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The business situation.

the BUSINESS SITUATION

U.S. production, as measured by real GNP, increased 2 percent in the third quarter of 1990 after increasing 1/2 percent in the second quarter and 1 1/2 percent in the first (chart 1 and table 1). (1)

GNP, which measures production attributable to factors of production supplied by U.S. residents, includes net factor income received from abroad. This item has been quite volatile in recent quarters. Gross domestic product (GDP) is a measure of production that excludes net factor income and, consequently, reflects production attributable to factors of production located in the United States. In recent quarters, changes in real GDP have varied somewhat less than those in real GNP; for example, real GDP increased less than real GNP in the third quarter: Real GNP increased 1 1/2 percent after increasing 1 percent in the second quarter and 2 percent in the first.

Despite the step-up in GNP, the third quarter was the sixth consecutive quarter in which real GNP grew at a rate of 2 percent or less. In terms of the major components, personal consumption expenditures (PCE) increased considerably more in the third quarter than in the second, and fixed investment increased after declining in the second quarter. Movements in these components were partly offset by a downswing in inventory investment (that is, change in business inventories) and by a slowing in government purchases. Net exports declined about the same amount in the third quarter as in the second. (The components of GNP will be discussed in detail in the November "Business Situation.")

Turmoil in the Middle East and the associated jump in crude oil prices in August and September appear to have had little identifiable effect on third-quarter GNP and final sales of GNP. The advance GNP estimate for the third quarter incorporated monthly source data for all 3 months of the quarter for PCE and producers' durable equipment (see box on page 2). Together, these components account for about three-fourths of final sales. These data do not show a weakening during the quarter. (2)

The small increase ($1/2 billion) in national defense purchases by the Federal Government is, perhaps, surprising in light of the buildup of U.S. troops in the Middle East. The explanation appears to the threefold. First, most of the compensation paid to U.S. forces in the Middle East would have been paid even if the troops had not been deployed there. Increases in compensation--such as hazardous duty pay--associated with the deployment were relatively small. Second, purchases of fuel appear to have been held down by use of fuel from government inventories. Third, some expenditures on other operations may have been reduced to provide funds to finance Middle East operations.

Motor vehicles.--Motor vehicle output increased 13 1/2 percent in the third quarter and accounted for about 1/2 percentage point of GNP growth; motor vehicle output had increased 48 1/2 percent in the second quarter. Real final sales of motor vehicles increases 2 percent in the third quarter after declining 6 percent in the second.

In terms of units (at seasonally adjusted annual rates), domestic car production increased 0.6 million to 7.0 million, the highest level in five quarters. Domestic car sales increased 0.4 million, to 7.2 million. Domestic car inventories increased 0.1 million, to 1.4 million at the end of third quarter. The inventories-sales ratio in the third quarter was unchanged at 2.3, which is close to the industry target.

Some of the strength in motor vehicle sales and production in the third quarter reflected special developments and, thus, may be short lived. The third-quarter increase in production appears to have been partly due to less "downtime" to retool for model changeover than is usual for a third quarter; less "downtime" was needed because manufacturers had retooled for a number of 1991 models earlier in the year. Current fourth-quarter plans call for a number of plant closings and lower production.

Anecdotal evidence suggests that the third-quarter increase in car sales included a sharp increase in fleet sales to businesses, reflecting more aggressive fleet-marketing programs that may have shifted some new-car purchases scheduled for the fourth quarter into the third. If source data show this to be true, then business purchases of new cars (included in producers' durable equipment) were stronger in the third quarter than the advance estimates indicate, and consumer purchases (included in PCE) were correspondingly weaker. The advance estimates assume that the shares of consumer purchases and business purchases of new cars were about the same as in the second quarter.

Four developments in the third quarter were consistent with a smaller increase in new-car pruchases by consumers. First, many of the factors usually associated with comsumer spending showed weakness: Real disposable personal income declined, the unemployment rate increased, and consumer confidence (as measured by the Index of Consumer Sentiment prepared by the University of Michigan's Survey Research Center) dropped sharply. Second, many sales-incentive programs offered by manufacturers in the third quarter were only marginally more attractive than those offered in the second. Third, interest rates on new-car loans increased slightly in the third quarter. Fourth, gasoline prices jumped sharply, so the cost of operating a vehicle increased. However, two third-quarter developments that were consistent with a larger increase in new-car purchases by consumers were a decline in new-car prices and announcements by manufacturers of sizable price increases on 1991 models that were to be introduced in late September and early October.

Sales of imported cars fell to 2.5 million in the third quarter--the lowest level in more than 5 years--from 2.7 million in the second.

Domestic truck production was down in the third quarter after increasing in the second. Sales of new trucks totaled 4.8 million in the third quarter, about the same as in the second quarter; sales of light domestic trucks increased slightly, to 4.1 million, and sales of light imported trucks declined slightly, to 0.3 million. Truck inventories declined in the third quarter after increasing in the second.

Prices

Price measures for two BEA aggregates, GNP and gross domestic purchases, show different pictures of inflation in the U.S. economy in the second and third quarters. The GNP price index (fixed weights) increased 4 percent, the same rate as in the second quarter; the price index for gross domestic purchases (fixed weights) increased 5 percent after increasing 3 percent (table 2).

For many applications, the price index for gross domestic purchases is preferable as a measure of U.S. inflation because it measures prices of goods and services purchased; the GNP price index measures the prices of goods and services produced. (For a discussion of conceptual differences between the two price measures, see the February 1987 "Business Situation.") The differences in the increases in the two measures in the second and third quarters were accounted for by import prices, which dropped 7 percent in the second quarter and jumped 14 percent in the third; export prices increased 3-1/2 percent in each quarter. (Export prices are included in GNP prices but not in gross domestic purchases prices; import prices are subtracted out in deriving GNP prices but not in deriving gross domestic purchases prices.) The sharp changes in import prices were largely traceable to petroleum prices, which surged following the Iraqi invasion of Kuwait in early Au ust.

The third-quarter acceleration in gross domestic purchases prices was largely attributable to a sharp upswing in energy prices (chart 2). Energy prices increased 24-1/2 percent after an 8-percent decline in the second quarter. Food prices also picked up, increasing 4 percent after increasing 1 percent. Prices of gross domestic purchases less food and energy--which may be viewed as a measure of underlying inflation in the U.S. economy--increased 4 percent in the second and third quarters, a rate that was somewhat less than the rate in the first quarter and about the same as the average increase in 1989.

Among major components, PCE prices increased 5-1/2 percent in the third quarter after increasing 3 percent in the second. The acceleration was largely attributable to the sharp upswing in energy prices. Prices of gasoline and oil and of fuel oil and coal both increased substantially after declining; in contrast, prices of electricity and gas declined somewhat more than in the second quarter. PCE food prices picked up; prices of dairy products and of fresh vegetables increased after declining in the second quarter, and prices of fresh fruits declined less in the third quarter than in the second. Other PCE prices increased 5 percent, slightly more than in the second quarter; motor vehicle prices changed little after a decline, and housing costs increased nearly twice as much as in the second quarter.

Prices of both fixed investment and government purchases increased more in the third quarter than in the second. The pickup in fixed investment prices, from 1-1/2 percent to 2 percent, was widespread. The pickup in prices paid by government, from 3 percent to 4-1/2 percent, was also widespread; in particular, increases in prices of State and local government purchases of goods and structures accelerated.

Personal income

Real disposable personal income (DPI) declined 1/2 percent in the third quarter after increasing 1/2 percent in the second, and the personal saving rate declined 1.0 percentage point to 4.0 percent (chart 3). The downswing in real DPI reflected the acceleration in PCE prices just discussed. Current-dollar disposable personal income increased more in the third quarter than in the second, as personal tax and nontax payments slowed more than personal income.

Among the (current-dollar) components of personal income, wage and salary disbursements were up $37 billion in the third quarter, $7-1/2 billion less than in the second (table 3). The slowdown in private wages and salaries was in the manufacturing, where employment declined more than in the second quarter, and in the distributive industries, where average weekly hours declined in the third quarter after increasing in the second. Government wages and salaries also increased less than in the second quarter.

Farm proprietors' income declined $8 billion in the third quarter after declining $6-1/2 billion in the second. Federal agricultural subsidy payments to farmers declined 6-1/2 billion in the third quarter after declining $5 billion in the second. The declines in subsidies mainly reflected declines in deficiency payments--payments made because the market price of a crop is, or is projected to be, below the Federal target price--and in disaster relief payments. Farm income excluding subsidies declined $2 billion in the third quarter after declining $1-1/2 billion in the second. The third-quarter decline largely reflected farmer transactions under the Commodity Credit Corporation commodity loan program; the second-quarter decline reflected lower market prices. Nonfarm proprietors' income increased $4-1/2 billion, about the same as in the second quarter.

Rental income increased $3-1/2 billion in the third quarter after declining $1 billion in the second. The increase largely reflected increases in housing output associated with higher rents and in royalty income associated with higher oil prices.

Transfer payments increased more than in the second quarter, and increases in other labor income, personal dividend income, and personal interest income were similar to increases in the second quarter. Personal contributions for social insurance, which are subtracted in deriving the personal income total, registered a larger increase than in the second quarter. Contributions were reduced in the second quarter as a result of the repeal of the major provisions of the Medicare Catastrophic Act of 1988.

Personal tax and nontax payments increased $12-1/2 billion in the third quarter after increasing $21-1/2 billion in the second. The second-quarter increase had included large payments of estate and gift taxes.

Disposable personal income increased 4-1/2 percent in the third quarter, a little more than in the second. Personal outlays (largely PCE) were up substantially more than disposable personal income in the third quarter; thus, personal saving fell $35-1/2 billion. The resulting 1.0-percentage-point drop in the personal saving rate followed three consecutive quarterly increases.

Note.--Daniel Larkins of the Current Business Analysis Division was primarily responsible for preparing this article, with contributions from Douglas R. Fox, Larry R. Moran, Ralph W. Morris, and Mira A. Piplani.

(1) The regularly featured estimate of real GNP is based on 1982 weights. An alternative estimate of real GNP growth based on more current weights can be calculated using the change in the chain p rice index, which is published in table 8.1 of the "Selected NIPA Tables." This alternative measure increased 1-1/2 percent in the third quarter after increasing 1 percent in the second. 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 November SURVEY OF CURRENT BUSINESS.

(2) Source data on inventory change in September, which became available after the advance estimate of GNP was released, likewise suggest no weakening. However, September source data on nonresidential structures, which also became available after the advance estimate of GNP was released, do show some slowing.
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Title Annotation:third quarter of 1990
Publication:Survey of Current Business
Date:Oct 1, 1990
Words:2200
Previous Article:Regional and state projections of income, employment, and population to the year 2000.
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