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The business situation.

PRELIMINARY estimates show that real GNP-A measure of U.S. production-increased at an annual rate of 4 and 1/2 percent in the first quarter of 1989; the advance estimates issued a month ago had shown an increase of 5 and 1/2 percent (see table 1 on page 18). The fourth-quarter increase in real gross domestic purchases-a measure of U.S. demand-was revised down from 4 and 1/2 percent to 2 and /2 percent at an annual rate. Increases in both the GNP price index fixed weights) and the gross domestic purchases price index fixed weights) were unrevised at annual rates of 5 percent and 51/2 percent, respectively (chart 1).1

The unusually large downward revisions in real GNP, which amounted to $11.7 billion, and in real gross domestic purchases, which amounted to $19.7 billion, were mainly attributable to a substantial revision in inventory investment-that is, change in business inventories. In turn, about three-fourths of the $15.8 billion revision in inventory investment was in nonfarm inventories, mostly in wholesale and retail trade (monthly Census Bureau data on trade inventories for March and revised data for February). A $2.3 billion downward revision in nonresidential fixed investment was traceable to petroleum and natural gas drilling (monthly data from the Energy Information Administration for March and revised data for February) and to public utilities (quarterly information on anticipated expenditures from the Census Bureau plant and equipment survey). Within government purchases, Federal purchases were revised up $2.6 billion; about one-half of the revision was accounted for by Commodity Credit Corporation inventory transactions (new and revised monthly data from the Department of Agriculture). A $2.1 billion downward revision in State and local government purchases was accounted for by structures (monthly Census Bureau data on construction put in place for March and revised data for February).

The difference between the size of the downward revision in real GNP and that in real domestic purchases was accounted for by a $7.8 billion upward revision in net exports. Within net exports, exports were revised up $5.6 billion and imports were revised down $2.2 billion (monthly Census Bureau merchandise trade data for March and revised data for February).

The preliminary GNP estimates show a somewhat different picture of the economy than sketched in the last month's Business Situation." If the impact of the 1988 drought is excluded, the preliminary estimate for real GNP increased 2 percent in the first quarter of 1989, somewhat slower than the pace of 3 to 4 percent registered in the four preceding quarters; the comparable advance estimate increased 3 percent, which was in the range of the four preceding quarters. Among the components of real GNP, the preliminary estimates for nonfarm inventories show smaller accumulations in all categories-manufacturing, wholesale, retail, and "other" in the first quarter than in the fourth; the advance estimates had shown larger accumula- tions in both wholesale and retail trade inventories.

Corporate Profits

In the first quarter of 1989, profits from current production feE 211/2 billion-the largest decline in 7 years; declines were very widespread. Profits before tax (PBT), in contrast, declined only $1/2 billion.

The current-production measure of profits includes two adjustments that are not included in PBT-namely, the inventory valuation adjustment (IVA), which declined 14 and 1/2 billion, and the capital consumption adjustment (CCAdj), which declined $6 and 1/2 billion.

The decline in the IVA mirrored an increase in inventory profits that resulted from a step-up in the rate of increase of inventory prices. For example, the Producer Price Index, a major source for estimating inventory prices, increased 9 percent (annual rate) in the first quarter, following a 2-percent increase in the fourth. Although the most dramatic step-up in prices was in crude materials (reflecting an almost 150-percent increase in crude petroleum prices), step-ups were significant in all major stages of processing and in many industrial commodities.

The CCAdj is the difference between depreciation based largely on tax accounting, on the one hand, and economic depreciation as estimated by BEA, on the other. The first-quarter decline in the CCAdj reflected the continuing impact of the Tax Reform Act of 1986, which lengthened the service lives that may be used in calculating most depreciation allowances for tax purposes. (The CCAdj, now 33 and 1/2 billion, is expected to turn negative in the early 1990's.)

Domestic nonfinancial corporations accounted for most of the first-quarter drop in profits from current production. (Profits of domestic financial corporations declined $1/2 billion, and profits from the rest of the world declined 1 and 1/2 billion.) Real product of domestic nonfinancial corporations increased slightly, but profits per unit fell sharply. The decline in unit profits reflected a smaller increase in unit prices than in unit costs; both labor and nonlabor unit costs increased.

Government Sector

The fiscal position of the government sector improved slightly in the first quarter of 1989, as the combined deficit of the Federal Government and of State and local governments declined 1 and 1/2 billion. The deficit of the Federal Government increased $1 billion, and the surplus of State and local governments increased $21/2 billion.

The Federal sector.-The Federal Government deficit increased to $1581/2 billion, as expenditures increased more than receipts.

Receipts increased 32'/-? billion, compared with a $16 billion increase in the fourth quarter of 1988. Personal tax and nontax receipts increased $151/2 billion, and contributions for social insurance increased $14 billion. Contributions were boosted by the following special factors, all of which were effective January 1, 1989: (1) An increase in the social security tax base to $48,000 from $45,000 ($31/2 billion); (2) the initiation of premiums for catastrophic health insurance ($2 billion); (3) an increase in the supplemental medical insurance premium to $27.90 per month from $24.80 ($1 and 1/2 billion); and (4) an increase in the contribution for military retirement ($1 billion). Corporate profits tax accruals increased $2 billion, and indirect business tax and nontax accruals increased $1/2 billion.

Expenditures increased $331/2 billion, compared with a $50 billion increase in the fourth quarter of 1988 that reflected increased spending for agricultural purchases and subsidies. Over one-half of the increase was in transfer payments to persons; an $18 billion increase included $12 billion for cost-of-living adjustments COLA's). The largest COLA's were for social security ($8 and 1/2 billion), civilian and military retirement ($1 billion each), and veterans pensions and disability payments ($1/2 billion). Net interest paid increased $10 billion, reflecting higher interest rates, and grants-in-aid to State and local governments increased $6 billion, including $2and 1/2 billion for highways and $1 and 1/2 billion for public assistance. Nondefense purchases of goods and services and subsidies less the current surplus of government enterprises each increased by smaller amounts. The increases in expenditures were partly offset by declines in transfer payments to foreigners and in national defense purchases of goods and services.

Cyclically adjusted surplus or deficit.-When measured using simplified cyclical adjustments (see next paragraph) based on a 6-percent unemployment rate trend GNP, the Fed- eral deficit on the national income and product accounts basis increased from $177.3 billion in the fourth quarter of 1988 to $187.5 billion in the first quarter of 1989 (see table 3 on page 19). The cyclically adjusted deficit as a percentage of the 6-percent unemployment rate trend GNP increased from 3.6 percent in the fourth quarter to 3.7 percent in the first.

Beginning with the estimate of the cyclically adjusted deficit for the first quarter of 1989, BEA will temporarily discontinue use of detailed models to derive the estimates. Instead, BEA will use a simplified procedure to derive cyclically adjusted receipts, expen- ditures, and surplus or deficit based on a 6-percent unemployment rate trend GNP. This change is being made because the more detailed models need to be reviewed and updated to reflect, for example, new income tax elasticities that may have resulted from tax legislation. Until a review can be completed, BEA will use the simplified procedure, which yields results that are very similar to the detailed models. Using the simplified procedure allows BEA to continue to provide users with cyclically adjusted budget estimates while freeing the resources necessary for the review. A description of the simplified procedure and an historical series based on this procedure is available upon request.

The State and local sector.-The State and local governmment surplus increased to $55 billion, as receipts increased more than expenditures.

Receipts increased $15 billion, compared with a $12V2 billion increase in the fourth quarter of 1988. A large increase in Federal grants-in-aid-$6 billion-more than accounted for the acceleration. Indirect business taxes increased $5 billion, of which 21/2 billion was in property taxes. Personal tax and nontax receipts increased $4 billion, and contributions for social insurance increased $1/2 billion.

Expenditures increased 12 and 1/2 billion, compared with a $15 and 1/2 billion increase in the fourth quarter of 1988. All of the first-quarter increase was in purchases of goods and services; on balance, all other types of expenditures were unchanged. Purchases of nondurable goods increased 2 and 1/2 billion, compared with a 1/2 billion increase in the previous quarter; the first-quarter increase largely reflected higher prices for petroleum products. Purchases of services also accelerated, increasing $3 billion, compared with a $2 billion increase in the fourth quarter; the first-quarter increase largely reflected higher prices for air fares and lodging. Purchases of durable goods increased at the same pace as in the previous quarter, and purchases of structures was unchanged after a $4 billion increase in the fourth quarter. (Table)
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Title Annotation:first quarter of 1989
Publication:Survey of Current Business
Date:May 1, 1989
Words:1624
Previous Article:County and metropolitan area personal income, 1985-87.
Next Article:U.S. business enterprises acquired or established by foreign direct investors in 1988.
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