Printer Friendly

The business situation.

the BUSINESS SITUATION

U.S. PRODUCTION continued at a brisk pace in the fourth quarter of 1987: Real GNP increased at an annual rate of 4 percent, following an increase of 4 1/2 percent in the third quarter (chart 1). In the fourth quarter, as during most of the year, the increase in GNP went either into nonfarm business inventory investment or into exports.

U.S. demand slowed sharply in the fourth quarter: Real gross domestic purchases increased at an annual rate of 3 percent, following an increase of 5 percent in the third quarter. Among its final sales components, personal consumption expenditures and fixed investment both declined in the fourth quarter; the decline in personal consumption expenditures was substantial. Government purchases were up in the fourth quarter; however, much of the increase reflected net placements of crops by farmers with the Commodity Credit Corporation, which were offset by a decline in farm inventory investment.

Inflation, whether measured by the prices of U.S. production of goods and services or by the prices of goods and services purchased in the United States, continued at about the same rate in the fourth quarter as in the third: The GNP price index (fixed weights) again increased at an annual rate of 3 1/2 percent, and the price index for gross domestic purchases (fixed weights) again increased 4 percent.1

The next section of the "Business Situation" compares changes in U.S. production, demand, and inflation from the fourth quarter of 1986 to the fourth quarter of 1987 with changes during the preceding four-quarter

1. Quarterly estimates in the national income and product accounts are expressed at seasonally adjusted annual rates, and quarterly changes in them are the 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 fourth quarter are based on the following major source data: For personal consumption expenditures (PCE), retail sales through December, and unit auto and truck sales through December; for nonresidential fixed investment, the same information for autos and trucks as for PCE, construction put in place for October and November, and manufacturers' shipments of machinery and equipment for October and November; for residential investment, construction put in place for October and November, and housing starts through December; for change in business inventories, manufacturing and trade inventories for October and November, and unit auto inventories through December; for net exports of goods and services, merchandise exports and merchandise imports for October and November; for government purchases of goods and services, Federal unified budget outlays for October and November, and State and local construction put in place for October and November; and for GNP prices, the Consumer Price Index through December, the Producer Price Index through December, the unit-value index for petroleum imports for October and November, and unit-value indexes for exports and for nonpetroleum imports for October. Some of the source data are subject to revision. period. It provides perspective for the sections that follow on the components of real GNP, prices, and personal income, which focus on developments in the fourth quarter and over the course of 1987.

The year in perspective

U.S. production.--The fourth-quarter increase in real GNP capped off a year of faster growth in U.S. production. From the fourth quarter of 1986 to the fourth quarter of 1987, real GNP increased 4 percent; from the fourth quarter of 1985 to the fourth quarter of 1986, real GNP had increased 2 percent (table 1). The strength during 1987 was also evident in other principal measures associated with production. Employment, as measured by the Bureau of Labor Statistics household survey, increased 3.1 million from December 1986 to December 1987, compared with a 2.5 million increase during the preceding 12 months; the unemployment rate fell to 5.8 percent by the end of 1987, the lowest rate in more than 8 years. The Federal Reserve Board index of industrial production increased 5 percent from December 1986 to December 1987, compared with a 1-percent increase during the preceding 12 months; the manufacturing capacity utilization rate moved up to 82.1 percent by the end of 1987, the highest rate in nearly 8 years.

Much of the increased U.S. production in 1987 either went into business inventories or was exported. To assess inventory developments over the recent 2-year period, it is more useful to compare the fourth-quarter levels of real business inventories than to compare the fourth-quarter levels of change in real business inventories that are shown in table 1. (Levels for constant-dollar business inventories, business final sales, and ratios of inventories to final sales are shown in the National Income and Product Accounts Tables, table 5.11.) Real business inventories increased from $846 billion in the fourth quarter of 1986 to $888 billion in the fourth quarter of 1987--a substantial accumulation of $42 1/2 billion. During 1986, businesses had added $14 billion to their inventories. The buildup in inventories during 1987 combined with a slowing in final sales to push up the constant-dollar ratio of total inventories to total final sales to the highest level in 2 1/2 years.

Exports stepped up sharply during 1987: Real exports of goods and services increased 17 percent from the fourth quarter of 1986 to the fourth quarter of 1987, following an increase of 6 percent during the preceding year. Merchandise exports surged during 1987, almost doubling the increase during the preceding year; the pickup reflected, to some extent, the improved price competitiveness of U.S. goods resulting from the depreciation of the dollar since early 1985 against most foreign currencies.

The step-up in exports led to a turnaround in real net exports of goods and services, which improved $21 billion over the quarters of 1987 after a deterioration of $22 1/2 billion during 1986. Imports again increased strongly: Real imports of goods and services increased 8 percent, only slightly less than during the preceding year. Merchandise imports, however, decelerated sharply, increasing just over one-half as much as during 1986; the slowdown reflected, to some extent, price increases resulting from the depreciation of the dollar.

U.S. demand.--U.S. demand also picked up during 1987, but by much less than U.S. production. As shown in the addenda to table 1, real gross domestic purchases increased 3 percent from the fourth quarter of 1986 to the fourth quarter of 1987, compared with a 2 1/2-percent increase during 1986. In contrast, U.S. demand for final goods and services--that is, excluding investment in business inventories --slowed: Real final sales to domestic purchasers increased only 1 1/2 percent over the quarters of 1987, compared with 3 percent during 1986.

The weakening in U.S. final demand during 1987 was in consumer spending. Real personal consumption expenditures increased only 1/2 percent from the fourth quarter of 1986 to the fourth quarter of 1987, following a 4-percent increase during 1986. A major factor in the slowdown was a deceleration in income: Real disposable personal income increased 2 percent after an increase of 3 1/2 percent.

Both fixed investment and government purchases did somewhat better during 1987 than during 1986. Real fixed investment increased modestly during 1987 after virtually no change during 1986; the pickup was in business purchases of both structures and equipment. Real government purchases increased a little more than during 1986; the pickup was in Federal purchases, both national defense and nondefense.

U.S. inflation.--Inflation picked up during 1987. The GNP price index increased 4 percent from the fourth quarter of 1986 to the fourth quarter of 1987, following an increase of 2 1/2 percent during 1986. The acceleration was sharper in prices paid by U.S. purchasers: The price index for gross domestic purchases increased 4 1/2 percent during 1987, following a 2-percent increase during 1986.

For the major components shown in table 1, prices were up considerably more over the quarters of 1987 than during 1986. Increases in prices paid both by consumers and by government more than doubled to 4 1/2 percent, and fixed investment prices picked up moderately to 2 1/2 percent.

Components of Real GNP

Personal consumption expenditures

Real personal consumption expenditures (PCE) decreased 4 percent in the fourth quarter after increasing 5 1/2 percent in the third (table 2). The fourth-quarter drop was the largest since the second quarter of 1980, as broadly based decreases in both durable and nondurable goods more than offset an increase in services.

Since the third quarter of 1985, motor vehicles and parts have dominated the quarterly pattern of total PCE. Manufacturers' sales-incentive programs boosted sales in the third quarters of 1985, 1986, and 1987 relative to sales in adjoining quarters. (For a detailed discussion of motor vehicles, see "Motor Vehicles, Model Year 1987" in the November 1987 SURVEY.) As chart 2 shows, PCE excluding motor vehicles and parts continued the weak performance of recent quarters, decreasing 1 percent in the fourth quarter after increasing 2 1/2 percent in the third.

The marked weakness in total PCE since late 1986 is attributable to several factors. Gains in real disposable personal income were modest during 1987. Particularly after the stock market slumped in the third and fourth quarters, consumers may have become more cautious about spending, preferring to add to savings and hesitating to borrow to finance purchases. Consumer confidence, as measured by the Index of Consumer Sentiment prepared by the University of Michigan's Survey Research Center, slipped early in the fourth quarter.

Expenditures for durable goods decreased 20 1/2 percent in the fourth quarter after an even larger increase in the third. In the fourth quarter, as earlier in the year, motor vehicles and parts accounted for most of the change in durables. However, both furniture and household equipment and other durable goods contributed to the fourth-quarter decrease.

Expenditures for nondurable goods decreased 4 1/2 percent in the fourth quarter after a smaller decrease in the third. The fourth-quarter decrease, the most substantial in recent quarters, was spread across all of the major subcategories of nondurable goods.

Expenditures for services increased 3 percent in the fourth quarter after a somewhat larger increase in the third. The slowdown was mainly in energy services, which had increased sharply in the third quarter.

Nonresidential fixed investment

Real nonresidential fixed investment declined 3 1/2 percent in the fourth quarter, following a 26-percent increase in the third (table 3). In the fourth quarter, an increase in purchases of structures was more than offset by a decline in purchases of producers' durable equipment (PDE); in the third quarter, both components had registered large increases.

The fourth-quarter deceleration in structures was traceable to oil well drilling and to construction by public utilities. In the third quarter, both components had increased strongly; in the fourth, both posted much smaller increases. In contrast, construction of commercial buildings accelerated, recording a second consecutive increase after six quarters of decline. Construction of industrial buildings also increased again in the fourth quarter.

Despite the increases in the two most recent quarters, construction of commercial and of industrial buildings was lower in the fourth quarter of 1987 than a year earlier. Weakness early in the year probably reflected an oversupply of office buildings and the changes in depreciation schedules and in the tax treatment of passive investment income mandated by the Tax Reform Act of 1986. Oil well drilling and construction by public utilities were both substantially higher at the end of 1987 than at the end of 1986. Oil well drilling increased in each quarter of 1987, reflecting the expectation of increased profitability resulting from the partial recovery in oil prices.

The fourth-quarter swing in PDE was evident in all four major categories --information processing, transportation, industrial, and other equipment. Despite its fourth-quarter decline and a decline in the first quarter, PDE at yearend was 3 1/2 percent above its year-earlier level. The first-quarter decline may have reflected, at least in part, a shifting of purchases into the fourth quarter of 1986 for reasons related to the next tax law. Increases in the middle quarters of 1987 were consistent with increasing capacity utilization rates and export demand and with high levels of unfilled orders for capital goods and of corporate cash flow relative to investment expenditures.

The fourth-quarter decline in PDE may appear surprising in light of other information on capital goods: Census Bureau data on shipments of nondefense capital goods increased moderately in the quarter, and responses to BEA's latest plant and equipment expenditures survey indicated that businesses had been planing a large increase in capital spending for the quarter.

BEA's estimate of PDE declined in the fourth quarter while the Census Bureau's estimate of nondefense capital goods shipments increased, even though both estimates are drawn, in part or in whole, from monthly data in the Census Bureau report "Manufacturers' Shipments, Inventories, and Orders" (frequently referred to as the M3 report). Three factors account for this divergence. First, nondefense capital goods excludes certain types of equipment (such as motor vehicles, instruments, photocopy equipment, and agricultural machinery) that are included in PDE; purchases of these products decreased, accounting for more than one-half of the total decrease in PDE. Second, shipments data in the M3 report include shipments of some products (such as intermediate goods) that are excluded from PDE; shipments of these products increased more than the fourth-quarter increase in shipments of nondefense capital goods. Third, BEA does not use the M3 data on shipments of aircraft; instead, it uses data from the Census Bureau report "Civilian Aircraft and Aircraft Engines," which specifically identifies shipments of complete civilian aircraft. Aircraft shipments were substantially weaker in this report than implied in the M3.2

2. In addition, BEA adds imports and subtracts exports, subtracts changes in trade inventories of equipment, converts the shipments data from producers' prices to purchasers' prices, and deflates the current-dollar estimates. None of these steps, however, was a major source of the divergent behavior of the BEA and the Census series in the fourth quarter. See the July 1987 SURVEY, page 116, for a discussion of the "commodity-flow method," the name given to the steps used to derive estimates of purchases from data on manufacturers' shipments.

The divergence between PDE and the plant and equipment expenditures survey in the fourth quarter is hard to explain. Presumably differences in coverage play some role, however, and it may be relevant that some of the responses to the plant and equipment expenditures survey, which reflect anticipated rather than actual expenditures for the fourth quarter, were returned before the stock market collapse in October.

Residential investment

Real residential investment increased 6 percent in the fourth quarter after three consecutive quarterly declines. The turnaround reflected the following changes: A 5 1/2-percent increase in single-family construction after little change in the preceding quarter; a leveling-off of multifamily construction after five quarters of decline; and a 7 1/2-percent increase in the other component of residential investment --which includes major replacements, additions and alterations, mobile home sales, and brokers' commissions on house sales--after a decline.

Real single-family construction was stronger than single-family housing starts in the fourth quarter and, indeed, for most of the year. Single-family construction increased moderately in the first, second, and fourth quarters and was virtually unchanged in the third. Starts, in contrast, did not increase substantially in any quarter except the first, and they posted substantial declines--114,000 and 76,000 at annual rates--in the second and fourth quarters, respectively (chart 3). The difference in the behavior of the two series in this period is traceable to increases in the size and amenities--in short, the "quality"--of the units being started. One indication of the increase in quality is shown by the differing behavior of two price measures. Through the third quarter, the average sales price of new one-family houses sold--a measure that is affected by quality changes--increased 19 1/2 percent, while the price index for new one-family houses sold--a measure that is not affected by quality changes--increased only 8 percent (annual rates). Incomplete information suggests that quality continued to increase in the fourth quarter.

Both real multifamily construction and multifamily starts were weak throughout most of the year. A high and rising rental vacancy rate--which exceeded 8 percent in the third quarter, about 2 1/2 percentage points above its longrun average--severely damped the attractiveness of investment in multifamily structures, especially in parts of the South and West. In addition, the tax advantages of multifamily investment were sharply curtailed by changes in the Federal tax laws. A strong rebound in this sector is probably unlikely until rents increase sufficiently to offset the effect of the tax changes on the profitability of multifamily investment; the very high vacancy rates make substantial rent hikes less likely.

In the other component of residential investment, brokers' commissions on house sales declined substantially in the second half of 1987, as house sales dropped about 8 percent (annual rate) after a sharp runup in mortgage interest rates in the spring (chart 4). It appears likely that the runup in rates would have had an even bigger impact on sales--and on brokers' commissions --if adjustable rate mortgages (ARM's) had not been available. The rates on ARM's increased much less sharply than those on fixed-rate mortgages, and the ARM share of mortgage originations more than doubled.

Inventory investment

Real inventory investment increased $33 1/2 billion in the fourth quarter, as inventory accumulation jumped to $58 1/2 billion from $24 1/2 billion in the third quarter (table 4). Inventory investment had declined $14 1/2 billion in the third quarter. Almost all of the fourth-quarter inventory buildup was in nonfarm inventories; in contrast, inventory accumulation in the third quarter had been about evenly split between farm and nonfarm inventories.

Nonfarm inventories were up in each quarter of 1987, reflecting strong production and steadily rising imports in the face of weak sales. The total accumulation over the four quarters amounted to $33 billion. All major categories of nonfarm inventories ended the year up sharply from year-earlier levels: Manufacturing inventories were up $5 1/2 billion, wholesale inventories were up $7 1/2 billion, retail inventories were up $13 1/2 billion, and other inventories were up $6 1/2 billion. Overall, durable inventories accounted for three-fourths of the accumulation and nondurables, one-fourth.

Manufacturing inventories increased in the first quarter, declined in the second, and then accumulated substantially in the third and fourth quarters, although the rate of accumulation slowed in the fourth. The second-half buildup was widespread among durables industries, but was concentrated in transportation equipment other than motor vehicles.

Wholesale trade inventories grew throughout the year, but more than one-half of the accumulation occurred in the fourth quarter. The fourth-quarter accumulation was largely in durables, especially in those held by the machinery, equipment, and supplies industry.

Retail inventories were up substantially in three of the four quarters of 1987. Two-thirds of the particularly large fourth-quarter buildup was in auto dealers' inventories. These inventories fluctuated sharply from quarter to quarter, primarily reflecting the impact of on-again-off-again sales incentives offered by auto manufacturers. On balance, auto dealers' inventories were up in 1987. (For a detailed discussion of motor vehicles, see "Motor Vehicles, Model Year 1987" in the November 1987 SURVEY.) A yearlong accumulation in other retail inventories was largely in those held by furniture and appliance, other durable good, apparel, and department stores.

Other nonfarm inventories registered sizable accumulations in each quarter of 1987.

Farm inventories were up in each quarter of 1987; the total accumulation over the four quarters amounted to $9 1/2 billion. Substantial second- and third-quarter buildups of farm inventories largely reflected net redemptions of crops placed under loan with the Commodity Credit Corporation (CCC), offset to some extent by strong open-market sales in the second quarter. The slower fourth-quarter accumulation reflected large net placements of crops under loan with the CCC; the effects of the CCC placements were offset to some extent by weak open-market sales.

Reflecting rising inventories and flat sales, the constant-dollar ratio of total inventories to total final sales increased to 3.23 in the fourth quarter from a low of 3.14 a year earlier. This ratio is near the top of the range within which it has fluctuated during the past 2 years. The 0.09-point rise in the ratio since the fourth quarter of 1986 can be attributed in roughly equal parts to the farm, the motor vehicle, and the other nonfarm business sectors of the economy.

Net exports

Real net exports increased $7 1/2 billion in the fourth quarter, following a decrease of $5 1/2 billion in the third (table 5). In the third quarter, a surge in petroleum imports had resulted in a larger increase in imports than in exports. As petroleum imports dropped in the fourth quarter, exports increased more than imports.

Exports increased $16 1/2 billion, or 16 percent, in the fourth quarter, equaling the average increase in the preceding quarters of 1987. The strength was in nonagricultural merchandise exports, which registered progressively larger increases through the quarters of 1987, ending with a surge of $20 1/2 billion in the fourth quarter. Although the improvement was widespread across end-use categories, it was particularly pronounced in capital goods except autos and, in the fourth quarter, in autos and in industrial supplies and materials as well. The improvement reflected, to some extent, the effect of dollar depreciation, reinforced in the second half of the year by a pickup in demand in some Asian countries. Agricultural exports fluctuated during the year, increasing in the second and third quarters and declining in the first and fourth. Despite a $4 1/2 billion fourth-quarter decline, agricultural exports ended the year well above the year-earlier level. The course of agricultural exports reflected the effects of reduced harvests in some parts of the world, the Soviet Union's purchases of grain under export promotion programs, and the increased price competitiveness of U.S. agricultural products in world markets.

Exports of services were up strongly during 1987, although the increases were progressively smaller in each quarter. The increases were primarily in investment income and largely reflected increases in lending and in interest rates. Exports of other services also were up during 1987.

Imports increased $9 billion, or 6 1/2 percent, in the fourth quarter after an increase of $28 1/2 billion in the third. Volatility throughout the year was largely traceable to petroleum imports. Petroleum imports, influenced by changes in prices and price expectations, plunged in the first quarter, increased in the second, and then jumped $15 1/2 billion in the third before declining $4 billion in the fourth. Despite the fourth-quarter decline, petroleum imports remained high, reflecting increasing domestic consumption and declining domestic production in recent quarters.

Nonpetroleum merchandise imports increased $10 billion in the fourth quarter. About two-fifths of the increase was in capital goods except autos. Changes earlier in the year had been even more concentrated in that end-use category. Over the four quarters of 1987, capital goods accounted for $18 billion of the $20 1/2 billion increase.

In turn, the capital goods category was dominated in the fourth quarter, as well as during the year, by its "business and office machines, computers, etc." subcategory, which increased $13 1/2 billion over the four quarters of 1987. The constant-dollar estimates for this category are derived using the implicit price deflator for business purchases of office, computing, and accounting machinery. This deflator incorporates BEA's quality-adjusted measure of computer prices. (See "Improved Deflation of Purchases of Computers" in the March 1986 SURVEY for a description of BEA's quality-adjusted measure.) The deflator has two shortcomings specific to its use in deflating imports. First, it measures the change in the prices of domestically produced business machines, not the prices of imports. This shortcoming can be important to the extent that changes in value of the dollar against the currencies of the supplying countries are reflected in the price of imports. In the recent period, use of this deflator would tend to understate prices of imports and, as a result, to overstate constant-dollar imports. (Much of any misstatement would not carry through to GNP, however; for the imports that move directly into final sales, the deflator that is used to derive constant-dollar imports, which are subtracted in calculating GNP, is also used to derive constant-dollar estimates of the final sales components.) About one-half of the imports in the business machines category in recent years has come from Japan, against whose currency the dollar has depreciated sharply; the remainder is mainly from Singapore, Korea, and other countries against whose currencies the dollar has depreciated much less. Second, the deflator measures the change in the prices of the mix of business machines purchased from U.S. manufacturers, which may differ from the mix of imports. For example, computer processors have a much larger weight in purchases from domestic manufacturers than in imports. It is not yet clear whether the difference in the mix would tend to understate or overstate the constant-dollar estimates. Until a more adequate deflator is available, BEA will continue to use the existing deflator.

The remaining three-fifths of the fourth-quarter increase in nonpetroleum imports was in nonpetroleum industrial supplies and materials and in autos. Industrial supplies and materials had declined over the three preceding quarters and, on balance, were down during the year. Increases in auto imports earlier in the year had been much smaller than in the fourth quarter. Other end-use categories, both in the fourth quarter and over the four quarters, either increased little or, as in the case of consumer durables, declined.

Imports of services increased substantially throughout 1987. The increases were primarily in investment income and largely reflected increases in borrowing and interest rates. Imports of other services also were up during 1987.

Government purchases

Real government purchases increased $23 1/2 billion, or 12 1/2 percent, in the fourth quarter, following an increase of $5 billion, or 2 1/2 percent, in the third (table 6). Largely reflecting changes in inventories of farm products held by the CCC, Federal Government purchases increased considerably more in the fourth quarter than in the third. State and local government purchases also increased more than in the third quarter.

CCC inventories increased $9 1/2 billion in the fourth quarter, following three consecutive quarters of decline. The fourth-quarter swing largely reflected net placements of corn and soybeans with the CCC under the commodity loan program, along with a pickup in direct purchases of dairy products. Over the four quarters of 1987, CCC inventories declined $3 1/2 billion, the first calendar year liquidation since 1984. Placements of crops by farmers with the CCC were substantial but withdrawals were even larger. Withdrawals from CCC inventories included not only redemptions by farmers of crops they had previously placed under loan but also redemptions using certificates initially issued to farmers by the CCC in lieu of cash subsidy payments.

Federal nondefense purchases excluding CCC inventory transactions increased $1/2 billion in the fourth quarter, following a $1 billion decline in the third. These purchases had jumped $6 billion in the second quarter after a small decline in the first. This quarterly pattern was evident in all categories of other nondefense purchases except compensation of employees, which held steady throughout the year.

Federal national defense purchases declined $1/2 billion in the fourth quarter, following three quarters of strong increases. This pattern largely reflected purchases of military equipment, which declined $3 billion after increases totaling $10 1/2 billion in the preceding three quarters. Over the four quarters of 1987, purchases of military equipment--particularly the aircraft, missiles, and other military equipment categories--accounted for almost one-half of the $15 billion increase in defense purchases. Most of the remainder was accounted for by services other than compensation of employees--particularly installation support, weapons support, and personnel support.

State and local government purchases increased $5 billion in the fourth quarter, following smaller increases in the preceding two quarters and a similar increase in the first. The weakness in the middle two quarters was due to declines in purchases of structures.

Prices

GNP prices increased at about the same rate--3 1/2 percent--in both the third and fourth quarters, somewhat less than in the first half of the year (table 7). The deceleration can be traced to a number of developments, including a sharp slowdown in energy prices during the year, a pay raise for Federal personnel in the first quarter, and a temporary pickup in food prices in the second quarter.

Gross domestic purchases prices also increased at about the same rate--4 percent--in the fourth quarter as in the third. Throughout the year, increases in gross domestic purchases prices exceeded those in GNP prices; the differences narrowed from eight-tenths of a percentage point in the first quarter to two-tenths in the fourth. The differences were largely traceable to the prices of imports--in particular, merchandise imports. As shown in the addenda to table 7, prices of merchandise imports increased rapidly in the first three quarters of 1987, followed by some slowdown in the fourth. The pattern largely reflected sharp movements in petroleum prices: Substantial--albeit decelerating--increases in the first three quarters of the year and a decline in the fourth. Prices of other imported goods have increased strongly in recent quarters. Over the four quarters of 1987, prices of nonpetroleum industrial supplies and materials were up 11 percent, prices of capital goods except autos were up 6 percent, auto prices were up 5 1/2 percent, and consumer goods prices were up 9 1/2 percent.

PCE prices increased at about the same rate in the fourth quarter as in the third, somewhat less than in the first half of the year. Food prices were up somewhat more than in the third quarter but less than in the second: In the fourth quarter, a decline in meat prices was more than offset by a jump in prices of fruits and vegetables; in the second quarter, the prices both of meat and of fruits and vegetables had increased sharply. Energy prices declined after several quarters of sharp increases; prices of gasoline and oil, fuel oil and coal, and electricity and gas were all down in the fourth quarter. Other PCE prices picked up in the fourth quarter, largely reflecting a sharp swing in prices of clothing and shoes.

Among the investment components, prices of nonresidential structures continued to increase at a moderate pace. PDE prices again changed little, as declined in computer prices continued to offset increases in the prices of other PDE. The prices of residential structures increased less in the fourth quarter than in the preceding three quarters.

Prices of government purchases increased in the fourth quarter at the same rate as in the second and somewhat more than in the third. A somewhat larger increase in the first quarter had included the pay raise for Federal civilian and military personnel, which is treated in the national income and product accounts as an increase in the price of employee services purchased by the Federal Government. The fourth-quarter pickup in the prices of government purchases was evident in prices of both Federal defense and nondefense purchases; prices of State and local government purchases were up somewhat less than in the third quarter.

Personal Income

Personal income was up substantially during 1987. The strength in personal income carried through to disposable personal income (DPI), but not to real DPI because of the somewhat higher PCE prices.

Personal income surged $90 1/2 billion in the fourth quarter after a $52 1/2 billion increase in the third (table 8). The strengthening in the fourth quarter, as well as during the year, was primarily in wages and salaries, farm proprietors' income, and personal interest income.

Wages and salary disbursements increased $44 billion in the fourth quarter, following a $34 1/2 billion increase in the third. The acceleration was largely due to continued improvement in manufacturing and in other commodity-producing industries, although the other major private industries also contributed. Employment and average hourly earnings in private industries increased more in the fourth quarter than in the third. Over the quarters of 1987, wages and salaries increased strongly, reflecting gains in both employment and average hourly earnings. Manufacturing wages and salaries registered large increases, particularly in the second half of the year, following weakness in 1986. The next section of the "Business Situation" indicates that the second-half strengthening was geographically widespread and provides some industry detail.

Farm proprietors' income increased $15 billion in the fourth quarter, following a $6 1/2 billion decline in the third. The sharp changes in farm income in 1987 reflected the pattern of Federal agricultural subsidy payments: These payments amounted to a record $20 billion in the first quarter, $10 1/2 billion in the second, $5 billion in the third, and $19 billion in the fourth. Farm income excluding subsidies resumed an uptrend in the fourth quarter, as crop prices increased after a decline in the third. Nonfarm proprietors' income increased at about the same rate as in recent quarters.

Personal interest income increased $17 billion in the fourth quarter, the third consecutive quarter of progressively larger increases. This pattern reflected the generally upward path of interest rates and increases in holdings of personal assets.

Transfer payments increased $5 1/2 billion in the fourth quarter, somewhat more than in the third. Unemployment insurance benefit payments declined in all four quarters of the year. Other changes in transfer payments largely reflected the impact of the special factors shown in the addenda to table 8.

Among the other components of personal income, other labor income and personal dividend income increased by relatively small amounts in the fourth quarter, as they had in the last several quarters; rental income of persons increased after two quarters of decline. Personal contributions for social insurance, which are subtracted in deriving the personal income total, registered another moderate increase.

Personal tax and nontax payments increased $13 billion in the fourth quarter, following a $12 1/2 billion decrease in the third. As shown in table 8, the sharp changes in personal tax and nontax payments in the first three quarters of 1987 were largely due to the effects of the Tax Reform Act of 1986. (See the July 1987 "Business Situation" for a discussion of these effects.)

DPI increased $77 1/2 billion in the fourth quarter, following a $64 1/2 billion increase in the third. The fourth-quarter acceleration was attributable to the step-up in personal income, which more than offset the swing in personal tax and nontax payments.

Real DPI increased strongly in the second half of 1987--4 1/2 percent in the third quarter and 5 1/2 percent in the fourth. Over the four quarters of 1987, however, real DPI was up only 2 percent, compared with a 7-percent increase in DPI.

Personal outlays--mainly PCE--decelerated sharply in the fourth quarter. Largely as a result, personal saving jumped $71 1/2 billion after two quarters of decline. The personal saving rate rebounded from 2.8 percent in the third quarter--the lowest rate in nearly 40 years--to 4.9 percent.

Regional Aspects of the Strengthening in Manufacturing

As mentioned in the section on personal income, wages and salaries in manufacturing strengthened in the second half of 1987. They increased 1.3 percent in the third quarter and 2.0 percent in the fourth (not at annual rates) after weaker performance in the preceding 1 1/2 years (chart 5). State estimates of wages and salaries, prepared as part of the State personal income estimates presented on pages 29 and 30 of this issue, show that the strengthening was wide-spread geographically; 35 States shared in the strengthening in the third quarter.

Table 9 shows the 17 States in which the difference between the second-quarter change and the third-quarter change in manufacturing wages and salaries--the acceleration in the third quarter--was at least twice the U.S. average of 0.9 percentage point. In all 17 States except Illinois, wages and salaries accelerated in both durables and nondurables manufacturing, and in most of them, the durables acceleration was larger.

In durables manufacturing, production in the third quarter accelerated substantially in aircraft and parts, farm machinery and equipment, primary metals, shipbuilding, and logging. Aircraft production showed strength in Washington, Missouri, Connecticut, and Utah. Farm machinery production showed strength in Minnesota, Illinois, and Wisconsin. Primary metals production showed strength in Kentucky and Alabama, as did shipbuilding in Mississippi and logging in Oregon.

In nondurables manufacturing, production accelerated substantially in chemicals, paper, and food processing. Chemicals production showed strength in New Jersey and Delaware. Paper production showed strength in Minnesota and Wisconsin, as did food processing in South Dakota and Nebraska.

The motor vehicles industry was a notable exception to the general strengthening in manufacturing. It was the only major manufacturing industry that had large declines in production in both the second and third quarters. Michigan and Ohio--which together account for nearly 60 percent of wages and salaries in motor vehicles nationally--had declines in durables wages and salaries in both quarters.

Table: CHART 1 Selected Measures: Change From Preceding Quarter

REAL GNP

GNP PRICE INDEX (FIXED WEIGHTS)

REAL GROSS DOMESTIC PURCHASES

REAL DISPOSABLE PERSONAL INCOME

Table: 1.--Fourth Quarter Over Fourth Quarter Changes in Real GNP and GNP Prices

Table: 2.--Real Personal Consumption Expenditures

Table: CHART 2 Real Personal Consumption Expenditures: Change From Preceding Quarter

Table: 3.--Real Gross Private Domestic Fixed Investment

Table: CHART 3 Housing Starts

Table: 4.--Change in Real Business Inventories

Table: CHART 4 Selected Interest Rates

Table: 5.--Real Net Exports of Goods and Services

Table: 6.--Real Government Purchases of Goods and Services

Table: 7.--Price Indexes (Fixed Weights): Change From Preceding Quarter

Table: 8.--Personal Income and Its Disposition

Table: CHART 5 Manufacturing Wages and Salaries: Change From Preceding Quarter

Table: 9.--Manufacturing Wages and Salaries, Selected States
COPYRIGHT 1988 U.S. Government Printing Office
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1988 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:fourth quarter of 1987
Publication:Survey of Current Business
Date:Jan 1, 1988
Words:6356
Previous Article:Current business statistics.
Next Article:National income and product accounts estimates: when they are released; where they are available and how they are presented.
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