Printer Friendly

The business situation.

the BUSINESS SITUATION

THE pace of U.S. production slowed in the second quarter. Real GNP increased at an annual rate of 2 1/2 percent, following an increase of 4 1/2 percent in the first quarter (chart 1).1 The first-quarter estimates of real GNP and other national income and product account (NIPA) estimates have been revised as part of the regular annual revision presented later in this issue.

1. Quarterly estimates in the national income and product accounts are expressed at seasonally adjusted annual rates, and quarterly changes in them are differences between these rates. Quarter-to-quarter percent changes are annualized. Real, or constant-dollar, estimates are expressed in 1982 dollars.

The preliminary GNP estimates for the second quarter are based on the following major source data: For personal consumption expenditures (PCE), retail sales through June, and unit auto and truck sales through June; for nonresidential fixed investment, the same information for autos and trucks as for PCE, construction put in place for April and May, and manufacturers' shipments of machinery and equipment for April and May; for residential investment, construction put in place for April and May, and housing starts through June; for change in business inventories, book values for manufacturing and trade for April and May, and unit auto inventories through June; for net exports of goods and services, merchandise exports and merchandise imports for April and May, and fragmentary information on investment income for the quarter; for government purchases of goods and services, Federal unified budget outlays for April and May, and State and local construction put in place for April and May; and for GNP prices, the Consumer Price Index for April and May, the Producer Price Index through June, and the unit-value index for petroleum imports for April and May. Some of the source data are subject to revision.

U.S. demand also slowed and, for the third consecutive quarter, increased less than U.S. production. As measured by real gross domestic purchases, demand increased 1 1/2 percent, following a 2 1/2-percent increase in the first quarter. The difference between U.S. production and U.S. demand is net foreign demand for U.S. goods and services (that is, net exports). Net foreign demand has increased substantially in the past three quarters, largely reflecting the cumulative depreciation of the dollar; in the second quarter, real net exports increased $7 1/2 billion after a $16 1/2 billion increase in the first and a $10 billion increase in the fourth quarter of 1986.

Both the GNP price index (fixed weights) and the price index for gross domestic purchases (fixed weights) increased 4 1/2 percent in the second quarter; in the first quarter, the GNP price index had also increased at this rate, while the purchases price index had increased 5 1/2 percent.

Real GNP

Personal consumption expenditures

Real personal consumption expenditures (PCE) increased 2 percent in the second quarter after declining slightly in the first; increased expenitures on durables and services more than offset lower expenditures on nondurables (table 1).

Although PCE for motor vehicles and parts accounts for only about 7 percent of total PCE, movements in this item have shaped the quarterly path of total PCE in recent quarters. If PCE expenditures for motor vehicles and parts are excluded, a deceleration is apparent over the past several quarters; in the second quarter, the increase in PCE excluding motor vehicles and parts slowed to 1 percent from 3 percent in the first quarter. (A discussion of motor vehicles, in terms of units, appears at the end of this article.)

Durable goods increased 11 1/2 percent after a sharp decline. Motor vehicles and parts increased after two quarters of large declines, furniture and household equipment increased about as much as in the first quarter, and other durables increased moderately after a sharp drop.

Nondurable goods declined 4 1/2 percent in the second quarter after a modest increase in the first. Declines in food and in clothing and shoes were responsible; expenditures for energy--gasoline and oil, and fuel oil and coal--increased after a decline, while other nondurables increased slightly less than in the first quarter.

Services increased 4 percent in the second quarter after a larger increase in the first. The deceleration was attributable to the other services category; brokerage charges declined after a sharp increase. In contrast, household operation services--which includes electricity and gas--increased moderately after a sharp drop, and medical care services accelerated.

Nonresidential fixed investment

Real nonresidential fixed investment increased 8 percent in the second quarter, following a 14 1/2-percent decline in the first (table 2). Structures--which have been weak for a number of quarters--changed little, while producers' durable equipment resumed its upward path after a drop in the first quarter.

In structures, office buildings once again registered the largest decline, as previous overbuilding and high vacancy rates continued to inhibit new construction. The drop in office buildings was largely offset by a rebound in public utilities; other types of construction changed little, although petroleum exploration and drilling increased for the third consecutive quarter.

In producers' durable equipment, motor vehicles--which account for about 15 percent of the total--accounted for about 40 percent of the increase. Most of the second-quarter increase was in trucks. Information processing equipment accounted for the rest of the increase.

Residential investment

Real residential investment declined 1/2 percent in the second quarter, following a 7 1/2-percent decline in the first. Multifamily construction recorded its fourth consecutive quarterly decline, and single-family construction its seventh consecutive increase. Other residential investment--which includes major replacements, additions and alterations, mobile home sales, and brokers' commissions on house sales--changed little.

The continued decline in multifamily construction reflected the long and sometimes sharp decline in multifamily starts (chart 2). At 472,000 (seasonally adjusted annual rate) in the second quarter, multifamily starts were 33 percent below the year-earlier level.

The increase in single-family construction reflected the lagged impact of the large increase in starts in the first quarter. In the second quarter, starts dropped 116,000, and mortgage interest rates increased almost 1 1/4 percentage points (chart 3).

In other residential investment, increases in major replacements and in additions and alterations offset the decline in brokers' commissions that resulted from a drop in house sales.

Inventory investment

Real inventory investment declined $6 1/2 billion in the second quarter, as the rate of inventory accumulation slowed to $41 billion in the second quarter from $47 1/2 billion in the first (table 3). Nonfarm inventory investment declined $21 1/2 billion while farm inventory investment increased $15 billion.

The increase in farm inventory investment largely reflected transactions under CCC loan programs; net redemptions of crops under loan--redemptions less placements--increased sharply as corn and wheat prices received by farmers increased. A decline in crop sales also contributed to the increase in inventories.

In nonfarm inventory investment, retail auto dealers' inventories declined $3 1/2 billion, following an increase of $21 1/2 billion. Other nonfarm inventories increased $26 billion, following an increase of $22 1/2 billion; the second-quarter increase was accounted for by durable goods. More than one-half of the increase was at the wholesale and retail levels--and included a sizable increase in imported motor vehicles and parts held by merchant wholesalers.

The second-quarter increases in both inventories and final sales left the constant-dollar ratio of total inventories to total final sales little changed at 3.22. Similar levels had been recorded in the first and second quarters of 1986, before sales-incentive programs offered by auto manufacturers during the second half of 1986 helped reduce the ratio by the end of the fourth quarter to 3.14--the lowest level registered during the current recovery and expansion.

Net exports

Real net exports of goods and services increased $7 1/2 billion in the second quarter, following an increase of $16 1/2 billion in the first; exports increased $13 billion--13 1/2 percent-- and imports increased $5 1/2 billion--4 percent (table 4).

The increase in exports was predominantly in merchandise, with both agricultural and nonagricultural products contributing. Agricultural exports have increased in three of the last four quarters; the uptrend reflects lower loan rates under Federal price support programs, dollar depreciation, and increasing foreign demand. (The first-quarter decline can be traced, in large part, to a drop in soybean exports as Brazil's new crop became available.) In the second quarter, sales of corn and wheat to the Soviet Union contributed to the increase. In nonagricultural exports, the increase was widespread among end-use categories and is largely traceable to the increasing competitiveness of U.S. exports in world markets resulting from dollar depreciation. Exports of services increased slightly after a big first-quarter jump that was largely due to foreign military sales.

The increase in imports was more evenly split between merchandise and services. Petroleum imports accounted for much of the increase in merchandise imports, increasing 17 percent after two consecutive quarterly declines of well over 30 percent each. The increase in petroleum imports, despite an increase in its price, is traceable to relatively stable demand at a time of declining domestic production. An increase in imports of services was in factor incomes.

Government purchases

Real government purchases increased $2 1/2 billion, or 1 1/2 percent, in the second quarter, following a decline of $12 billion, or 6 percent, in the first (table 5). These changes largely reflected the pattern of CCC transactions in Federal nondefense purchases; government purchases less CCC inventory change increased $9 billion in each quarter.

Among other Federal purchases, national defense purchases registered another strong increase; as in the first quarter, the increase was concentrated in military hardware and in services other than compensation of employees. Nondefense purchases other than CCC inventory change increased slightly, following three quarters of decline.

State and local government purchases increased less than in the first quarter. The slowdown was in structures, as highway construction declined slightly after a $2 billion increase in the first quarter.

GNP Prices

The GNP price index (fixed weights) increased 4 1/2 percent in the second quarter, the same rate as in the first (table 6). The price index for gross domestic purchases also increased 4 1/2 percent in the second quarter, following a 5 1/2-percent increase in the first. (Both price measures were boosted about 1/2 percentage point in the first quarter by a 3-percent pay raise for Federal civilian and military personnel; such a pay raise is treated in the NIPA's as an increase in the price of employee services purchased by the Federal Government.) The difference (1 percentage point) in the first-quarter increases in the two price measures had reflected a large--12 1/2 percent--increase in import prices. (Prices of imported goods are subtracted out in deriving GNP prices but not in deriving prices of gross domestic purchases.) Prices of imported petroleum had jumped 127 1/2 percent in the first quarter; in the second quarter, they increased 23 1/2 percent. Other merchandise import prices increased 4 percent in the second quarter, following a 7-percent increase in the first.

PCE prices increased 5 percent in the second quarter, following a 5 1/2-percent increase in the first. The small deceleration was attributable to energy prices, which were up much less than in the first quarter. Food prices increased more than in the first quarter; the pickup was largely in meat and in fresh fruit and vegetables. Prices of structures, both nonresidential and residential, continued to accelerate in the second quarter. Prices paid by government were up less than in the first quarter; most of the difference was accounted for by the Federal pay raise.

Personal Income

Personal income increased $54 1/2 billion in the second quarter, following a $68 1/2 billion increase in the first (table 7). The deceleration was largely accounted for by a sharp swing in subsidy payments to farm proprietors. Due to a sharp jump in personal tax and nontax payments, disposable personal income was up much less than personal income in the second quarter. Personal saving fell sharply after a substantial increase.

Wage and salary disbursements increased $28 1/2 billion, following a $35 billion increase in the first quarter. Government wages and salaries, which had been boosted $2 1/2 billion in the first quarter by the pay raise for Federal employees, accounted for part of the deceleration. The rest of the deceleration was spread across the major private industry components except in the distributive industries; in the distributive industries, wages and salaries were up more than in the first quarter. The increase in private wages and salaries in both quarters largely reflected continued gains in employment and average hourly earnings.

Farm proprietors' income changed little after a first-quarter jump of $14 1/2 billion, to a level of $51 1/2 billion. In the first quarter, subsidy payments --largely final deficiency payments on 1986 crops and initial deficiency payments on 1987 crops--had jumped $12 billion to a level of $20 billion. (Deficiency payments are payments by the government to farmers when the market price of a crop is below the target price set by the CCC.) In the second quarter, subsidies declined $11 1/2 billion but farm income excluding subsidies increased by the same amount, as prices received by farmers increased. (Crop prices were up even more than in the first quarter, and livestock prices increased after a decline.) Nonfarm proprietors' income increased somewhat less than in the first quarter.

Personal interest income was up $6 1/2 billion, about twice as much as in the first quarter. Personal holdings of financial assets continued to increase, and the decline in interest rates subsided.

Transfer payments were up $8 billion, slightly more than in the first quarter. Cost-of-living adjustments to benefits paid under social security and several other Federal retirement and income support programs added $3 1/2 billion to the first-quarter increase; retroactive social security payments to recent retirees added $1 1/2 billion to the second-quarter increase.

Among the remaining components of personal income, other labor income, rental income of persons, and personal dividend income registered somewhat larger increases than in the first quarter. The second-quarter increase in other labor income included a $ 1/2 billion initial payment by the Federal Government to a savings fund established by the Federal Retirement System Act of 1986; the payment was largely for Government employees hired after December 31, 1983, and equaled 1 percent of their earnings for 1984 through 1986. Personal contributions for social insurance, which are subtracted in deriving the personal income total, increased considerably less than in the first quarter, when they had been boosted $2 billion by increases in the taxable wage base for social security and in the monthly premium for supplementary medical insurance.

Personal tax and nontax payments surged $42 billion in the second quarter, following a $4 billion increase in the first; this pattern was the result of direct and indirect effects of the Tax Reform Act of 1986. In the second quarter, taxes were increased more by the act than by the growth in the taxable earnings base (table 8). In the first quarter, the act largely offset an increase in taxes due to growth in the earnings base.

Federal tax payments increased $34 billion in the second quarter, following a $5 billion increase in the first. Federal withheld income taxes added to the change in taxes in the second quarter after reducing them in the first quarter. In the first quarter, a large reduction occurred in withheld income taxes due to the tax act; this reduction came about as the act, on balance, lowered withholdings and as underwithholding occurred because most employees had not yet filed a new Form W-4 (see the April "Business Situation'). As more new forms were filed, the amount of underwithholding was reduced as employers adjusted withholdings to match expected liabilities more closely. Declarations (estimated tax payments) and net settlements (final tax payments less refunds of the preceding year's taxes) continued to add, on balance, to tax payments in the second quarter, reflecting the acceleration of capital gains realizations into 1986; they were partly offset by lower payments due to income deferral and deduction accelerations.

State and local tax payments increased in the second quarter, following a small decline in the first. In the first quarter, payments were lowered to the extent that taxpayers deferred income and/or accelerated deductions to minimize their tax liability in 1986. In the second quarter, as in the first, payments were raised to the extent that taxpayers shifted realization of capital gains into 1986 to take advantage of the lower tax rate.

Reflecting the changes in personal income and in personal tax and nontax payments, disposable personal income (DPI) increased $12 1/2 billion in the second quarter, following a $64 1/2 billion increase in the first. Without the special factors affecting income and taxes in the two quarters, DPI would have accelerated to a $47 billion increase in the second quarter from a $35 billion increase in the first.

The sharp changes in DPI carried through to real DPI, which declined 3 percent in the second quarter after increasing 2 1/2 percent in the first. Without the special factors, the quarterly pattern in real DPI would have been reversed--increasing 1 1/2 percent in the second after declining 1 1/2 percent in the first.

Reflecting both the sharp deceleration in DPI and an acceleration in personal outlays, personal saving fell $38 billion in the second quarter after increasing $29 1/2 billion in the first. The personal saving rate dropped 1.2 percentage points to 3.2 percent in the second quarter.

Motor Vehicles

Sales of new cars increased to 10.0 million units (seasonally adjusted annual rate) from 9.5 million in the first quarter; sales of domestic cars increased to 7.0 million from 6.7 million, and sales of imports increased to 3.0 million from 2.8 million. Domestic car inventories were unchanged at 1.80 million units in the second quarter, and the inventory-sales ratio fell to 3.08 from 3.21 in the first; although still substantially above the 2.0 level generally considered normal by industry observers, the ratio may not be so very far out of line with industry wishes in light of upcoming labor negotiations at two of the major U.S. automakers.

New car sales remained considerably below the sales levels for most of the 1984-86 period despite the second-quarter increase. A number of factors contributed to this weakness. Sales-incentive programs and tax law changes in 1986 resulted in some sales being made last year that otherwise would have occurred early in 1987; most of this effect probably had dissipated by the middle of the second quarter of this year. In the second quarter, however, consumers may have postponed purchases in anticipation of new incentive programs; a recent survey commissioned by a domestic automaker found that nearly one-half of all potential car buyers expect incentive programs to become more attractive over the next several months. Moreover, in recent years, consumers have substituted purchases of light trucks (including pickups, recreational vehicles, and vans) for cars; sales of light trucks increased to 4.7 million units-- considerably above the sales levels for most of the 1984-86 period--in the second quarter from 4.1 million in the first. Finally, the weakness in auto sales may have reflected the weakness in real disposable personal income that has damped overall consumer spending for the past several quarters and concern about debt positions on the part of potential buyers.

Inventories remain high despite a cut in production to 7.1 million units in the second quarter from 7.9 million in the first; further cuts are likely: production schedules call for a decline to 6.4 million in the third quarter. The second-quarter cut was accomplished by temporary plant closings and by early and extended plant conversions for new models.

Unit sales of new trucks increased to 5.0 million in the second quarter from 4.4 million in the first; light trucks accounted for the increase. Sales of domestic trucks increased to 4.1 million in the second quarter from 3.7 million in the first. Sales of imported trucks increased to 0.9 million from 0.7 million.

Table: CHART 1 Selected Measures: Change From Preceding Quarter

Table: 1.--Real Personal Consumption Expenditures

Table: 2.--Real Gross Private Domestic Fixed Investment

Table: 3.--Change in Real Business Inventories

Table: CHART 2 Housing Starts

Table: CHART 3 Selected Interest Rates

Table: 4.--Real Net Exports of Goods and Services

Table: 5.--Real Government Purchases of Goods and Services

Table: 6.--Price Indexes (Fixed Weights): Change From Preceding Quarter

Table: 7.--Personal Income and Its Disposition

Table: 8.--Personal Tax and Nontax Payments: Change From Preceding Quarter
COPYRIGHT 1987 U.S. Government Printing Office
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1987 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:1st quarter, 1987
Publication:Survey of Current Business
Date:Jul 1, 1987
Words:3487
Previous Article:U.S. international transactions, first quarter 1987.
Next Article:The U.S. national income and product accounts: revised estimates.
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.
Trend of business.

Terms of use | Copyright © 2017 Farlex, Inc. | Feedback | For webmasters