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The business situation.

the BUSINESS SITUATION

PRELIMINARY estimates show that real GNP--a measure of U.S. production--increased at an annual rate of 2 1/2 percent in the third quarter of 1989; the advance estimates issued a month ago had shown a similar increase. The third-quarter increase in real gross domestic purchases--a measure of U.S. demand--was revised down from 4 1/2 percent to 4 percent at an annual rate. The third-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 3 percent and 2 1/2 percent, respectively (chart 1).(1)

Although the third-quarter revision in real GNP was small, revisions in two major components were substantial. Net exports was revised up $10.5 billion, and inventory investment was revised down $9.0 billion (see table 1).

Within net exports, a $2.3 billion upward revision in exports was largely attributable to new and revised monthly Census Bureau merchandise trade data. An $8.2 billion downward revision in imports reflected a revision in merchandise trade due to the newly available monthly Census Bureau data and a revision in services that stemmed from new information on the impact of Hurricane Hugo (see the section on corporate profits for a discussion of this revision).

The downward revision in inventory investment--that is, change in business inventories--was concentrated in nonfarm inventories. The change in manufacturing inventories was revised down $5.2 billion, and the change in wholesale trade inventories was revised down $6.0 billion; these revisions reflected new and revised monthly Census Bureau inventory data.

The broad picture of the economy sketched in last month's "Business Situation" was not greatly altered by the revisions. Real GNP increased at the same pace in the third quarter as in the second. Real gross domestic purchases increased considerably more than in the second quarter, reflecting a sharp downswing in net exports; growth in exports slowed sharply, and imports increased at about the same pace in both quarters (the advance estimates had shown a pickup in imports). Inflation, as measured by the GNP price index and the gross domestic purchases price index, slowed in the third quarter.

Corporate Profits

Profits from current production declined $15 1/2 billion in the third quarter after a decline of $8 1/2 billion in the second (table 1). Hurricane Hugo, which ripped into the southeastern coast of the United States in late September, caused most of the third-quarter decline. Domestic insurance companies paid almost $9 1/2 billion in storm-related benefits, reducing profits of domestic financial corporations by that amount; in addition, storm-related corporate damages not covered by insurance reduced profits, mainly of domestic nonfinancial corporations, by about $1 1/2 billion.

Last month's "Business Situation" reported that domestic insurance company benefit payments arising from the storm were about $12 billion.(2) The downward revision, to less than $9 1/2 billion, is based on new information indicating that about $3 billion of insurance payments that had been attributed to domestic insurers were actually from foreign insurers and reinsurers. In the national income and product accounts (NIPA's), purchases of casualty insurance are recorded as the difference between premiums and benefits, and purchases of insurance from foreigners are reflected in service imports. Recognition of the $3 billion in benefits received from foreign insurers, therefore, resulted in a $3 billion downward revision in imports and a $3 billion upward revision in net exports and in GNP.

Domestic nonfinancial corporations.--For domestic nonfinancial corporations, profits from current production declined $4 1/2 billion in the third quarter after a similar decline in the second. (The third-quarter decline includes the storm damage of close to $1 1/2 billion not covered by insurance.) Real product of these corporations increased more in the third quarter than in the second, 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 before tax.--Profits before tax (PBT) declined $24 billion in the third quarter after a decline of about the same size in the second. 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 NIPA's. The IVA increased $14 1/2 billion in the third quarter, somewhat less than in the second; the CCAdj declined by $6 billion in the third quarter, somewhat more than in the second. The third-quarter increase in the IVA--or, equivalently, the decline in inventory profits--resulted from a slowdown in the rate of increase in inventory prices. For example, the Producer Price Index, the components of which are a major source of data on inventory prices, changed little in the third quarter after a 5-percent increase in the second.

Government Sector

The fiscal position of the government sector deteriorated in the third quarter of 1989, as the combined deficit of the Federal Government and of State and local governments increased $5 billion to $103 billion (table 2). The increase was caused by an increase in the Federal Government deficit and a decline in the State and local government surplus.

The Federal sector.--The Federal Government deficit increased $2 billion to $147 1/2 billion, as receipts declined more than expenditures.

Receipts declined $10 billion, in contrast to a $17 billion increase in the second quarter. Corporate profits tax accruals declined $10 billion, compared with a $7 1/2 billion decline in the second quarter; both declines were attributable to declining profits. Personal tax and nontax receipts declined $6 billion after an $18 billion increase in the second quarter. These large changes in personal taxes were due to provisions of the Tax Reform Act of 1986; final settlements were boosted in the second quarter of 1989 by tax payments on income shifted from 1987 to 1988 to take advantage of lower tax rates. Indirect business tax and nontax accruals increased $1 1/2 billion after no change in the second quarter; the acceleration was in customs duties and in nontaxes, which included a $1/2 billion (annual rate) fine levied on a major securities trader. Contributions for social insurance increased $4 1/2 billion after a $6 billion increase in the second quarter, reflecting continued growth in incomes.

Expenditures declined $8 billion, in contrast to a $15 billion increase in the second quarter. Large declines in subsidies less the current surplus of government enterprises and in nondefense purchases were partly offset by increases in other categories. A $13 1/2 billion decline in subsidies less the current surplus of government enterprises included $10 1/2 billion in Government payments to farmers. In the second quarter, payments to farmers included large advance deficiency payments for the 1989 crop and disaster payments for the 1988 crop; no comparable payments were made in the third quarter. A $9 1/2 billion decline in defense purchases included $8 1/2 billion in net purchases of agricultural commodities by the Commodity Credit Corporation.

National defense purchases increased $7 billion. The increase was accounted for by services other than compensation of employees ($4 billion) and military equipment ($3 billion). Transfer payments to persons increased $6 billion, primarily because of growth in benefits for social security, medicare, and catastrophic medical insurance. All other expenditures, on balance, increased $2 billion.

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 increased from $183.3 billion in the second quarter to $186.5 billion in the third (see table 3). The cyclically adjusted deficit as a percentage of the 6-percent unemployment rate trend GNP was 3.6 percent in both quarters.

The State and local sector.--The State and local government surplus declined $3 billion to $44 1/2 billion, as expenditures increased more than receipts.

Receipts increased $8 billion, compared with a $10 billion increase in the second quarter. Personal tax and nontax payments increased $2 1/2 billion, compared with $6 billion in the second quarter; most of the deceleration was attributable to indirect effects of the Tax Reform Act of 1986. Corporate profits tax accruals declined $2 1/2 billion, about the same as in the second quarter; both declines were attributable to declining profits. Indirect business tax and nontax accruals increased $7 billion, compared with $5 1/2 billion in the second quarter; the acceleration was in sales taxes. All other receipts, on balance, increased $1 billion.

Expenditures increased $11 billion, about the same as in the second quarter. Purchases of goods and services increased $9 1/2 billion, slightly less than in the second quarter; a deceleration in fuel purchases was partly offset by an acceleration in purchases of structures. All other expenditures, on balance, increased $1 1/2 billion, slightly more than in the second quarter. [Chart 1 Omitted] [Tabular Data 1 to 2 Omitted]

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 6 and 7 on page 20. (2)The October "Business Situation" also described the sources used by BEA for estimating the impact of the hurricane, the types of property damage included in the estimates, and the effect of the storm on incomes other than corporate profits.
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Title Annotation:third quarter of 1989
Publication:Survey of Current Business
Date:Nov 1, 1989
Words:1628
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