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The business situation.


Corporate Profits

PROFITS from current production decline $2 billion in the first quarter of 1988 after a similar decine in the fourth quarter of 1987. Despite these two declines, profits in the first quarter were $17 billion higher than a year earlier.

The first-quarter decline resulted from a sharp drop in the profits from the rest of the world (ROW) that was not quite offset by an increase in domestic profits. ROW profits plummented $12 billion in the first quarter after an increase of about one-half that size in the preceding quarter; domestic profits, which also reversed direction, increased $10 billion after a decline of $9 billion. Relative to year-earlier levels, ROW profits were down $6 billion while domestic profits were up $23 billion.

The $12 billion first-quarter drop in ROW profits reflected a $1 billion decline in profits of U.S. -owned corporations abroad and an $11 billion increase in profits of foreign-owned corporations do not affect national profits because they enter domestic profits as a positive and enter ROW profits as a negative. However, as explained in detail in the May "Business Situation," profits of foreign-owned corporations did affect national profits in the first quarter because the measure include as a positive in domestic profits was smaller than the measure included as a negative in ROW profits. In ROW profits, profits of foreign-owned corporations are based on financial accounting standards; about one-third of the sharp increase in the profits of foreign-owned corporations reflected a change in one of these standards. In domestic profits, in contrast, profits of foreign-owned (as well as U.S.-owned) corporations are based on tax accounting rules; thus changes in financial accounting standards should have no effect.

Profits from current production equals profits before tax (PBT) plus the inventory valuation adjustment (IVA) and the capital consumption adjustment (CCAdj). PBT declined $4 billion in the first quarter, following an increase of $1/2 billion, yet was $24 1/2 billion higher than a year earlier. Inventory profits -- the IVA with sign reversed -- declined $5 billion because inventory price inflation slowed. The CCAdj -- the difference between depreciation based on tax accounting and economic depreciation as estimated by BEA --declined $3 billion in the first quarter, reflecting the less liberal depreciation rules in the Tax Reform Act of 1986.

Domestic profits by industry. -- Quarterly estimates of the CCAdj are not available by industry. PBT with IVA alone -- i.e., PBT less inventory profits -- is the best available quarterly measure of profits. For domestic industries, creased $12 1/2 billion in the first quarter after a decline of $10 billion in the proceeding quarter; profits of nonfinancial corporations dominated these changes, increasing $12 billion after a decline of $8 1/2 billion.

Manufacturing profits increased $8 billion after declining the same amount in the proceeding quarter. Within manufacturing, first-quarter increases were widespread; only profits in petroleum refining declined.

Trade profits, which increased $5 billion after a $3 1/2 billion decline, have been failed to register movements in the same direction in two consecutive quarters since mid-1985 in retail trade and since mid-1984 in wholesale trade, so that undue weight should not be attached to a single quarter's movement. A better indication of trends can be obtained by averaging profits in one quarter with profits in the preceding quarter. Retail trade profits smoothed in this way have not increased for seven quarters, and the level in the first quarter of 1988 was $4 billion lower than in the second quarter of 1986. smoothed profits in wholesale trade increased in five of the seven quarters, and the level in the first quarter of 1988 was $3 1/2 billion higher than in the second quarter of 1986.

Profits of financial corporations increased $1 billion after a decline of $1 1/2 billion. Current net earnings of Federal Reserve banks, which are treated as corporate profits in the NIPA's more than accounted for the increase. For depository institutions, profits were unchanged after declining $1 1/2 billion in the preceding quarter, savings and loan associations registered losses for the second consecutive quarter.

* * *

Table 1 on page 16 shows the second revision of the NIPA estimates for the first quarter of 1988.

Statistical Conventions Used for NIPA Estimates

Most of the estimates are presented in billions of dollars. The major exceptions are certain current-dollar annual estimates, which are presented in millions of dollars, and estimates presented as index numbers. Current-dollar estimates are valued in the prices of the period in which the transaction takes place. Constant-dollar estimates are valued in the prices of a period designated the base period (at present, 1982), thus removing price change from any period-to-period movement in the series. The designation of 1982 as the base period also means that price levels in 1982 are set equal to 100 in calculating price indexes and implicit price deflators.

For quarters and months, and estimates (except price indexes) are presented at annual rates. Annual rates show values for a quarter or a month at their annual equivalent (that is, the value that would be registered if the rate of activity measured for a month or a quarter were maintained for a full year). Annual rates make it easier to compare values for time periods of different lengths -- for example, quarters and years.

The present changes shown in table 8.1 are also at annual rates and are calculated from the published quarterly estimates, which are rounded to the nearest one-tenth of a billion dollars. The annual rates for quarterly percent changes are calculated with the formula: r = ((Q(Subscript t)) Q (Subscript t-1) (Superscript 4) -1)x 100 where r = the percent change at an annual rate, and Qt, and Qt-1 = the quarterly estimates for a quarter and the proceeding quarter, respectively.

Quarterly and monthly NIPA estimates are seasonally adjusted, if necessary. Seasonal adjustment removes from the time series the average impact of variations that normally occur at about the same time and in about the same magnitude each year -- for example, whether, holidays, and tax payment dates. The statistical procedures used are based on historical experience; the Census Bureau's X-11 program is widely used. After seasonal adjustment, cyclical and other short-term changes in the economy stand out more clearly.

Reconciliation and Other Tables

TABLE: Table 1. -- Revisions in Selected Component Series of the NIPA's, First Quarter of 1988
 TABLE: Seasonally adjusted at annual rates Percent change from
 TABLE: preceding quarter at
 TABLE: annual rates
 TABLE: First Second
 TABLE: revision revision Difference First Second
 TABLE: revision revision
 TABLE: Billions of current dollars

TABLE: Table 2. -- Relation of Net Exports of Goods and Services in the National Income and Product Accounts (NIPA's) to Balance of Goods and Service in the Balance of Payments Accounts (BPA's)

(Billions of dollars)
 TABLE: Seasonally adjusted at annual rates
 TABLE: Line 1987 1987 1988
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Title Annotation:fourth quarter of 1987
Publication:Survey of Current Business
Date:Jun 1, 1988
Previous Article:State and local government fiscal position in 1987.
Next Article:National income and product accounts tables; selected NIPA tables and reconciliation and other special tables.

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