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The business situation.

The BUSINESS SITUATION REVISED (45-day) estimates show that real GNP increased at an annual rate of 3 percent in the third quarter of 1986; preliminary (15-day) estimates had shown a 2-1/2-percent increase (table 1). The upward revision was more than acccounted for by government purchases of goods and services, in which Federal national defense purchases were revised up (reflecting newly available September data). Partly offsetting were downward revisions in personal consumption expenditures (PCE) (reflecting September retail sales data) and business inventory investment (reflecting newly available manufacturing and trade book value data for September and revised data for August). The increase in the GNP price index (fixed weights) was essentially unrevised at 2-1/2 percent.

The broad picture of the economy was sketched in last month's "Business Situation." The step-up in real U.S. production from a 1/2-percent increase in the second quarter was more than accounted for by final sales; inventory investment, which had declined substantially in the second quarter, did so again in the third. Within final sales, PCE, which had increased strongly in the second quarter, increased even more in the third. Much of the third-quarter strength was in motor vehicles. Fixed investment and goverment purchases increased in both quarters, but less in the third than in the second. Net exports, which had declined sharply in the second quarter, declined much less in the third.

Corporate profits

Profits from current production--profits before tax (PBT) plus inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj)--increased $6-1/2 billion in the third quarter, as PBT increased $10 billion while IVA and CCAdj dropped $2-1/2 billion and $1 billion, respectively.

The repeal of the investment tax credit as part of the Tax Reform Act of 1986--signed into law October 22--will necessitate revision of several profits-related measures for the first three quarters of the year; measures in need of revision include PBT and CCAdj but not profits from current production or IVA. The revisions are necessary because repeal of the investment tax credit will result in increased depreciation charges, causing downward revisions in PBT and upward revisions in CCAdj; profits from current production will not be affected because the PBT and CCAdj revisions will offset each other. Revised estimates for PBT and CCAdj--as well as for profits tax liability, profits after tax, undistributed profits, and cash flow--will be published in the December SURVEY; estimates discussed in this issue are not revised.

For domestic nonfinancial corporations, profits from current production increased $4-1/2 billion in the third quarter after a $1/2 billion increase, and PBT with IVA--the quarterly measure of profits available by industry--increased $5-1/2 billion after a $4-1/2 billion increase. The third-quarter increases were largely the result of a sharp increase in chemicals profits (which more than accounted for the increase in manufacturing profits) and a rebound in wholesale trade profits after a second-quarter decline.

For domestic financial corporations, profits from current production and PBT with IVA both increased $1 billion after $2 billion increases in the second quarter. The third-quarter increases were more than accounted for by insurance companies. For the rest of the world, both profits measures increased $1 billion after a steep second-quarter decline ($5-1/2 billion) related to the drop in oil prices.

Government sector

The fiscal position of the government sector in the national income and product accounts (NIPA's) improved in the third quarter of 1986, as the combined deficit of the Federal Government and of State and local governments declined $37-1/2 billion (table 2). The improvement was the result of a decline in the Federal deficit and an increase in the State and local surplus.

The Federal Sector.--The Federal Government deficit declined $32-1/2 billion in the third quarter to $206 billion, as receipts increased and expenditures declined.

Receipts increased $18-1/2 billion, compared with $7-1/2 billion in the second quarter. The acceleration was largely accounted for by personal tax and nontax receipts, which increased at twice the pace of the second quarter, and by indirect business tax and nontax accruals, which increased after a second-quarter decline. Contributions for social insurance also contributed to the acceleration by increasing more than in the second quarter. The larger gains in personal taxes and in contributions were mainly the result of higher incomes. The swing in indirect business taxes was mainly due to two components affected by petroleum-related developments. First, windfall profit taxes, which had declined $2-1/2 billion in the second quarter to $0.1 billion, did not show any accruals in the third. Second, nontaxes increased almost $1-1/2 billion due to payments from a number of petroleum companies for earlier violations of Federal pricing regulations.

Expenditures declined $14 billion after a $44 billion increase in the second quarter. Farm programs operated by the Commodity Credit Corporation (CCC), which affected nondefense purchases and subsidies less the current surplus of government enterprises, accounted for much of the volatility in expenditures in recent quarters. These programs accounted for over two-thirds of the third-quarter swing and a similar amount of the opposite swing in the second quarter.

Nondefense purchases declined $3 billion after essentially no change in the second quarter. The purchases of agricultural commodities by the CCC accounted for almost all of the third-quarter decline, and they had been unchanged in the second quarter. Subsidies less the current surplus declined $19-1/2 billion after an $18-1/2 billion increase in the second quarter. Because the CCC is treated as a government enterprise, its current surplus (or deficit) affected one part of this net measure, and the subsidies it paid affected the other. The CCC deficit declined $1-1/2 billion in the third quarter after a $1/2 billion decline in the second. Agricultural subsidies declined $18 billion after a $19 billion increase. In the second quarter, these subsidies had included both final 1985 deficiency payments and advance 1986 deficiency payments.

Although programs of the CCC accounted for the bulk of the negative swing in expenditures, the other expenditure categories, with one exception, also contributed. The exception was transfer payments to persons, which showed a larger increase in the third quarter than in the second, largely because of $2-1/2 billion of retroactive social security payments. Transfer payments to foreigners decreased following a second-quarter increase that reflected large economic and military assistance payments, including a special payment of about $1 billion (at an annual rate) to the Philippines. Grants-in-aid to State and local governments increased less than in the second quarter. The second-quarter increase had been boosted by payments ($3-1/2 billion at an annual rate) to five States for settlement of a dispute between the Federal and State governments over revenue from leases of the Outer Continental Shelf and from royalties paid on discovered oil. The third-quarter increase was more than accounted for by a $2-1/2 billion increase in revenue sharing grants to local governments, which was due to an advance payment of the fourth-quarter grant. (This was the final payment under the local government revenue sharing program, which was terminated by legislative action.)

Cylically adjusted surplus of deficit.-- When measured using cyclical adjustments based on middle-expansion trend GNP, the Federal Fiscal position moved from a deficit of $245 billion in the second quarter to a deficit of $216 billion in the third (see table 2 on page 18).

The State and local sector.-- The State and local government surplus increased $5 billion in the third quarter to $64-1/2 billion, as receipts increased more than expenditures. An increase in the surplus of other than social insurance funds accounted for most of the total increase.

Receipts increased $19 billion, compared with $3 billion in the second quarter. The acceleration was accounted for by a rebound in indirect business tax and nontax accruals. The second-quarter decline in indirect business taxes was from a first-quarter level that included payment of a fine ($8 billion at an annual rate) by a major petroleum corporation for earlier violation of Federal pricing regulations. The large third-quarter increase reflected two factors: (1) A sharp increase in sales taxes--up $6-1/2 billion compared with $2-1/2 billion in the second quarter--partly due to the large third-quarter auto sales, and (2) payments totaling $3 billion (at an annual rate) from a number of petroleum companies for earlier violations of Federal pricing regulations.

Expenditures increased $13-1/2 billion, only slightly less than in the second quarter. Purchases of goods and services increased $12-1/2 billion, and all other expenditures, on balance, increased $1 billion. Within purchases, structures increased $5-1/2 billion after a $7 billion increase in the second quarter.

Over the past 2 years, purchases of structures have been a major factor in the changes in State and local purchases. From the third quarter of 1984 to the third quarter of 1986, when total purchases increased at an average annual rate of about 2 percent, purchases of structures increased at an average rate of about 4 percent. On a quarterly basis, purchases of structures are generally volatile, and, over the past 2 years, much of that volatility was due to fluctuations in highways (chart 1). Highway construction increased as often as it declined over the period. All other structures have also been volatile, but they increased in all but one quarter and moderated the swings in highway construction. Over the 2-year period, all other structures-financed to a substantial extent from the very large volume of municipal borrowing that began in late 1983 and continued well into 1985-contributed more than highways to the growth of total structures.
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Title Annotation:3rd quarter, 1986
Publication:Survey of Current Business
Date:Nov 1, 1986
Words:1590
Previous Article:U.S. affiliates of foreign companies: operations in 1984.
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