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The business situation.

the BUSINESS SITUATION

BOTH U.S. production and U.S. demand slowed in the first quarter of 1988. Inflation continued at about the same rate as in the preceding two quarters (chart 1).

* Real GNP increased at an annual rate of 2-1/2 percent, following an increase of 5 percent in the fourth quarter.

* Real gross domestic purchases increased at an annual rate of 2 percent, following a 4-1/2-percent increase.

* Both the GNP price index (fixed weights) and the price index for gross domestic purchases (fixed weights) again increased at an annual rate of 3-1/2 percent.

In the first quarter, as in the fourth, the increase in real GNP, a measure of production, was somewhat larger than that in real gross domestic purchases, a measure of demand. The difference reflected a modest improvement in real net exports. While exports and imports both increased less than in the fourth quarter, the increase in exports again exceeded that in imports (table 1).

The deceleration in real gross domestic purchases in the first quarter was attributable to a sharp swing in business inventory investment; final sales to domestic purchasers were up considerably more in the first quarter than in the fourth. Sharp changes in motor vehicles and in farm products were the major contributors to the movements in both inventories and final sales.

Real inventory investment--that is, change in business inventories--declined $2-1/2 billion in the first quarter, following a $36 billion increase in the fourth. The swing was more than accounted for by motor vehicles; farm inventories were a partial offset. Investment in motor vehicle inventories jumped $29 billion in the fourth quarter and fell $20 billion in the first, as inventories swung from decumulation in the third quarter to accumulation in the fourth and then back to decumulation in the first. The changes in motor vehicle inventories largely reflected the scope and timing of incentive programs that boosted sales in the third and first quarters relative to sales in the fourth. In addition, motor vehicle production was higher in the fourth quarter than in the third and first quarters. Investment in farm inventories declined $3-1/2 billion in the fourth quarter and increased $10-1/2 billion in the first, as inventories accumulated at differing rates in the third, fourth, and first quarters. The changes in farm inventories largely reflected the pattern of net crop placements with the Commodity Credit Corporation (CCC). Investment in other inventories--that is, nonfarm business inventories other than motor vehicles--increased in both quarters, as inventories registered substantial, and progressively larger, accumulations. The accumulations were concentrated in inventories held by manufacturers and merchant wholesalers of durable goods.

Real final sales to domestic purchasers increased $21 billion in the first quarter, following a $6-1/2 billion increase in the fourth. The acceleration was more than accounted for by motor vehicles; net purchases of farm products by the CCC in government purchases were a partial offset. Reflecting the scope and timing of incentive programs, final sales of motor vehicles to domestic purchasers increased $10-1/2 billion after dropping $20 billion. Reflecting the pattern of net crop placements, CCC net purchases declined $16 billion after increasing $10 billion. Other final sales to domestic purchasers--which may be regarded as an indicator of underlying demand in recent quarters--strengthened to an increase of $26 billion, or 3 percent, following an increase of $16 billion, or 1-1/2 percent, in the fourth quarter. The step-up in these final sales was in personal consumption expenditures and in nonresidential fixed investment, specifically producers' durable equipment.

Components of Real GNP

Except for net exports, which registered another modest improvement, changes in the major components of real GNP in the first quarter differed considerably from those in the fourth. Personal consumption expenditures increased after a decline, and nonresidential fixed investment was up substantially after a small increase. Residential investment, change in business inventories, and government purchases all declined after increasing in the fourth quarter.

Personal consumption expenditures

Real personal consumption expenditures (PCE) increased 4 percent in the first quarter after decreasing 2-1/2 percent in the fourth (table 2). About two-thirds of the swing was attributable to purchases of motor vehicles. Since the third quarter of 1985, quarterly changes in PCE have largely been traceable to sharp changes in its motor vehicles and parts components; these changes, in turn, reflected on-again-off-again sales-incentive programs. Chart 2 compares changes in PCE excluding motor vehicles and parts with changes in total PCE. PCE excluding motor vehicles and parts increased 3 percent in the first quarter, following a 1/2-percent increase in the fourth.

The first-quarter strengthening in PCE can be attributed to several factors. Consumer confidence--as measured by the University of Michigan's Survey Research Center--rallied as consumers saw that the October stock market plunge was not immediately followed by a recession. Although consumer wealth was reduced as a result of stock market losses, income gains and recent declines in interest rates may have increased willingness to spend and to finance some purchases.

Expenditures for durable goods increased 12-1/2 percent in the first quarter after a 20-1/2-percent decrease in the fourth. All the major durables categories contributed to the swing. Partly in response to enhanced sales-incentive programs for new cars and trucks, motor vehicles and parts increased in the first quarter, following a sharp decrease in the fourth. Furniture and household equipment increased sharply, reflecting a large increase in sales by radio and television retail stores, after a decrease. Other durable goods decreased less than in the fourth quarter.

Expenditures for nondurable goods decreased for the fourth consecutive quarter; however, the decreases have been progressively smaller. In the first quarter, as in previous quarters, the decline in the total masked divergent changes in the major nondurables categories. Although clothing and shoes decreased less than in the fourth quarter, the first-quarter decrease was large enough to more than offset increases in other categories. Food and energy each registered smaller increases than in the fourth quarter, and other nondurables changed little after a moderate decrease.

Expenditures for services increased 4 percent in the first quarter after a smaller increase in the fourth. All the major services categories contributed to the first-quarter increase. Housing increased about the same as in the fourth quarter; household operation, transportation, medical care, and other services each accelerated. Within household operation, electricity and gas increased after a small decline.

Nonresidential fixed investment

Real nonresidential fixed investment increased 22-1/2 percent in the first quarter, following a small increase in the fourth (table 3). Purchases of producers' durable equipment (PDE) more than accounted for the first-quarter increase; purchases of structures declined after two quarters of increase.

The first-quarter decline in structures was concentrated in nonfarm buildings. Within this category, the largest decline was in construction of commercial buildings, which has fallen 20 percent below its high in the fourth quarter of 1985; construction of industrial buildings, which also declined in the first quarter, has fallen 25 percent below its high in the second quarter of 1985. Oil well drilling declined slightly again in the first quarter; its first-quarter level was 40 percent below the high in the third quarter of 1984.

Two-thirds of the first-quarter increase in PDE was accounted for by purchases of information processing equipment. Within this category, computers dominated; communication equipment increased modestly, and other components were flat. The computer component of PDE had grown rapidly during 1983-85 but then stalled through 1986 and the first half of 1987. The large increases in the third quarter of last year and in the first quarter of this year may be a signal that computer purchases are recovering. Nevertheless, a second-quarter increase equal in size to that of the first quarter would be needed for computers to reach a level consistent with a continuation of the 1983-85 trend.

Residential investment

Real residential investment declined 9-1/2 percent in the first quarter, following a 7-1/2-percent increase in the fourth (table 3). All three components declined--construction of single-family and of multifamily structures after increases in the fourth quarter, and the other component (which includes mobile homes, additions and alterations, major replacements, and brokers' commissions on house sales) after little change in the fourth.

The decline in single-family construction mainly reflected a drop of 64,000 in the number of single-family units started (at seasonally adjusted annual rates) in the fourth quarter of last year (chart 3). Starts increased in the first quarter, but only by 12,000.

The decline in multifamily construction resumed a downtrend that had been interrupted by a small increase in the fourth quarter. The downtrend reflected high rental vacancy rates and the curtailment, by changes in the Federal tax laws, of tax incentives for multifamily investment. The first-quarter level of multifamily construction was 33 percent below its high in the second quarter of 1986.

The decline in the other component of residential investment partly reflected a drop in brokers' commissions. Sales of new and existing residences (seasonally adjusted at annual rates) declined 327,000 from the fourth quarter to January-February, despite a slide in mortgage rates from 11.26 percent in October 1987 to 9.93 percent in March 1988 (chart 4).

Inventory investment

Real inventory investment decreased $2-1/2 billion in the first quarter, as inventory accumulation decreased to $58 billion from $60-1/2 billion in the fourth quarter (table 4). In contrast, inventory investment had increased $36 billion in the fourth quarter.

Among nonfarm inventories, inventories of retail auto dealers declined $10 billion, following an increase of $14 billion in the fourth quarter and a decline of $12 billion in the third. The recent reduction, which was concentrated in inventories of domestic cars and trucks (as indicated by unit data), reflected enhanced sales-incentive programs and cuts in production.

Nonfarm inventories excluding those held by auto dealers (shown as an addendum to table 4) increased $48 billion after increases of $37-1/2 billion and $24 billion in the fourth and third quarters, respectively. This steady accumulation was evident in most major subcategories.

Manufacturing inventories increased $16-1/2 billion, following increases of $9-1/2 billion and $12 billion in the preceding two quarters. The three-quarter accumulation was concentrated in durables, where almost one-half was in other transportation equipment. Inventories of nondurables, particularly chemicals, also accumulated in all three quarters.

Wholesale trade inventories surged $23 billion, following increases of $14 billion and $1-1/2 billion. Inventories of merchant wholesales of durable goods increased sharply in both the first and fourth quarters; about one-half of the two-quarter buildup was accounted for by machinery, equipment, and supplies. Inventories of merchant wholesalers of nondurables continued to increase; the first-quarter accumulation was more than accounted for by farm products and by petroleum and petroleum products.

Retail trade inventories excluding autos increased $3 billion, following increases of $6 billion and $4 billion. The first-quarter accumulation was more than accounted for by department store inventories, which accumulated at a higher rate than in the past several quarters.

Other nonfarm inventories continued the steady accumulation of the past several quarters.

Farm inventories increased $19-1/2 billion, following increases of $9 billion in the fourth quarter and $12-1/2 billion in the third. In the first quarter, crop withdrawals from the CCC were substantial, while open market sales remained well below current production.

Because of the rapid accumulations in inventories, the constant-dollar ratio of total business inventories to total business final sales increased sharply over the past two quarters--to 3.26 from 3.18. At 3.26, the ratio is above the range within which it fluctuated during the past 10 quarters.

Net exports

Real net exports increased $3-1/2 billion in the first quarter, following an increase of $2-1/2 billion in the fourth (table 5). Exports and imports both increased, although less than in recent quarters.

Merchandise exports increased $12 billion, or 16-1/2 percent, in the first quarter after an increase of $12-1/2 billion, or 18 percent. The first-quarter increase was about evenly divided between agricultural and nonagricultural exports. Agricultural exports increased $5 billion in the first quarter after a decrease of $4-1/2 billion in the fourth; the increase reflected large shipments of wheat and soybeans to the Soviet Union. Nonagricultural exports increased $6-1/2 billion, following larger increases in the preceding two quarters. The increases were widespread among end-use categories; in each quarer, the largest increase was in capital goods except autos.

Exports of services declined $1-/2 billion after an increase of $4 billion. The swing, which was in receipts of factor income, reflected declines in interest rates and in the volume of lending. Exports of other services increased after a decline.

Merchandise imports increased $7 billion, or 6 percent, in the first quarter after an increase of $10-1/2 billion, or 9-1/2 percent. The first-quarter increase was largely accounted for by petroleum imports, which have fluctuated sharply from quarter to quarter. Petroleum imports increased $6 billion in the first quarter, following a decrease of $7 billion in the fourth quarter and an increase of $15-1/2 billion in the third. Aside from these fluctuations, which partly reflected changes in petroleum prices and price expectations, petroleum imports were strong; the average level for the last three quarters was 16 percent above the average level for the previous three quarters. The recent strength partly reflects increasing domestic consumption and declining domestic production. Nonpetroleum imports increased $1 billion, following an increase of $17-1/2 billion. The sharp slowing in the first quarter was largely accounted for by automotive imports, which decreased $5-1/2 billion after an increase of $2 billion, and by capital goods except autos, which increased $3 billion after an increase of $9 billion.

Imports of services increased $1/2 billion after an increase of $3-1/2 billion. The slowdown, which was in payments of factor income, reflected declines in interest rates and in the volume of borrowing. Imports of other services increased after a decline.

Government purchases

Real government purchases decreased $20-1/2 billion, or 10 percent, in the first quarter, following an increase of $17 billion, or 9 percent, in the fourth (table 6). The sharp turnabout largely reflected the pattern of changes in inventories of farm products held by the CCC, although other Federal Gvoernment purchases and State and local government purchases also contributed.

The level of inventories held by the CCC decreased $15 billion in the first quarter, resuming a series of reductions that had been interrupted by a small increase in the fourth quarter. The fourth-quarter increase reflected increased placements of corn and soybeans with the CCC under the commodity loan program. The first-quarter decrease was largely due to continued withdrawals of crops from the CCC through the use of certificates initially issued to farmers in lieu of cash subsidy payments and to increased sales of commodities, particularly soybeans and wheat, from CCC inventories.

Federal nondefense purchases excluding CCC inventory transactions decreased $1/2 billion in the first quarter after increasing in the fourth; most of the swing was in purchases of structures. Federal national defense purchases decreased $6 billion, following a small decrease in the fourth quarter. One-half of the first-quarter decrease was accounted for by purchases of military equipment, which fell to its lowest level in 2 years. All of the other categories of defense purchases--other durable goods, nondurable goods, employee compensation, other services, and structures--also decreased in the first quarter.

State and local government purchases increased $1-1/2 billion in the first quarter, following a larger increase in the fourth. The slowdown was traceable to purchases of structures, which had registered its only recent increase in the fourth quarter.

Prices

GNP prices and gross domestic purchases prices both increased at about the same rate--3-1/2 percent--in the first quarter as in the fourth (table 7). The first-quarter increase in each of these price measures was boosted 0.3 percentage point by the combined effects of a 2-percent pay raise for Federal civilian and military personnel and of increases in the Federal Government's contributions--as an employer--for social insurance programs. (Such increases in employee compensation are treated in the national income and product accounts as an increase in the price of employee services purchased by the Federal Government.)

Prices of exports again increased moderately in the first quarter; increases in prices of imports slowed for the fourth consecutive quarter. The slowdown in import prices during the past year was largely due to petroleum prices, which cascaded from an increase of 126-1/2 percent in the first quarter of last year to a decline of 41 percent in the first quarter of this year. Prices of other merchandise imports again increased strongly--7-1/2 percent--in the first quarter. The first-quarter strength was primarily in prices of nonpetroleum industrial supplies and materials, which accelerated to an 11-1/2-percent increase, and in prices of capital goods except autos, which accelerated to an 8-1/2-percent increase. Some deceleration was evident in prices of autos, which were up 3 percent, and in prices of consumer goods, up 4-1/2 percent.

PCE prices increased 2-1/2 percent in the first quarter, somewhat less than in the fourth. Food prices increased less than in the fourth quarter; the deceleration was largely due to prices of fresh fruits and vegetables, which dropped sharply after a large increase. Energy prices declined about as much as in the fourth quarter; the declines were mainly in gasoline prices. Other PCE prices increased somewhat less than in the fourth quarter; fluctuations in other PCE prices in recent quarters were largely due to sharp swings in prices of clothing and shoes.

Prices of fixed investment increased 3 percent, following little change in the fourth quarter. Among the investment components, prices of nonresidential structures returned to a moderate rate of increase after a somewhat smaller increase in the fourth quarter. PDE prices increased after several quarters of little change, as computer prices declined much less than in recent quarters and as other PDE prices picked up. Prices of residential structures increased after a decline.

Prices of government pruchases were up 5-1/2 percent, somewhat more than in the fourth quarter. The Federal pay raise and increased Federal Government contributions for social insurance boosted the first-quarter increase by 1.4 percentage points.

Personal Income

Personal income increased $43 billion in the first quarter, following a $93-1/2 billion increase in the fourth (chart 5 and table 8). About two-fifths of the deceleration was attributable to the special factors shown in the addenda to the table; in combination, they raised personal income in the fourth quarter and lowered it in the first. Excluding the special factors, all major personal income components--particularly wage and salary disbursements and personal interest income--contributed to the deceleration.

Wage and salary disbursements increased $36-1/2 billion in the first quarter, $8 billion less than in the fourth. Private wages and salaries were up less than in the fourth quarter, despite $2-1/2 billion in profit-sharing payments to employees in the motor vehicle industry. The deceleration in private wages and salaries was attirubtable to average weekly hours, which declined after an increase, and to employment and average hourly earnings, both of which increased less than in the fourth quarter. Government wages and salaries were boosted $2 billion in the first quarter by the pay raise for federal employees.

A sharp--$24 billion--downswing in farm proprietors' income in the first quarter reflected the timing of major farm subsidy payments. Subsidies had jumped $14-1/2 billion to a level of $19-1/2 billion in the fourth quarter, when deficiency payments on 1986-harvested corn and 1987-harvested wheat and payments for participation in conservation programs were made. Subsidies declined $9-1/2 billion in the first quarter. Farm income excluding subsidies declined slightly for the third consecutive quarter; the declines reflected weakness in both prices and production. Nonfarm proprietors' income was up less than in the fourth quarter; construction declined after an increase, and services were up less than in the fourth quarter.

Transfer payments increased $17-1/2 billion in the first quarter, $12 billion more than in the fourth. The step-up was due to cost-of-living adjustments (COLA's) to benefits under the social security and several other Federal retirement and income support programs; the COLA's, which became effective in January, added $13 billion to transter payments in the first quarter. In addition, retroactive social security payments to recent retirees added $1-1/2 billion.

Personal interest income increased $7 billion in the first quarter, less than one-half the increase in the fourth. The slowdown reflected recent declines in interest rates.

Among the other components of personal income, other labor income, rental income, and dividend income all increased somewhat less in the first quarter than in the fourth. Personal contributions for social insurance, which is subtracted in deriving the personal income total, increased $16 billion, $13 billion more than in the fourth quarter. The following changes accounted for $11 billion of the first-quarter increase in personal contributions: The social security employee tax rate was raised from 7.15 to 7.51 percent, the social security self-employed tax rate was raised from 12.3 to 13.02 percent, the taxable earnings base was raised from $43,800 to $45,000, and the supplementary medical insuran ce monthly premium was raised from $17.90 to $24.80.

Personal tax and nontax payments declined $2-1/2 billion in the first quarter after increasing in the fourth. The decrease largely reflected the direct and indirect effects of the Tax Reform Act of 1986. A large reduction in withheld Federal income taxes resulted from the use of the new Internal Revenue Service graduated tax tables for calculating withholding for the tax year 1988. The lower withholdings reflect decreases in tax rates, increases in personal exemption amounts, and increases in standard deduction amounts. The tax act, on balance, did not have a large impact on non withheld taxes (mainly declarations and net settlements) in the first quarter: Nonwithheld taxes were raised by payments on income that had been shifted from 1986 to 1987 to take advantage of lower tax rates and were lowered by several permanent changes in the income tax law that became effective in 1988.

The sharp first-quarter deceleration in personal income more than offset the swing in personal tax and nontax payments, thus leading to a slowdown in disposable personal income (DPI). DPI increased $45 billion, or 5-1/2 percent, in the first quarter, following an increase of $79-1/2 billion, or 10-1/2 percent, in the fourth. The deceleration largely carried through to real DPI, which increased 3 percent after a 6-percent increase.

Personal outlays--largely PCE--were up substantially more in the first quarter than in the fourth. This pickup and the slowdown in current-dollar DPI led to a swing in personal saving from a $67 billion increase to a $3 billion decline. The personal saving rate dropped 0.2 percentage point to 4.6 percent in the first quarter but remained above the rates earlier in 1987.

Corporate Profits in 1987

Profits from current production--profits before tax plus inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj)--increased $20-1/2 billion in 1987, following an increase of $7 billion in 1986. Domestic profits of nonfinancial corporations--by far the largest component of profits, as shown by chart 6--accounted for most of the increase, as both real product and profits per unit of product increased. Domestic profits of financial corporations changed little, and profits from the rest of the world increased $3 billion.

Profits before tax (PBT) increased $42 billion in 1987 after an increase of $7 billion, and profits tax liability increased $31-1/2 billion after an increase of $8-1/2 billion. Thus profits after tax increased $11 billion in 1987 after a $1-1/2 billion decline in 1986.

The smaller increase in profits from current production than in PBT was more than accounted for by the IVA, which declined $24 billion (to a level of negative $17-1/2 billion). The CCAdj increased $2 billion (to $48 billion).

The decline in the IVA mirrored an increase in inventory profits that resulted from widespread inventory price increases. Prices of inventoried petroleum and petroleum products showed espeically large increases, as the refiner acquisition cost of crude oil increased 23 percent. In 1986, an even sharper decline (45 percent) in crude oil cost had been responsible for most of the negative inventory profits registered that year.

The CCAdj is the difference between depreciation based largely on tax accounting, on the one hand, and economic depreciation as defined by BEA, on the other; as such, it is sensitive to the asset service lives specified in tax laws. For example, the sharp reduction in service lives mandated by the Economic Recovery Tax Act of 1981 led to substantial increases in tax-based depreciation during 1981-85 but not in economic depreciation; the CCAdj increased steadily. The Tax Reform Act of 1986 mandated an increase in service lives, which will reduce the difference between tax-based depreciation and economic depreciation in the near future; the CCAdj will dcline. In the absence of additional tax law changes and unusual changes in levels and prices of business investment, tax-based depreciation is expected to fall below economic depreciation in the early 1990's.

Profits by industry.--Profits from current production is not available by industry. PBT with IVA alone, the best measure of industry profits available, increased $18 billion, to $256-1/2 billion. By this measure, domestic profits of nonfinancial corporations increased $14-1/2 billion, domestic profits of financial corporations increased $1 billion, and profits from the rest of the world increased $3 billion. Manufacturing profits, up $19 billion, more than accounted for the increase in profits of nonfinancial corporations.

Industry profits are estimated from company-based data; in contrast, most of the data that provide insight into the developments that underlie industry profits are establishment-based. Establishment-based data are "pure" in the sense that virtually all of the products or services produced at any one establishment fit neatly into a single industrial classification; virtually all of the products produced at a steel mill, for instance, fall neatly into the category covered by "primary metal industries." In contrast, a company consisting of a number of establishments with very different products or services may not fit so neatly into a single industrial classification. For instance, if a company classified in "primary metal industries" consists of two establishments that manufacture steel, another that refines oil, and still another that provides brokerage services, then that company's profits are not explainable solely in terms of developments affecting primary metal establishments. Despite a lack of strict comparability between the two types of data, establishment-based data are used in the following paragraphs to provide some insight into changes in the company-based profits estimates on the assumption that there is sufficient overlap in the two classification systems for one to shed some light on the other.

The increase in profits of petroleum refining corporations followed a sharp decline in 1986 (chart 7). These changes reflect the involvement of refiners in the "upstream" activities of exploration, development, and extraction. Refining itself actually became less profitable in 1987, as increases in prices of petroleum products did not match increases in refiner acquisition cost. Increased upstream profits, however, much more than offset the decline in profits at the refining stage. Higher crude oil prices were the dominant factor in upstream profits, but a reduction in operating costs--reflecting a cut in production of almost 400,000 barrels per day--also contributed. (Production was cut despite an increase in demand; U.S. consumption increased by 300,000 barrels per day.)

Profits in the chemicals industry increased $2-1/2 billion in both 1986 and 1987, but the two increases had quite different sources. In 1986, a decline in costs contributed importantly to the increase in profits; revenue from sales (as approximated by industry shipments) changed little. Two factors--one transitory--contirubed to the decline in costs. The transitory factor was the steep drop in petroleum prices that was not matched by declines in prices of petrochemicals. (Petroleum feedstocks account for as much as 70 percent of the production costs of some petrochemicals.) The other factor was the restructuring of the industry that had been under way since about 1982 and that involved the closing of inefficient operations, with associated reductions in work force. Employment declined 19,000 in 1986, to a level 5 percent below its 1982 level, while production increased moderately.

In 1987, increased revenue was the main contributor to increased profits in chemicals. Spurred by foreign demand, sales revenue increased 8-1/2 percent, with volume increasing 6-1/2 percent and prices 2 percent. Exports increased 16 percent, almost four times as much as the year before. In this context of strong demand, firms were able to pass on much of the increase in costs resulting from the partial rebound in petroleum prices. Employment stabilized.

Profits of motor vehicle manufacturers declined $1 billion after a decline of $1/2 billion in 1986 (and a decline of $2-1/2 billion in 1985). Domestic output of new autos declined in each of the first three quarters of 1987 before jumping sharply in the fourth. For the year as a whole, domestic output (in 1982 dollars) was down 9 percent. (A detailed review of the 1987 model year in motor vehicles appeared in the November 1987 SURVEY.)

Profits of food manufacturers increased $1 billion in 1987 after a somewhat larger increase in 1986. The 1986 increase largely reflected the reclassification of tobacco manufacturers into the food category as a result of major merger and acquisition activity. The 987 increase, however, was more substantive, reflecting increased production and--to judge from scanty evidence--higher profit margins by food producers.

The reversal in transportation and public utilities profits--from a $5 billion increase in 1986 to a $3-1/2 billion decline in 1987--is largely explainable by inventory costs, which increased sharply in 1987 after a sharp decline in 1986; neither year's change was fully passed on to purchasers. Within transportation and public utilities, the 1987 cost increase (and the 1986 cost decline) was concentrated in electric utilities. A similar explanation applies to the reversal in trade profits, which declined $1-1/2 billion in 1987 after increasing $1/2 billion in 1986. Within trade, 1987 inventory cost increases were largest at the wholesale level.

Domestic profits of financial corporations increased $1 billion in 1987; profits of property/casualty insurers more than accounted for the increase as they had the $8 billion increase in 1986. In 1986, profits of proeprty/casualty insurers increased very sharply, as a moderate increase in investment income was reinforced by a sharp reduction in underwriting losses. (Premiums increased 20 percent in 1986, while claims and related expenses increased 13 percent.) In 1987, both the increase in investment income and the reduction in underwriting losses were substantially smaller.

Profits from the rest of the world increased $3 billion in 1987, as increased receipts more than offset increased payments. In both receipts and payments, increases were widespread. Within receipts, however, the increase in profits of motor vehicle manufacturing affiliates in Europe was especially large; within payments, affiliates in the petroleum and chemical industries registered large increases.
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Title Annotation:first quarter of 1988
Publication:Survey of Current Business
Date:Apr 1, 1988
Words:5185
Previous Article:BEA working paper summary.
Next Article:National income and product accounts tables; selected NIPA tables.
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