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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 1.3 percent in the first quarter of 1990, a downward revision from the 2.1percent rate of increase reported in the advance estimates issued a month ago. The increase in real gross domestic purchases-a measure of U.S. demand-was revised down a similar amount, to an annual rate of 0.7 percent from 1.5 percent (see table 1 on page 20). The revisions in the two estimates stemmed from a substantial downward revision in inventory investment (that is, change in business inventories).'

Revisions in price measures were quite small. The first-quarter increase in the GNP price index fixed weights) was revised up 0.2 percentage point to 6.7 percent, and the increase in the gross domestic purchases price index fixed weights) was unrevised at 7.1 percent.

The $8.5 billion downward revision in change in business inventories was almost entirely in nonfarm inventories. Within nonfarm inventories, manufacturing inventories (in most categories of durables) were revised down $11.4 billion.

Within net exports, a $9.2 billion upward revision in exports was more than accounted for by nonagricultural products (largely in capital goods except autos); an $8.5 billion upward revision in imports was more than accounted for by nonpetroleum products (largely in autos, capital goods except autos, and consumer goods).

Impact of the revisions.-The preliminary estimates show somewhat less strength in U.S. production and demand in the first quarter of 1990 than was indicated in the advance estimates; both real GNP and real gross domestic purchases now show increases that are only slightly more than those in the fourth quarter of 1989. The differences between the preliminary and the advance estimates are largely traceable to revisions in manufacturing inventories, which now show only moderate accumulation in the first quarter. Within net exports, exports of nonagricultural products now show a substantial increase 4.n the first quarter, and imports of nonpetroleum products now show only a moderate decline.

Corporate Profits

Profits from current productionprofits before tax with inventory valuation adjustment IVA) and capital consumption adjustment CCAdj)increased $2 billion, to $288 billion, in the first quarter of 1990 after declining $9 1/2 billion in the fourth quarter of 1989 (table 1).

Profits of domestic financial corporations, up $71/2 billion, more than accounted for the increase; profits of domestic nonfinancial corporations edged down $1/2 billion, and profits from the rest of the world declined $5 billion. (In the fourth quarter, profits of domestic nonfinancial corporations had been reduced about $4 billion as a result of uninsured damage caused by October's earthquake in northern California.)

Profits before tax and related measures.-Profits before tax (PBT) increased $8 billion after declining $1 1/2 billion. The difference between the $2 billion increase in profits from current production and the $8 billion increase in PBT reflected declines in the IVA and 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 increased $1 1/2 billion, reflecting a pickup in the rate of increase in prices of inventoried goods, especially food products. The CCAdj, which declined $4 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.

Profits tax liability increased about as much as PBT; as a result, profits after tax (PAT) changed little. A decline in profits from the rest of the world, like that in the first quarter, lowers PBT but does not affect profits tax liability.

For domestic corporations, PBT increased $13 billion and PAT increased $5 billion (table 1.16 of the "Selected NIPA Tables'). PAT consists of net dividend payments (that is, payments less receipts) and undistributed profits. In the first quarter, net dividend payments of domestic corporations increased, in large part because dividends paid by the rest of the world, most of which are received by domestic corporations, declined. UndiStributed profits of domestic corporations-the difference between PAT and net dividend payments-declined.

Cash flow from current production, a profits-related measure of internally generated funds available to corporations for investment, declined $9 billion after declining $1 billion. PBT with 1-VA but without CCAdj.Profits from current production is not available by industry; PBT with IVA is the best available measure of industry profits. Profits of domestic financial corporations increased $8 1/2 billion after declining $5 billion. Profits of commercial banks rebounded from a fourth-quarter drop that reflected an unusually high level of loan writeoffs. Profits of insurance companies improved; in the fourth quarter, profits had been held down by about $3 1/2 billion in benefits related to the California earthquake.

Profits of domestic nonfinancial corporations incereased $3 billion after declining $9V2 billion. Of the four major industry groups, only trade registered a decline in the first quarter reflecting increased costs of inventories that were not fully passed through to prices. Manufacturing registered a substantial gain, partly reflecting increased profits of transportation equipment manufacturers following a fourth-quarter strike at a major aircraft manufacturer.

Profits from the rest of the world declined $5 billion after increasing $9 1/2 billion. This component of profits measures inflows of profits from fore affiliates of U.S. corporations less outflows of profits from U.S. affiliates of foreign corporations. In the first quarter, inflows moved down and outflow increased.

Government Sector The fiscal position of the government sector deteriorated in the first quarter of 1990, as the combined deficit of the Federal Government and of State and local governments increased $13 billion to $134 1/2 billion (table 2). The deficit of the Federal Government increased $15 1/2 billion, and the surplus of State and local governments increased $3 billion. The Federal sector. The Federal Government deficit increased to $172 billion, as expenditures increased more than receipts. Receipts increased $281/2 billion, compared with a $13 billion increase in the fourth quarter. Personal tax and nontax receipts increased $6 billion, one-half of the increase in the fourth quarter; the deceleration was attributable to the annual indexation of the individual income tax withholding table. Corporate profits tax accruals increased $6 1/2 billion, in contrast to a $4V2 billion decline in the fourth quarter. Indirect business tax and nontax accruals increased $1 billion after a slight decline in the fourth quarter. Contributions for social insurance increased 15'/2 billion, compared with a 51/2 billion increase in the fourth quarter. Contributions were boosted by three special factors, all of which were effective January 1, 1990: (1) An increase in the social security tax base to $51,300 from $48,000 $3,72 billion); (2) an increase in the social security tax rate to 15.3 percent from 15.02 percent ($6 billion); and (3) an increase in the contribution for military retirement ($1 billion). compared with a 24 1/2 billion increase in the fourth quarter. Transfer payments to persons increased $19 billion, compared with an $8 1/2 billion increase in the fourth quarter. Cost-ofliving adjustments (COLA's) accounted for $14 1/2 billion of the increase. The largest COLA's were for social security $lO 1/2 billion), civilian and military retirement ($2 1/2 billion), and veterans pensions and disability payments ($V2 billion). Defense purchases increased $8 billion; $3 billion was for a January pay raise for defense employees. Subsidies less the current surplus of government enterprises increased $81/2 billion; the increase was more than accounted for by a $5 billion increase in payments to farmers and a $4 billion increase in the enterprise deficit of the Commodity Credit Corporation (CCC). Grants-in-aid to State and local governments increased $7 billion, largely in grants for medicaid, food and nutrition programs, and social services. Net interest paid increased $5 1/2 billion, Nondefense purchases increased $1/2 billion; a 51/2 billion decrease in net purchases of agricultural commodities by the CCC was offset by a $2 billion increase in National Aeronautics and Space Administration purchases, a 1172 billion pay raise, and other increases. Transfer payments to foreigners declined $4 billion from an unusually high level in the fourth quarter. 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 $1921/2 billion in the fourth quarter to $205 billion in the first (see table 3 on page 21). The cyclically adjusted deficit as a percentage of the 6-percent unemployment rate trend GNP increased from 3.7 percent in the fourth quarter to 3.9 percent in the first. The State and local sector.-The State and local government surplus increased to 3 l/2 billion, as receipts increased more than expenditures.

Receipts increased $19 1/2 billion, compared with a $101/2 billion increase in the fourth quarter. Indirect business tax and nontax accruals increased $7V2 billion; $3 billion was in sales taxes and $2V2 billion was in property taxes. Grants-in-aid increased $7 billion, and personal tax and nontax receipts increased $21/2 billion. Corporate profits tax accruals increased $1 V2 billion, and contributions for social insurance increased $1 billion.

Expenditures increased $16V2 billion, compared with a 20'/2 billion increase in the fourth quarter. All categories of expenditures contributed to the deceleration. Purchases of goods and services increased 15V2 billion, compared with a $17 billion increase

the deceleration was attributable to purchases of structures. All other categories of expenditures combined increased $1 billion, compared with a 3 1/2 billion increase in the fourth quarter.
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Title Annotation:first quarter of 1990
Publication:Survey of Current Business
Date:May 1, 1990
Words:1615
Previous Article:County and metropolitan area personal income, 1986-88.
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