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The business situation.

The Business Situation

Real GNP grew sluggishly again in the second quarter - 1 percent at an annual rate, the fifth consecutive quarterly increase of 1 1/2 percent or less (chart 1). Inflation, as measured by the GNP price index, returned to its 1989 average, 4 percent, after a 6 1/2-percent spike in the first quarter.(1)

National income and product account (NIPA) estimates for the first quarter of 1987 through the first quarter of 1990 have been revised as part of the annual revision that incorporates new and revised source data and methodologies. The revisions, which are presented and discussed elsewhere in this issue, were large for some quarters of 1989. For example, according to the revised estimates, GNP grew 1 1/2 percent in both the second and the third quarters of 1989; the previously published estimates were in the range of 2 1/2 to 3 percent.

To provide perspective for this review of second-quarter developments, table 1 presents growth rates for selected components of real GNP for two periods. The first period, a baseline for comparison, is from the third quarter of 1982 (the most recent through in GNP) to the first quarter of 1989; the second period is from the first quarter of 1989 to the second quarter of 1990.(2) A comparison of these two periods shows that the recent weakness has been widespread: Only Federal nondefense purchases increased faster in the second period than in the first; inventory transactions of the Commodity Credit Corporation accounted for almost all of the acceleration.

Table : Table 1. - Gross National Product in Constant Dollars [Percent change at annual rates]
 1982:III 1989:I
 through through
 1989:I 1990:II
 Gross national product 4.1 1.3
Personal consumption expenditures 3.9 1.2
 Durable goods 8.3 1.0
 Nondurable goods 2.7 -1.1
 Services 3.6 2.9
Gross private domestic investment 7.5 -.3
 Fixed investment 6.5 -.3
 Nonresidential 5.2 1.5
 Structures -1.9 -.8
 Producers' durable equipment 8.6 2.3
 Residential 10.7 -5.1

Change in business inventories

Net exports of goods and services
 Exports 7.5 6.4
 Imports 9.5 5.2

Government purchases of goods and
 services 3.3 2.7
 Federal 3.1 2.6
 National defense 4.0 .9
 Nondefense .7 8.0
 State and local 3.4 2.8


Gross domestic purchases 4.4 1.2

Note. - Percent changes for recent quarters are found in table 8.1 of the "National Income and Product Accounts Tables." Dollar levels are found in tables 1.2 and 1.6.

Although almost all major components have been weak over the past five quarters, the biggest difference between the two periods is in investment. Growth of nonresidential producers' durable equipment slowed markedly, and residential investment declined. Investment in nonresidential structures declined in both periods. (In the earlier period, the decline was more than accounted for by a decline in oil well drilling and exploration; in the later period, by declines in nonresidential buildings and public utilities.)

Over the past five quarters, personal consumption expenditures grew at only one-third the rate posted earlier in the expansion. Each of the major types of personal consumption expenditures contributed to the slowing. Durable goods slowed the most; weak motor vehicle sales accounted for about one-half of the slowdown. Nondurable goods (including food, energy, and clothing and shoes) dropped in four of the last five quarters; earlier in the expansion, nondurables declined only once. Even services slowed, partly reflecting a slowdown in housing services related to weakness in residential investment.

Table 2 provides another perspective on developments over the past five quarters by showing the impact of motor vehicle output on the growth rates of selected components of real GNP. Although motor vehicle output constitutes less than 5 percent of GNP, motor vehicles subtracted between 1/2 and 1 percentage point from GNP growth rates from the second quarter of 1989 to the first quarter of 1990. In the second quarter of 1990, motor vehicle output increased, but the rest of the economy weakened. [Tabular Data Omitted]

Motor vehicles. - Although motor vehicle output increased sharply in the second quarter, it remained at a low level. Sales declined from a low level to an even lower one, and inventories edged down after a sharp runoff.

Motor vehicle output increased about 40 percent in the second quarter after declines of more than 20 percent in the two preceding quarters. The turnaround reflected the cuts in output and the aggressive marketing that had finally brought inventories down to desired levels by the end of the first quarter. The turnaround was not an indication of expected increases in sales; real final sales of motor vehicles (including net sales to foreigners) declined 7 percent in the second quarter.

In the second quarter, domestic car production (in terms of units) rebounded to its fourth-quarter level of 6.3 million (seasonally adjusted annual rate) from its first-quarter level of 5.6 million. However, the rebound was not an indication of vigorous activity; the level had been as low as 6.3 million in only one other quarter since mid-1983. Third-quarter production may increase if manufacturers decide to build inventories as a hedge against the strikes that may result if union contract negotiations (scheduled for late summer) break down.

The weakness in production reflected the weakness in domestic car sales. Sales declined to 6.8 million units in the second quarter, 0.2 million lower than in the first quarter and 0.6 million higher than the fourth quarter of 1989. Not since 1983 have domestic car sales been so low for three consecutive quarters.

Domestic car inventories declined slightly to 1.29 million units at the end of the second quarter from 1.34 million at the end of the first. To reduce inventories from the 1.57 million to 1.76 million in 1989, manufacturers cut production in each quarter of 1989 and in the first quarter of 1990, and they offered sales-incentive programs that in many cases were the most attractive ever offered. The inventory-sales ratio in the second quarter was 2.28, little changed from the first and low compared with the ratios in recent years; the industry target is about 2.40.

Sales of imported cars also have been weak. Sales were 2.7 million units in the second quarter, down slightly from 2.8 million in the first but above the 2.6 million in the fourth quarter of 1989. The levels in all three quarters were weak compared with those in recent years, when sales only occasionally fell below 3.0 million.

Even unit sales of new trucks, which have been relatively strong in recent years, slowed in the second quarter; sales declined to 4.7 million from 4.8 million. Truck sales had topped 5.0 million in most of 1988 and 1989. Light domestic truck sales decreased to 4.0 million in the second quarter from 4.1 million in the first. Sales of other domestic trucks, at 0.3 million, and sales of imported trucks, at 0.4 million, were unchanged. Truck inventories increased in the second quarter after dropping sharply in the first.

Components of Real GNP

Personal consumption expenditures, nonresidential fixed investments, residential investment, and net exports declined in the second quarter. Only inventory investment and government purchases increased.

Personal consumption expenditures

Real personal consumption expenditures (PCE) edged down1/2 percent in the second quarter after increasing 1 percent in the first (table 3). The recent weakness in PCE reflected a marked slowdown in real disposable personal income and slipping consumer confidence. Real disposable personal income increased only 1/2 percent in the second quarter and increased between 1 and 2 1/2 percent in each of the previous three quarters. Consumer confidence (as measured by the Index of Consumer Sentiment prepared by the University of Michigan's Survey Research Center) declined in the last three quarters and in four of the last five quarters. [Tabular Data Omitted]

The second-quarter decline in PCE was broad based in both durable and nondurable goods. PCE services increased.

Expenditures for durable goods dropped 8 1/2 percent after jumping 14 1/2 percent. In the second quarter, all durable goods components fell. Motor vehicles and parts, which fell 12 percent, accounted for more than one-half of the decline. "Other" durables fell 14 1/2 percent, and furniture and household equipment declined 3 percent. Consumer electronics (a subcomponent of furniture and household equipment) is the only durable goods item that has shown sustained growth over the past four quarters.

Expenditures for nondurable goods declined 4 1/2 percent after declining 3 percent. As was the case with durable goods, all components of nondurable goods declined in the second quarter; the largest declines were in clothing and shoes (8 1/2 percent) and "other" nondurables (7 percent). Energy declined 5 percent; food declined 1 1/2 percent, mainly reflecting a drop in restaurant meals. No nondurable goods component has grown over the past four quarters, and food and energy were lower in the second quarter than they were 2 years ago.

Expenditures for services increased 5 1/2 percent after changing little in the first quarter. Nearly one-half of the second-quarter increase was due to a 20 1/2-percent increase in household operations; almost all of this increase was in energy and reflected a return to near-normal temperatures following an unusually mild winter. Expenditures for medical care increased 6 percent, and expenditures for "other" services increased 5 percent.

Nonresidential fixed investment

Real nonresidential fixed investment declined in the second quarter after increasing in the first; both structures and producers' durable equipment (PDE) contributed to the drop (table 4). [Tabular Data Omitted]

Structures declined 6 percent after increasing 2 1/2 percent. Nonresidential buildings, which make up almost two-thirds of total structures, declined for the third consecutive quarter. Small increases in public utilities and in oil well drilling were offset by a decline in "other" structures.

PDE declined 6 percent in the second quarter after increasing almost that much in the first. Industrial equipment accounted for more than one-half of the decline. Transportation equipment, which had posted large swings in the two preceding quarters, declined 11 1/2 percent; trucks and railroad equipment were mainly responsible for the second-quarter drop. Information-processing equipment posted its first, modest decline since the end of 1988.

A Census Bureau survey in April and May found that businesses' planned expenditures for plant and equipment in 1990 imply a moderate constant-dollar increase. Many other factors that are usually considered in assessing the outlook for investment spending are less encouraging. Over the past year or so, corporate profits and cash flow have been weak, increases in real final sales have generally been modest or nonexistent, the rate of capacity utilization in the manufacturing has drifted down, and the yield on new issues of high-grade corporate bonds has risen.

Residential investment

Real residential investment declined 13 1/2 percent in the second quarter after increasing 15 percent in the first. The downswing was mostly accounted for by single-family construction. Multifamily construction increased after a decline. The "other" component - which includes additions and alterations, major replacements, mobile home sales, and brokers' commissions - declined.

Single-family construction declined 22 1/2 percent after increasing 31 percent. The pattern in construction mirrored changes in starts (chart 2). In the second quarter, single-family starts dropped 189,000, to 894,000 units (seasonally adjusted annual rate), the lowest level since the fourth quarter of 1982. In the first quarter, of 1982. In the first quarter, starts had increased 95,000 - a reflection, in part, of the unusually mild weather in January and February. A second-quarter decline in the average size of single-family houses under construction may have also contributed to the downswing in single-family construction.

A 10-percent increase in multifamily construction in the second quarter followed three consecutive quarters of decline. The increase may reflect attempts by builders to complete units before new Department of Housing and Urban Development regulations - mandating improved accessibility for the disabled - become effective.

A 6-percent decline in the "other" component reflected a drop in brokers' commissions. Commissions are estimated as a percentage of the value of houses sold. In the second quarter, two components of value declined: The average sales price of existing homes declined $2,700, and sales of existing homes fell 25,000 units (seasonally adjusted annual rate). The drop in sales partly reflected stricter loan standards on the part of mortgage lenders and higher mortgage interest rates (chart 3).

Inventory investment

Real inventory investment - that is, the change in business inventories - increased $28 1/2 billion in the second quarter, as businesses added $26 billion to their inventories after drawing them down slightly in the first quarter (table 5). The upswing in inventory investment was more than accounted for by retail trade, where inventories increased $4 billion after declining $25 1/2 billion. [Tabular Data Omitted]

Inventory accumulation in manufacturing picked up but remained moderate. The pickup was in durables manufacturing, where increases in inventories were widespread in the second quarter after widespread declines in the first. Accumulation in nondurables manufacturing slowed, reflecting much less accumulation at petroleum refineries than in the first quarter. (In the first quarter, unusually mild weather allowed refineries to replenish stocks that had been drawn down during the severe cold spell in December.)

Wholesale trade inventories also increased more than in the first quarter. For merchant wholesalers, both durable and nondurable inventory investment picked up. In durables, machinery, equipment, and supplies more than accounted for the pickup; in nondurables, pickups were widespread. For nonmerchant wholesalers, inventories increased about as much as in the first quarter. In the first quarter, the accumulation was largely accounted for by nondurables (mainly inventories held in petroleum bulk stations and terminals); in the second, accumulation at bulk stations and terminals slowed, but durable inventories increased after little change.

The second-quarter upswing in inventory investment at the retail level reflected a sharp slowing in the rate of liquidation by auto dealers - from $22 1/2 billion in the first quarter to $2 billion in the second - and a swing from liquidation to accumulation by other retailers. The upswing in nonauto inventory investment was accounted for by nondurables.

Farm inventories declined $1 billion after five quarters of increase. The decline reflected net placement of crops with the Commodity Credit Corporation (CCC).

Reflecting the increase in inventories and the decline in final sales in the second quarter, the ratio of nonfarm business inventories to final sales of business moved up from 2.81 to 2.84 but remained within the narrow range that the ratio has fluctuated within for the past 2 years.

Net exports

Real net exports declined $11 billion in the second quarter after increasing $12 1/2 billion in the first (table 6). Exports (down $6 billion) and imports (up $5 billion) both contributed to the second-quarter decline. [Tabular Data Omitted]

Merchandise exports declined $4 billion (or 4 percent) in the second quarter after increasing $17 billion in the first. Agricultural exports accounted for most of the decline. Nonagricultural exports slipped slightly after a large increase in the preceding quarter; most major end-use categories registered small changes.

Merchandise imports increased $3 billion (or 2 percent) in the second quarter after increasing $3 1/2 billion in the first. Petroleum imports declined after an increase, but nonpetroleum imports swung up. Within nonpetroleum imports, industrial supplies and materials, autos, and capital goods (except autos) registered the largest increases.

Exports of services (down $2 billion) and imports of services (up $2 1/2 billion) mainly reflected changes in incomes on investment.

Government purchases

Real government purchases increased 6 percent in the second quarter, double the rate of increase in the first (table 7). Federal Government purchases increased considerably more in the second quarter than in the first; State and local government purchases increased considerably less. [Tabular Data Omitted]

Federal defense purchases increased $2 billion in the second quarter after declining in the two previous quarters. The increase was entirely in purchases of goods; purchases of goods declined in the previous two quarters.

Federal nondefense purchases increased $10 billion in the second quarter after increasing $1 1/2 billion in the first. CCC inventories increased $1/2 billion in the second quarter after declining $7 billion. The second-quarter increase followed nine consecutive quarters of inventory decumulation. Nondefense purchases other than CCC inventory change increased less in the second quarter than in the first.

State and local government purchases were flat in the second quarter after increasing $5 1/2 billion inn the first. The slowdown as in purchases of structures, which declined $1 1/2 billion after increasing $3 1/2 billion; highways more than accounted for the decline.


Inflation moderated in the second quarter after a first-quarter pickup that had largely reflected surges in food and energy prices and a pay raise for Federal military and civilian employees. (Such pay raises are treated in the NIPA's as an increase in the price of employee services purchased by the Federal Government.) The GNP price index (fixed weights) increased 4 percent after a 6 1/2-percent increase; the price index for gross domestic purchases (fixed weights) increased 3 percent after a 7-percent increase (table 8).

Table : Table 8. - Price Indexes (Fixed Weights): Change From Preceding Quarter [Percent change at annual rates: based on seasonally adjusted index numbers (1982=100)]
 1989 1990
GNP 3.1 3.8 6.6 3.9
 Less: Exports -.3 0 5.0 2.9
 Plus: Imports -5.8 4.0 9.2 -6.1
Equals: Gross domestic purchases 2.6 4.2 7.0 3.1

Less: Change in business inventories

Equals: Final sales to domestic
 purchasers 2.6 4.2 6.9 3.1
 Personal consumption expenditures 2.7 4.7 7.4 3.4
 Food 2.6 5.1 14.0 1.0
 Energy -7.4 -.3 17.5 -6.6

Other personal consumption
 expenditures 3.7 5.1 4.9 4.9
 Nonresidential structures .5 1.4 2.8 2.0
 Producers' durable equipment 3.0 4.4 5.4 1.2
 Residential investment 1.4 .5 3.5 .7
 Government purchases 2.6 3.4 7.2 3.1

 Merchandise imports -8.9 3.2 10.1 -9.9
 Petroleum and products -28.9 20.9 48.2 -54.3
 Other merchandise -5.2 .8 4.9 -.2

Note. - Percent changes in major aggregates are found in table 8.1 of the "National Income and Product Accounts Tables." Most index number levels are found in tables 7.1 and 7.3.

A deceleration in PCE prices reflected food and energy prices. PCE food prices decelerated to a 1-percent increase in the second quarter after increasing 14 percent percent in the first; the first-quarter surge reflected the effect on prices of the bitterly cold weather in December that had damaged crops. PCE energy prices declined 6 1/2 percent after increasing 17 1/2 percent. "Other" PCE prices increased at the same rate as in the first quarter.

Among the components of fixed investment, PDE prices slowed to a 1-percent increase after increasing 5 1/2 percent; the slowing was widespread. Prices of nonresidential structures increased only slightly slower than in the first quarter, but prices of residential structures increased only 1/2 percent after increasing 3 1/2 percent.

Prices of government purchases slowed to a 3 1/2-percent increase after a 7-percent increase. Most of the deceleration was in prices of Federal Government purchases. In the second quarter, prices of employee services increased much less than in the first (reflecting the pay raise in the first quarter), and prices of goods moderated.

Prices of exports slowed to a 3-percent increase after a 5-percent increase, and prices of imports declined 6 percent after a 9-percent increase. Prices of merchandise exports increased 1 1/2 percent after increasing 4 percent; the slowing was evident in most major end-use categories. Prices of merchandise imports declined 10 percent after increasing 10 percent; petroleum prices declined 54 1/2 percent after increasing 48 percent, and prices of capital goods (except autos) slowed to a 2 1/2-percent increase after an increase of 9 1/2 percent.

Personal Income

Personal income increased $60 1/2 billion in the second quarter after increasing $93 1/2 billion in the first (table 9 and chart 5). Much of the deceleration was in transfer payments and farm subsidy payments; other incomes, in total, increased almost as much as in the first quarter. [Tabular Data Omitted]

Wage and salary disbursements increased $41 1/2 billion in the second quarter, a little more than in the first. The increase mainly reflected a gain in average hourly earnings, although average weekly hours and employment also increased.

Farm proprietors' income declined $6 1/2 billion in the second quarter after an $11 1/2 billion increase in the first. The downswing was partly due to Federal farm subsidy payments; subsidies declined $5 billion after a $3 billion increase that mainly reflected deficiency payments - payments made because the market price of a crop is, or is projected to be, below the CCC target price. The downswing also reflected a drop in prices received by farmers, which resumed a slide that had been interrupted by an increase in the first quarter. Nonfarm proprietors' income was up less than in the first quarter, reflecting the slowdowns in residential construction and retail trade.

Transfer payments increased $5 1/2 billion in the second quarter after increasing $25 billion in the first. In the first quarter, cost-of-living adjustments in social security and several other Federal retirement and income and support programs had boosted payments by $14 billion.

Among the other components of personal income, personal interest income increased substantially more than in the first quarter; personal holdings of financial assets continued to increase, and the decline in interest rates slowed. Rental income resumed a downward trend. Personal contributions for social insurance, which are subtracted in deriving the personal income total, increased much less than in the first quarter, when legislated increases in the social security tax rates, taxable wage base, and social security contributions by the self-employed added $6 billion.

Personal tax and nontax payments increased $18 1/2 billion in the second quarter after increasing $5 1/2 billion in the first. The second-quarter increase included large payments of estate and gift taxes. The first-quarter increase was held down $5 billion because of the annual adjustment in the withholding tables in accordance with the indexing provisions of the tax code.

The deceleration in personal income and the acceleration in personal taxes both contributed a slowdown in disposable personal income (DPI). DPI increased $42 billion (or 4 1/2 percent) in the second quarter after increasing $88 billion (or 9 1/2 percent) in the first. Reflecting this slowdown, real DPI increased 1/2 percent after a 2 1/2-percent increase.

In the second quarter, personal outlays - mainly PCE - again increased less than DPI; thus, personal saving increased. The personal saving rate rose 0.2 percentage point to 5.1 percent.

(1.) The regularly featured estimates of real GNP and GNP prices are based on 1982 weights. An alternative measure of price change that uses more current weights - the chain price index - is published in table 8.1 of the "National Income and Product Accounts Tables." The GNP chain price index increased at about the same rate as the GNP fixed-weighted price index in the last two quarters - 4 percent in the second quarter and 6 percent in the first.

The chain price index can be used to calculate an alternative measure of real GNP growth based on more current weights; this measure of GNP increased at annual rates of 1 1/2 percent in the second quarter and 1/2 percent in the first. Growth of real GNP in 1987 dollars, another measure based on more current weights, will be published in the "Reconciliation and Other Special Tables" in the August SURVEY OF CURRENT BUSINESS.

(2.) The baseline growth rates are not very sensitive to the initial quarter; much the same picture would result if, instead of beginning with the trough in the GNP in the third quarter of 1982, it began with the third quarter of 1983, when GNP first exceeded its previous peak level.

The growth rate in the first quarter of 1989, the last quarter in which growth exceeded 1 1/2 percent, was affected by a rebound from the 1988 drought; if the impact of the drought is removed from 1988 GNP, growth in the first quarter of 1989 would be reduced from 3 1/2 percent to about 1 1/2 percent. However, the level of GNP in the first quarter was not affected by the drought. (Estimates of the drought's impact were presented in the July 1989 Survey.)
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Title Annotation:second quarter of 1990
Publication:Survey of Current Business
Date:Jul 1, 1990
Previous Article:Annual input-output accounts of the U.S. economy, 1985.
Next Article:The U.S. national income and product accounts: revised estimates, annual 1987-89.

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