers' commissions, which changed little after a substantial increase.

Nonresidential fixed investment

Real nonresidential fixed investment declined 2-1/2 percent in the second quarter, following a 15-percent declined in the first. Structures dropped more steeply than in the first quarter, but producers' durable equipment (PDE) registered a substantial increase after a decline of similar size in the first quarter.

In structures, declines were widespread in the second quarter after having been concentrated in petroleum in the first. Although petroleum exploration and drilling fell even more in the second quarter than in the first, it accounted for only one-half of the second-quarter drop in structures, after having more than accounted for the first-quarter drop. (As was reported in the June SURVEY, planned investment by petroleum manufacturing and mining firms in 1986 was sharply reduced--apparently in response to the recent sharp decline in petroleum prices--between the time of the BEA plant and equipment survey in January-March and the survey in April-May.) After a small increase in the first quarter, commercial buildings declined, accounting for about one-fourth of the second-quarter decline in structures; both office and other commercial buildings contributed to the decline.

In PDE, all four major equipment groupings increased; in the first quarter, three had declined (table 4). Information processing and related equipment--dominated by the volatile computer component--accounted for more than one-half of the second-quarter increase after having accounted for about four-fifths of the first-quarter decline. Transportation equipment increased in the second quarter after a decline in the first; autos increased as much as in the first quarter, and trucks recouped about one-half of a large first-quarter decline.

Residential investment

Real residential investment increased 15-1/2 percent in the second quarter, following an 11-percent increase in the first. Single-family construction was up strongly, although considerably less than in the first quarter; multifamily construction was up somewhat more than in the first quarter. The other component--which includes additions and alterations, major replacements, brokers' commissions on sales, and mobile home sales--increased sharply, following a decline in the first quarter.

The second-quarter increase in single-family construction reflected the continued impact of the first-quarter surge in houshing starts, which, in turn, reflected declines in interest rates. Starts of single-family units increased 179,000, to 1,253,000 (seasonally adjusted annual rate) in the first quarter; in the second they slipped 16,000 (chart 2). Mortgage interest rates dropped almost one percentage point in the first quarter and, despite increases in May and June, by another 1/2 percentage point in the second (chart 3).

The second-quarter increase in the other component was concentrated in brokers' commissions and reflected a turnaround in house sales. Sales of new and existing single-family houses increased 267,000, to 4,324,000 (seasonally adjusted annual rate) in April-May, following a decline of 139,000 in the first quarter.

Inventory investment

Real inventory investment declined $20-1/2 billion in the second quarter, as inventory accumulation was only about one-half as much as in the first (table 5). Nonfarm inventories accumulated much less than in the first quarter, more than accounting for the declined in inventory investment; farm inventories accumulated somewhat more than in the first quarter. Real inventory investment had increased $45 billion in the first quarter, as inventories accumulated strongly after some liquidation in the fourth.

Farm inventories increased $7-1/2 billion in the second quarter, following an increase of $3 billion in the first. The step-up was related to a slowdown in the net placement of crops under loan with the CCC.

Nonfarm inventories increased $12 billion in the second quarter, following a $37 billion increase in the first. The slowdown was mostly accounted for by the sharp swing in inventories of retail auto dealers from substantial accumulation in the first quarter to liquidation in the second. Manufacturing inventories increased after several quarters of runoff; the turnaround was largely in nondurables, especially petroleum. Wholesale inventories were up much less than in the first quarter; again the pattern reflected nondurables and was due to a sharp liquidation of inventories of petroleum products at the wholesale level. Retail inventories other than those held by auto dealers increased considerably less than in the first quarter.

Net exports

Real net exports of goods and services declined $20-1/2 billion in the second quarter, following an increase of $6 billion in the first. Most of the swing was accounted for by merchandise imports, which jumped $24 billion after an increase of $1-1/2 billion.

The acceleration in merchandise imports was due to imports of petroleum, which increased even more in the second quarter than they had dropped in the first. Nonpetroleum imports increased strongly in both quarters; about one-half of each increase was in capital goods, and the remainder was spread across most other major end-use categories. The continued strong increases in the face of the substantial year-long depreciation of the dollar may suggest that some foreign exporters have reduced profit margins to lessen increases in dollar prices in order to maintain their market position. Also, some domestic purchasers may have stepped up purchases in anticipation of price increases.

Government purchases

Real government purchases increased 7 percent in the second quarter, following a 12-1/2-percent decline in the first. As has frequently been the case in recent quarters, much of the swing was accounted for by transactions of the CCC, although Federal national defense purchases and State and local government purchases also contributed.

Federal national defense purchases increased 15-1/2 percent, following a small decline in the first quarter. The sharp turnaround is typical of the fluctuations that characterize the quarterly movements in these purchases. The second-quarter increase was spread across all types of purchases other than compensation, but was particularly large for military equipment.

Federal nondefense purchases declined much less in the second quarter than they had in the first, primarily reflecting transactions of the CCC. In the first quarter, net purchases of farm products by the CCC had fallen sharply from an unusually high level in the fourth, when farmers had placed record amounts of crops with the CCC under the commodity loan program. In the second quarter, CCC purchases registered a much smaller decline, as they returned to a more normal level.

State and local government purchases increased 7-1/2 percent, about three times the rate of increase in the first quarter. The pickup was concentrated in structures, mainly in highway construction.

Personal Income

Personal income increased $47-1/2 billion in the second quarter, following a $49-1/2 billion increase in the first (table 6). Although the increases were about the same in the two quarters, their composition differed considerably. In particular, wages and salaries and transfer payments were up much less in the second quarter, and proprietors' income was up much more.

Wage and salary disbursements increased $13-1/2 billion in the second quarter, $18 billion less than in the first. The deceleration, which was evident in all of the private industry components, was due to a sharp slowdown in employment gains and to a swing in average weekly hours from a small increase to a sizable decline. Wages and salaries in manufacturing and in the distributive industries declined after increasing in the first quarter. A strike by workers at a large communications company reduced wages and salaries in the distributive industries by about $1 billion in the second quarter.

The sharp pickup in proprietors' income was entirely due to farm income, which increased $14-1/2 billion after a $5 billion decline in the first quarter. The swing reflected agricultural subsidy payments, which jumped $15 billion to $18-1/2 billion in the second quarter after little change in the first. The second-quarter payments consisted largely of deficiency payments on corn and other crops covered by acreage reduction programs. Farm income excluding subsidies declined in the first quarter and changed little in the second.

Transfer payments increased $5 billion in the second quarter, following an $11 billion increase in the first. Cost-of-living adjustments to Social Security and several other Federal programs had boosted payments by $6-1/2 billion in the first quarter.

Among the other components of personal income, rental income of persons and personal dividend income increased somewhat less than in the first quarter; other labor income was up the same in both quarters; and personal interest income changed little in both quarters. Personal contributions for social insurance, which are subtracted in deriving the personal income total, was up much less than in the first quarter, when legislated increases in social security tax rates and in the taxable wage base had added $3-1/2 billion.

Personal tax and nontax payments increased $3-1/2 billion in the second quarter, following a decline of similar size in the first. The first-quarter decline was due to the indexing provisions of the Economic Recovery Tax Act of 1981, which had reduced withheld and nonwithheld Federal income taxes by $7-1/2 billion.

As a result of the swing in personal taxes, disposable personal income (DPI) increased $44 billion, or 6 percent, in the second quarter, compared with $53 billion, or 7-1/2 percent, in the first. Reflecting the low rates of price change, real DPI registered strong increases in both quarters--6-1/2 percent in the first and 7 percent in the second.

Personal outlays increased about the same in both quarters, so that the deceleration in current-dollar DPI carried through to personal saving, which increased about one-half as much as in the first quarter. The personal saving rate was up--0.2 percentage point to 5.2 percent--for the third consecutive quarter.
COPYRIGHT 1986 U.S. Government Printing Office
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1986 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:second quarter 1986
Publication:Survey of Current Business
Date:Jul 1, 1986
Words:2352
Previous Article:U.S. international transactions, first quarter 1986.
Next Article:The U.S. National Income and Products Accounts: revised estimates 1983-1985 first quarter 1986.
Topics:


Related Articles
The business situation.
The business situation.
The business situation.
The business situation.
The business situation.
The business situation.
The business situation.
The business situation.
The business situation.
The business situation.

Terms of use | Copyright © 2016 Farlex, Inc. | Feedback | For webmasters