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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 1.2 percent in the second quarter of 1990, the same rate of increase as was reported in the advance estimates issued a month ago.(1) A substantial downward revision in inventory investment (that is, change in business inventories) was offset by upward revisions in most of the components of final sales (see table 1).

In contrast to the increase in real GNP, the increase in real gross domestic purchases--a measure of U.S. demand--was revised down to 1.6 percent from 2.3 percent. The difference in the revisions in the two estimates was traceable to an upward revision in net exports, which is included in GNP but not in gross domestic purchases.

Revisions in price measures were quite small. The second-quarter increase in the GNP price index (fixed weights) was unrevised at 3.9 percent, and the increase in the gross domestic purchases price index (fixed weights) was revised down 0.1 percentage point to 3.0 percent.

Components of real GNP.--Inventory investment was revised down $14 1/2 billion; most of the revision was in nonfarm inventories. Within nonfarm inventories, wholesale inventories (in both durables and nondurables) were revised down $8 billion, and manufacturing inventories (largely in transportation equipment and nonelectrical machinery) were revised down $7 1/2 billion.

Net exports was revised up $6 1/2 billion; the revision was almost entirely accounted for by a downward revision in imports of merchandise. Imports of both nonpetroleum products (in most end-use categories) and petroleum products were revised down.

Among the other components of final sales, personal consumption expenditures was revised up $4 billion; the revision was more than accounted for by an upward revision in nondurable goods (mostly in food). Fixed investment was revised up $2 1/2 billion; the revision was about evenly split between nonresidential (in transportation equipment) and residential (mainly in residential improvements).

Impact of the revisions.--The broad picture of the economy sketched in last month's "Business Situation" was not greatly altered by the revisions. Real GNP and real gross domestic purchases both grew sluggishly in the second quarter, as they have for the past several quarters.

The preliminary estimates for the second quarter do show a somewhat better balance between inventories and final sales than was indicated in the advance estimates. The accumulation of $22 1/2 billion in nonfarm inventories is only about two-thirds as much as was previously indicated. Net exports now shows a smaller decline, and personal consumption expenditures now shows a small increase instead of a small decline. The ratio of constant-dollar nonfarm business inventories to final sales edged up to 2.82 in the second quarter from 2.81 in the first; the advance estimates showed a move up to 2.84.

Corporate Profits

Profits from current production--profits before tax with inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj)--increased $9 1/2 billion, to $306 1/2 billion, in the second quarter of 1990 after increasing $6 billion in the first (table 1).

Profits of domestic nonfinancial corporations, up $9 billion, accounted for most of the second-quarter increase. These corporations registered increases in both real gross product and profits per unit. The increase in unit profits reflected a larger increase in unit prices than in unit costs.

Cash flow from current production, a profits-related measure of internally generated funds available to corporations for investment, increased $9 billion after declining $3 billion.

PBT with IVA but without CCAdj.--Profits from current production is not available by industry; PBT with IVA is the best available measure of industry profits.

This measure of the profits of domestic nonfinancial corporations increased $13 billion after increasing $5 billion. On the basis of preliminary and incomplete source data, it appears that nondurable manufacturing (especially food, chemicals, and petroleum) accounted for about one-half of the second-quarter increase.

Profits of domestic financial corporations increased $1 1/2 billion after increasing $9 billion.

Profits from the rest of the world declined $1 billion after declining $4 billion. This component of profits measures inflows of profits from foreign affiliates of U.S. corporations less outflows of profits from U.S. affiliates of foreign corporations. Outflows appear to have increased in the second quarter.

Profits before tax and related measures.--Profits before tax (PBT) increased $1/2 billion and profits tax liability increased $1 billion; as a result, profits after tax declined $1/2 billion.

The difference between the $9 1/2 billion increase in profits from current production and the $1/2 billion increase in PBT reflected an increase in the IVA that was only partly offset by a decline in the CCAdj. (Both adjustments are added to PBT to obtain the current-production measure.)

The IVA is an estimate of inventory profits with sign reversed. Inventory profits declined $12 1/2 billion, reflecting second-quarter declines in the prices of inventoried goods, especially food and petroleum, after first-quarter increases. The CCAdj, which declined $3 1/2 billion, is the difference between the predominantly tax-based depreciation measure that underlies PBT, on the one hand, and BEA's approximation of economic depreciation, on the other.

Government Sector

The fiscal position of the government sector improved in the second quarter of 1990, as the combined deficit of the Federal Government and of State and local governments declined $6 billion (table 2). The deficit of the Federal Government declined $6 1/2 billion, and the surplus of State and local governments declined $1/2 billion.

The Federal sector.--The Federal Government deficit declined to $162 billion, as receipts increased more than expenditures.

Receipts increased $21 billion in the second quarter, compared with $25 billion in the first. Personal tax and nontax receipts increased $16 1/2 billion, compared with $4 billion. The second-quarter increase was boosted by large payments of estate and gift taxes; they increased $6 billion, compared with $1/2 billion in the first. The first-quarter increase was held down by the indexation of the income tax brackets and of the personal exemption under a provision of the Tax Reform Act of 1986. Corporate profits tax accruals increased $1 billion, and indirect business tax and nontax accruals were unchanged. Contributions for social insurance increased $4 billion, compared with $14 billion in the first quarter, when social security contributions were boosted by a tax rate and base increase.

Expenditures increased $14 1/2 billion in the second quarter, compared with $43 billion in the first, when a number of factors--such as a pay raise for Federal civilian and military employees and cost-of-living adjustments to social security and other transfer payments--combined for the unusually large increase. Nondefense purchases of goods and services increased $9 billion, compared with $2 1/2 billion. The acceleration was more than accounted for by a swing to net purchases of agricultural commodities by the Commodity Credit Corporation and by a step-up in purchases for the 1990 Census of Population and Housing. National defense purchases of goods and services increased $2 1/2 billion, compared with $8 billion. Transfer payments to persons increased $1 billion, compared with $20 billion in the first quarter, when a number of cost-of-living adjustments were effective. Grants-in-aid to State and local governments increased $3 billion, compared with $7 billion. In the first quarter, increases were widespread, paced by a $4 billion increase in public assistance grants; in the second quarter, public assistance grants continued to increase, but most other grants declined. Net interest paid increased $4 billion, compared with $3 billion. Subsidies less the current surplus declined $4 1/2 billion after increasing $7 billion; the shift was accounted for by agricultural subsidies.

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 account basis declined from $190 1/2 billion in the first quarter to $180 billion in the second (see table 3). The cyclically adjusted deficit as a percentage of the 6-percent unemployment rate trend GNP declined from 3.6 percent in the first quarter to 3.3 percent in the second.

The State and local sector.--The State and local government surplus declined to $37 1/2 billion, as expenditures increased more than receipts.

Receipts increased $8 billion in the second quarter, compared with $19 billion in the first; the deceleration was accounted for by indirect business tax and nontax accruals and Federal grants-in-aid. Personal tax and nontax receipts increased $3 billion, and indirect business tax and nontax accruals increased $1 1/2 billion. Contributions for social insurance increased $1 billion, and corporate profits tax accruals were unchanged.

Expenditures increased $8 1/2 billion in the second quarter, compared with $19 1/2 billion in the first. The deceleration was in purchases of goods and services. Purchases of structures declined $2 1/2 billion, in contrast to a $5 billion increase. In addition, all other types of purchases (excluding compensation) increased $1 billion, compared with $4 billion. All other categories of expenditures combined increased $3 billion, the same as in the first quarter. [Tabular Data 1 to 3 Omitted]

(1)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 annualized. (Dollar figures shown in the text are rounded to the nearest $1/2 billion.) Real, or constant-dollar, estimates are expressed in 1982 dollars and are based on 1982 weights. (Alternative measures based on more current weights are shown in tables 4 and 5 on pages 21-23.)
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Title Annotation:second quarter of 1990
Publication:Survey of Current Business
Date:Aug 1, 1990
Words:1603
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