Printer Friendly

The business situation.

the BUSINESS SITUATION

REVISED estimates show that real GNP, a measure of production, increased at an annual rate of 4 percent in the first quarter of 1988; the preliminary estimates had shown an increase of 2-1/2 percent (see table 1 on page 17). Gross domestic purchases, a measure of demand, was essentially unrevised at an annual rate of 2 percent. Increases in both the GNP price index (fixed weights) and the gross domestic purchases price index (fixed weights) were unrevised at an annual rate of 3-1/2 percent.

Most of the unusually large revision in real GNP was accounted for by a $13 billion upward revision in net exports. Exports were revised up $10-1/2 billion, and imports were revised down $2-1/2 billion. The revised estimates incorporated newly available data on merchandise exports and imports for March and partial information from BEA's survey of direct investment income. The latter reflected the effect of an upward adjustment in profits of foreign-owned corporations in the United States, described in discussing corporate profits.

On the revised basis, merchandise exports were up $21 billion, or 30-1/2 percent, in the first quarter. A $9-1/2 billion upward revision in nonagricultural merchandise exports brought the first-quarter increase in line with the strong increases of the past couple of quarters. Two end-use categories in particular--capital goods except autos, and industrial supplies and materials--showed even stronger increases than had been indicated. For agricultural exports, the first-quarter increase was substantial even after a $1/2 billion downward revision. On the revised basis, merchandise imports were up $1-1/2 billion, or 1 percent. For petroleum imports, a $5 billion downward revision sharply reduced its first-quarter increase. For nonpetroleum imports, the first-quarter increase was slight after a $1 billion downward revision.

The picture of the other major components of production and demand, as sketched in last month's "Business Situation," did not alter much. Personal consumption expenditures and Federal Government purchases were revised up $2-1/2 billion and $2 billion, respectively, and inventory investment was revised down $2-1/2 billion.

Corporate profits

Profits from current production--profits before tax with inventory valuation adjustment and capital consumption adjustment--declined $3 billion in the first quarter of 1988 after a decline of $2 billion in the preceding quarter. Profits before tax declined $5 billion in the first quarter, while corporate profits tax liabilities declined $6 billion; as a result, profits after tax increased $1 billion.

The sharp drop in tax liabilities reflected the impact of the Tax Reform Act of 1986 (TRA), which reduced the maximum tax rate from 46 percent to 34 percent, effective July 1, 1987. Quarterly national income and product account (NIPA) estimates of tax liabilities in 1987 continued to be influenced by the higher rates even after the effective date of rate reduction, because quarterly tax liabilities are calculated by applying the annual average effective tax rate to quarterly taxable profits. For 1988, the average tax rate is not affected by the pre-TRA rates. (For more detail on this and other tax-related issues, see "Federal Fiscal Programs" in the February 1988 SURVEY.)

The $5 billion decline in profits before tax was the sum of a $1 billion increase in domestic profits and a $6 billion decline in profits from the rest of the world (ROW). Domestic profits are the profits of all corporations located in the United States, regardless of whether they are owned by U.S. residents or by foreign residents. National profits are profits attributable to U.S.-owned corporations, regardless of where they are located. To derive a national measure, domestic profits must be (1) increased by the amount of profits earned by U.S.-owned corporations abroad and (2) reduced by the amount of profits earned by foreign-owned corporations in the United States. The net of these additions and subtractions--i.e., profits of U.S.-owned corporations abroad less profits of foreign-owned corporations in the United States--is ROW profits.

Estimates of domestic profits are based on tax accounting rules and are measured before income taxes; estimates of ROW profits are based on financial accounting standards and are measured after U.S. and foreign income taxes. (Although based on financial accounting standards, ROW profits are adjusted to remove capital gains and losses for consistency with NIPA concepts.) Thus, one measure of the profits of foreign-owned corporations in the United States is included in domestic profits, and a different measure is included (as a negative) in ROW profits. Usually these two measures move together rather closely; in the first quarter, however, they did not.

A $6-1/2 billion increase in the profits of foreign-owned corporations in the United States more than accounted for the $6 billion drop in ROW profits in the first quarter. A large but not precisely quantifiable part of the increase reflected the implementation of a recent financial accounting standard. The standard was adopted in response to the reduction in tax rates by the TRA. This rate reduction necessitated a reduction in corporate balance sheet accounts for deferred taxes, which, according to this financial standard, must be reflected in the income statement as an adjustment to (i.e., as an increase in) current earnings by the end of 1988.

Thus, implementation of this adjustment by foreign-owned corporations increased the amount that is substracted in estimating ROW profits. It did not, however, increase the tax-accounting measure included in domestic profits. National profits for the first quarter, therefore, were understated by the amount of the adjustment. (It should be noted that the current understatement offsets overstatement earlier, when profits of foreign-owned corporations were calculated using higher tax rates.)

In addition, the adjustment for deferred taxes in ROW profits affected the measurement of GNP. ROW profits appear as part of net exports of factor services in the product-side estimate of GNP. To the extent that these net exports are understated, GNP is also understated. Gross domestic product (GDP), in contrast, is not affected because GDP is defined to exclude all factor incomes from the rest of the world.

As noted above, the size of the adjustment (and, therefore, the size of the understatement in GNP) cannot be precisely quantified; at present only very limited information is available on the profits of foreign-owned corporations. (If the entire first-quarter change in profits of foreign-owned corporations in the United States is taken as an upper limit of the effect of the adjustment on GNP, then the GNP growth rate may have been understated by as much as 0.5 percentage point.) BEA surveys of direct investment will provide additional information on these profits for the revised estimate of GNP to be released in June.

Government sector

The fiscal position of the government sector in the NIPA's improved in the first quarter of 1988, as the combined deficit of the Federal Government and of State and local governments decreased $16-1/2 billion (table 1). The deficit of the Federal Government declined $8-1/2 billion, and the surplus of State and local governments increased $8 billion.

The Federal sector.--The Federal Government deficit declined to $152 billion, as receipts increased more than expenditures.

Receipts increased $14 billion, compared with $14-1/2 billion in the fourth quarter. On balance, the first-quarter increase was largely attributable to larger tax bases; tax changes offset each other. Increases due to social security changes and the Omnibus Budget Reconciliation Act of 1987 were offset by decreases due to the Tax Reform Act of 1986 (TRA).

The increase in total receipts was more than accounted for by a $25-1/2 billion increase in contributions for social insurance. The increase included (1) $14 billion from the increase in social security rates (to 7.51 percent from 7.15 percent for employers and for employees, and to 13.02 percent from 12.30 percent for the self-employed), (2) $2-1/2 billion from an increase in the medicare supplementary medical insurance premium (to $24.80 from $17.90 per month), and (3) $1 billion from an increase in the maximum earnings base for social security (to $45,000 from $43,800). Indirect business tax and nontax accruals also increased, by $1-1/2 billion.

A $7 billion decline in personal tax and nontax receipts was the net result of a $16 billion decline due to TRA and a $9 billion increase due to larger tax bases. A $6 billion decline in corporate profits tax accruals was the net result of a $7 billion decline due to TRA, a $3-1/2 billion decline due to declining profits, and a $5 billion increase due to the Omnibus Budget Reconciliation Act of 1987.

Expenditures increased $5-1/2 billion, compared with $39 billion in the fourth quarter. The first-quarter increase reflected several large, partly offsetting changes in the components. The largest increase was in transfer payments to persons, which increased $15 billion; $13 billion of this increase was due to cost-of-living adjustments to benefits under social security and several other Federal retirement and income support programs. Grants-in-aid to State and local governments increased $9 billion, including large increases in medicaid, highway, aid to families with dependent children, and education grants. Net interest paid increased $2-1/2 billion, and defense purchases of goods and services increased $1-1/2 billion.

Of the declines, the largest was in nondefense purchases of goods and services. The $11 billion decline was accounted for by purchases of agricultural commodities by the Commodity Credit Corporation. Subsidies less the current surplus of government enterprises declined $6-1/2 billion, reflecting a decline in subsidies to farmers. Transfer payments to foreigners declined $5-1/2 billion; the decline was in economic and military aid.

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 accounts basis declined from $199-1/2 billion in the fourth quarter to $196-1/2 billion in the first (see table 3 on page 18). The cyclically adjusted deficit as a percentage of middle-expansion trend GNP declined from 4.5 percent in the fourth quarter to 4.3 percent in the first.

State and local sector.--The State and local government surplus increased $8 billion in the first quarter to $46 billion, as receipts increased more than expenditures. A $6-1/2 billion increase in the other funds surplus largely accounted for the total increase; the social insurance funds surplus increased $1-1/2 billion.

Receipts increased $19 billion, compared with $6 billion in the fourth quarter. The previously discussed increase in Federal grants-in-aid accounted for almost one-half of the total increase. Personal tax and nontax receipts and indirect business tax and nontax accruals each increased $4-1/2 billion.

Expenditures increased $11 billion, compared with $14-1/2 billion in the fourth quarter. Most of the increase was in purchases of goods and services. The deceleration in purchases was more than accounted for by structures, which changed little after a $3-1/2 billion increase. All other categories of purchases increased in both quarters.
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:first quarter of 1988
Publication:Survey of Current Business
Date:May 1, 1988
Words:1820
Previous Article:County and metropolitan area personal income, 1984-86.
Next Article:National income and product accounts tables; selected NIPA tables and reconciliation and other special tables.
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