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The business situation.

the BUSINESS SITUATION

REVISED estimates show that real GNP increased at an annual rate of 2 1/2 percent in the second quarter of 1987; the preliminary estimates had shown about the same rate of increase (table 1).1 Although the broad picture of the economy, as sketched in last month's "Business Situation,' changed little, some major components registered offsetting revisions. The largest downward revision was in net exports ($5 1/2 billion). The largest upward revision was in Federal government purchases of goods and services ($5 1/2 billion). The increase in the GNP price index (fixed weights) was unrevised at a 4 1/2-percent annual rate.

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 compounded to annual rates. Real, or constant-dollar, estimates are expressed in 1982 dollars.

The downward revision in net exports largely reflected newly available merchandise import data for June. The upward revision in Federal government purchases reflected data on Federal unified budget outlays for June and was more than accounted for by purchases other than those of the Commodity Credit Corporation.

Corporate profits

Profits from current production-- profits before tax with inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj)--increased $2 1/2 billion in the second quarter, following a $13 billion increase in the first. Domestic profits of nonfinancial corporations increased $1 billion after a $9 billion increase, domestic profits of financial corporations were unchanged after a $1 billion increase, and profits from the rest of the world increased $1 1/2 billion after a $3 billion increase.

In nonfinancial corporations, real gross product increased but profits per unit declined. Manufacturing profits increased substantially; petroleum accounted for most of the increase. Nonmanufacturing profits declined; a sharp drop in trade profits was responsible.

Profits before tax (PBT) increased $10 billion in the second quarter after an increase of $9 billion in the first. The much smaller increase in profits from current production than in PBT was due to the IVA, which declined $7 1/2 billion (to negative $19 billion). The IVA converts the value of inventory withdrawals from the predominantly historical costs that underlie PBT to current replacement costs. When current replacement costs of inventory withdrawals are higher than costs that underlie PBT, the IVA is negative in order to remove the resulting capital-gains-like element from profits.

Government sector

The fiscal position of the government sector in the national income and product accounts improved considerably in the second quarter of 1987, as the combined deficit of the Federal Government and of State and local governments declined $37 billion to $92 1/2 billion, the lowest level in 3 years (table 2). The deficit of the Federal Government declined $28 1/2 billion, and the surplus of State and local governments increased $8 1/2 billion. The decline in the combined deficit was due to a large increase in receipts, which, in turn, was due to temporary behavioral responses to the Tax Reform Act of 1986.

The Federal sector.--The Federal Government deficit declined to $142 billion, as receipts increased more than expenditures.

Receipts increased $42 1/2 billion, following a $27 billion increase in the first quarter when corporate profits tax accruals recorded a large gain as a result of the Tax Reform Act. The bulk of the second-quarter increase was in personal tax and nontax receipts, which increased $34 billion, compared with $5 billion in the first quarter. Federal withheld income taxes added to the change in taxes in the second quarter after reducing them in the first. 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. (For more information, see the detailed discussion in the April "Business Situation' and table 8 in the July "Business Situation.') As more new forms were filed, the amount of underwithholding was reduced as employees 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 shifting of capital gains realizations into 1986; the capital gains taxes were partly offset by lower payments due to income deferrals and deduction accelerations.

The other categories of receipts contributed $8 1/2 billion to the second-quarter increase. Both a $4 billion increase in contributions for social insurance and a $3 1/2 billion increase in corporate profits tax accruals were the result of higher incomes.

Expenditures increased $14 billion, compared with $8 1/2 billion in the first quarter. Purchases of goods and services accounted for almost the entire increase; all other expenditures, on balance, increased less than $1 billion. National defense purchases increased $8 billion, and nondefense purchases increased $5 1/2 billion. The national defense increase was concentrated in purchases of services, which increased $5 1/2 billion. Within nondefense purchases, purchases of agricultural commodities by the Commodity Credit Corporation (CCC) continued to decline and all other purchases increased $7 billion; large increases occurred in a number of agencies.

The small increase in all other expenditures combined reflected large increases in transfer payments to persons ($5 1/2 billion) and in grants-in-aid to State and local governments ($3 1/2 billion) offset by a large decline ($9 1/2 billion) in subsidies less the current surplus of government enterprises. The increases in transfer payments to persons was the net result of a $4 1/2 billion increase in social security (including medicare), a $1 1/2 billion increase in Federal civilian employee retirement benefits, and a $1/2 billion decline in unemployment benefits. The increase in retirement benefits included over $1 billion for an alternative annuity option, effective in March 1987, that allowed new retirees to withdraw--in a single payment-- the contribution they had made as an employee and receive a reduced annuity. The increase in grants-in-aid was accounted for by medicaid ($3 billion) and food and nutrition ($1/2 billion). The decline in subsidies less the current surplus was more than accounted for by an $11 1/2 billion decline in subsidies to farmers.

Cyclically adjusted surplus or deficit. --When measured using cyclical adjustments based on middle-expansion trend GNP, the Federal deficit on the national income and product account basis declined from $188 1/2 billion in the first quarter to $164 billion in the second (see table 2 on page 4). The cyclically adjusted deficit as a percentage of middle-expansion trend GNP decreased from 4.4 percent in the first quarter to 3.7 percent in the second.

State and local sector.--The State and local government surplus increased $8 1/2 billion in the second quarter to $49 1/2 billion, as receipts increased more than expenditures. The increase in the surplus was concentrated in other funds, which moved from a large deficit in the first quarter to a $1 billion deficit in the second; the social insurance funds surplus increased $1/2 billion.

Receipts increased $18 1/2 billion, compared to $3 billion in the first quarter. Personal tax and nontax receipts increased $7 1/2 billion, following a small decline in the first. In the first quarter, tax payments on 1986 incomes were lowered to the extent that taxpayers deferred income from 1986, accelerated deductions, or both, to minimize their tax liability in 1986. In the second quarter, final 1986 payments were raised to the extent that taxpayers shifted realization of capital gains into 1986 to take advantage of the lower tax rate. Indirect business tax and nontax accruals increased $6 billion, of which $3 1/2 billion was for sales taxes. Federal grants-in-aid increased $3 1/2 billion; combined, all other categories of receipts increased $1 1/2 billion.

Expenditures increased $10 billion, compared with $12 1/2 billion in the first quarter. Most of the increase was in purchases of goods and services, which increased $8 1/2 billion, $3 billion less than in the preceding quarter. The deceleration was due to purchases of structures; they declined $1 billion, following a $2 1/2 billion increase.

Table: 1.--Revisions in Selected Component Series of the NIPA's, Second Quarter of 1987

Table: 2.--Government Sector Receipts and Expenditures

Table: 1.--Reconciliation of Change in Compensation Per Hour in the Business Economy Other Than Farm and Housing and Average Hourly Earnings in the Private Nonfarm Economy, Seasonally Adjusted

Table: 2.--Cyclically Adjusted Federal Receipts, Expenditures, Surplus or Deficit (-), and Debt
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Title Annotation:2d quarter, 1987
Publication:Survey of Current Business
Date:Aug 1, 1987
Words:1453
Previous Article:State personal income, first quarter, 1987.
Next Article:National income and product accounts tables.
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