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The business situation.

the BUSINESS SITUATION

PRELIMINARY estimates show somewhat more strength in the U.S. economy in the second quarter of 1989 than was indicated in the advances estimates. In particular, consumer spending increased at the same pace in the second quarter as it had in the first; the advance estimates had indicated that the pace of consumer spending slowed further in the second quarter.

* Real GNP--a measure of U.S. production--increased at an annual rate of 2-1/2 percent in the second quarter; the advance estimates issued a month ago had shown an increase of 1-1/2 percent.

* The second-quarter increase in real gross domestic purchases--a measure of U.S. demand--was also revised up from 1-1/2 percent to 2-1/2 percent at an annual rate.

* The second-quarter 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 5-1/2 percent, respectively (chart 1). (1)

The second-quarter revisions in real GNP and real gross domestic purchases were largely accounted for by a $7.1 billion upward revision in personal consumption expenditures (PCE) (see table 1 on page 18). Most of the nonauto components of PCE durable goods and most of the nonenergy components of PCE nondurable goods were revised up, reflecting the incorporation of revised Census Bureau retail sales data for May and June; the nonenergy components of PCE services were also revised up, reflecting information from a variety of government and trade sources.

Among the other components of GNP, Federal Government purchases was revised up $4.1 billion. The revision reflected new and revised monthly data from the U.S. Department of Agriculture (USDA) that showed higher net transfers of crops from farmers to the Commodity Credit Corporation (CCC) and information on Federal outlays for June that indicated higher purchases of most of the other nondefense categories. The change in farm inventories was revised down $3.2 billion, partly reflecting the newly available information on CCC inventory transactions and partly reflecting a lower USDA forecast of crop output for 1989.

Corporate Profits

Profits from current production declined $7 billion in the second quarter after a much sharper decline in the first (table 1). Profits before tax (PBT) registered the opposite pattern of decline--a $20-1/2 billion drop in the second quarter after only a slight decline in the first.

The current-production measure of profits includes two adjustments that are not included in PBT--namely, the inventory valuation adjustment (IVA) and the capital consumption adjustment (CCAdj); these adjustments convert the inventories and depreciation reported by business to those used in the national income and product accounts (NIPA's). The IVA increased $17-1/2 billion in the second quarter after a decline of $18 billion in the first; the CCAdj declined by about $4-1/2 billion in both quarters. The second-quarter increase in the IVA mirrored a decline in inventory profits that resulted from a slowdown in the rate of increase of inventory prices. For example, the Producer Price Index, the components of which are a major source of data for estimating inventory prices, increased 6-1/2 percent (annual rate) in the second quarter, following a 9-1/2-percent increase in the first.

Domestic nonfinancial corporations more than accounted for the second-quarter drop in profits from current production. Real product of domestic nonfinancial corporations increased slightly, but unit profits from current production fell. The decline in unit profits reflected a smaller increase in unit prices than in unit costs; both labor and nonlabor unit costs increased.

Profits by industry.--Current-production measures of profits are not available by industry; PBT with IVA is the best measure of industry profits. For nonfinancial corporations, this measure declined $3-1/2 billion in the second quarter after an $18 billion decline in the first. On the basis of incomplete source data, it appears that the second-quarter decline was largely in manufacturing; profits in wholesale and retail trade slipped only slightly, while profits in the transportation and public utilities group and in "other" nonmanufacturing industries increased. (Detailed industry estimates will be published in the September 1989 SURVEY OF CURRENT BUSINESS, when more complete source data are available.) Profits of motor vehicle manufacturers turned negative; the drop partly reflected the costs of sales incentive programs. (For imported cars, the costs of sales incentive programs are reflected in the profits of wholesalers and help to explain the slippage in trade profits.) Profits of chemical manufacturers dropped for the second consecutive quarter, perhaps reflecting increased costs associated with high capacity utilization rates. Profits of petroleum manufacturers were adversely affected by the costs of cleaning up the oil spill off the coast of Alaska.

For financial corporations, profits declined $1-1/2 billion. An increase in the income of Federal Reserve banks--which is treated as corporate profits in the NIPA's--was more than offset by a decline in the profits of other financial institutions. Losses of savings and loan associations increased (although at a slower rate than in the preceding two quarters), and profits of commercial banks declined.

Rest-of-world profits increased $2 billion. Inflows of profits from foreign affiliates of U.S. corporations increased more than outflows of profits from U.S. affiliates of foreign corporations.

Government Sector

The fiscal position of the government sector was essentially unchanged in the second quarter of 1989, as the combined deficit of the Federal Government and of State and local governments increased $3 billion. The deficit of the Federal Government increased $1 billion, and the surplus of State and local governments declined $2 billion.

The Federal sector.--The Federal Government deficit increased to $148-1/2 billion in the second quarter, as expenditures increased slightly more than receipts.

Receipts increased $15-1/2 billion, compared with $41-1/2 billion in the first quarter, when receipts were boosted by provisions of the Tax Reform Act (TRA) of 1986 and by an increase in the social security tax base. In the second quarter, personal tax and nontax receipts increased $18 billion, including $8 billion from TRA (which reduced taxes $26-1/2 billion in the first quarter and $18-1/2 billion in the second), and contributions for social insurance increased $14 billion. These increases were partly offset by an $8-1/2 billion decline in corporate profits tax accruals.

Expenditures increased $16-1/2 billion, compared with $21-1/2 billion in the first quarter. Purchases of goods and services increased $9 billion, in contrast to a decline of $7-1/2 billion in the first quarter. The shift occurred in both national defense and nondefense purchases but was most pronounced in the latter, as purchases of agricultural commodities by the Commodity Credit Corporation (CCC) rebounded. Transfer payments to persons increased $7 billion, and net interest paid increased $5 billion. These increases were partly offset by declines in subsidies less the current surplus of government enterprises, in transfer payments to foreigners, and in grants-in-aid to State and local governments.

Cyclically adjusted surplus or deficit.--When measured using cyclical adjustments based on a 6-percent unemployment rate trend GNP, the Federal deficit on the national income and product accounts basis declined from $185.2 billion in the first quarter to $181.1 billion in the second (see table 3 on page 18). The cyclically adjusted deficit as a percentage of the 6-percent unemployment rate trend GNP declined from 3.7 percent in the first quarter to

3.6 percent in the second.

The State and local sector.--The State and local government surplus decreased to $47 billion in the second quarter, as expenditures increased more than receipts.

Receipts increased $9-1/2 billion, compared with a $16 billion in the first quarter. The deceleration was accounted for by grants-in-aid, which increased $6-1/2 billion in the first quarter and declined slightly in the second. Personal income tax and nontax receipts increased $6 billion in the first quarter, including $1 billion from legislated tax increases. Indirect business tax and nontax receipts increased $5-1/2 billion, and corporate profits tax accruals declined $2-1/2 billion.

Expenditures increased $11-1/2 billion, compared with a $13 billion in the first quarter. Purchases of goods and services increased $10 billion; employee compensation and all other purchases (excluding structures) recorded smaller gains than in the first quarter, and structures declined more than in the first. All other categories of expenditures combined increased $1-1/2 billion, slightly more than in the first quarter.

NOTE.--Quarterly estimates in the national income and product accounts are expressed at seasonally adjusted annual rates, and quarterly changes are differences between these rates. Quarter-to-quarter percent changes are compounded to annual rates. Real, or constant-dollar, estimates are expressed in 1982 dollars.

(1) The regularly featured estimates of real GNP and GNP prices are based on 1982 weights. Alternative measures based on more current weights are shown in tables 4 and 5 on pages 19-21.
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Title Annotation:second quarter of 1989
Publication:Survey of Current Business
Date:Aug 1, 1989
Words:1466
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