U.S. Dept. of Commerce , BEA , Business Situation

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From the September 1999 SURVEY OF CURRENT BUSINESS
http://www.bea.doc.gov/bea/an/bussit/maintext.htm

Business Situation

This article was prepared by Larry R. Moran, Daniel Larkins, Ralph W. Morris, and Kurt S. Bersani.

Real gross domestic product (GDP) increased 1.8 percent in the second quarter of 1999, according to the "preliminary" estimates of the national income and product accounts (NIPA's), after increasing 4.3 percent in the first quarter (table 1 and chart 1); the "advance" second-quarter estimate of real GDP, reported in the August "Business Situation," had shown a 2.3-percent increase./1/ The downward revision to real GDP primarily reflected an upward revision to imports, which are subtracted in the calculation of GDP, and a downward revision to nonfarm inventory investment; these revisions were partly offset by an upward revision to consumer spending for durable goods. Real final sales of domestic product was revised down less than GDP, and real gross domestic purchases was revised up. (The sources of the revisions are discussed in the section "Revisions.")

The 1.8-percent increase in the second quarter was the smallest in four quarters and was below the 3.1-percent average annual growth rate for real GDP over the current expansion, which began in the second quarter of 1991.

The picture of the economy in the second quarter presented by the preliminary estimates is little changed from that presented by the advance estimates. Like the advance estimates, the preliminary estimates showed the following:

The price index for gross domestic purchases increased 2.1 percent in the second quarter after increasing 1.2 percent in the first (table 3). The second-quarter increase was the largest since the first quarter of 1997. The second-quarter step-up was largely accounted for by sharp upturns in prices for energy goods and services purchased by consumers, business, and government.

GDP prices increased 1.5 percent in the second quarter after increasing 1.6 percent in the first. The contrast between the small difference in the first- and second-quarter increases in GDP prices and the acceleration in gross domestic purchases prices was primarily due to the sharp upturn in the prices for petroleum imports, which are not included in GDP prices.

Real disposable personal income (DPI) increased 2.4 percent in the second quarter after increasing 3.5 percent in the first. The personal saving rate—personal saving as a percentage of current-dollar DPI—continued its downtrend, decreasing to -1.3 percent from -0.7 percent in the first quarter. (For additional information, see "Note on the Personal Saving Rate" on page 8 of the February 1999 SURVEY OF CURRENT BUSINESS.)

Personal consumption expenditures

Real personal consumption expenditures (PCE) increased 4.6 percent in the second quarter after increasing 6.7 percent in the first (table 4). Although PCE slowed, the second-quarter increase was well above the 3.4-percent average annual growth rate for PCE over the current expansion. In the second quarter, expenditures for nondurable goods increased much less than in the first, and expenditures for durable goods slowed less markedly. Expenditures for services increased about as much as in the first quarter.

As mentioned earlier, growth in real DPI slowed in the second quarter. Other factors frequently considered in analyses of PCE remained strong (chart 2). The unemployment rate remained at 4.3 percent, its lowest quarterly rate since 1970. The Index of Consumer Sentiment (prepared by the University of Michigan's Survey Research Center as a measure of consumer attitudes and expectations) increased to 106.2 from 105.9; thus, the index remained close to its record level of 107.8 set in the first quarter of 1998.

Expenditures for nondurable goods increased 2.9 percent after increasing 9.5 percent. The deceleration mainly reflected a sharp slowdown in clothing and shoes, but "other" nondurable goods also contributed./4/

Expenditures for durable goods increased 9.5 percent after increasing 12.9 percent. Furniture and household equipment increased about half as much as in the first quarter; within the category, slowdowns were widespread. "Other" durable goods also slowed./5/ In contrast, motor vehicles and parts increased after a small decrease.

Expenditures for services increased 4.3 percent after increasing 4.1 percent. Expenditures on medical care, "other" services, and household operation increased somewhat more than in the first quarter, and expenditures on housing and transportation increased somewhat less./6/

Nonresidential fixed investment

Real private nonresidential fixed investment jumped 11.2 percent in the second quarter after increasing 8.5 percent in the first (table 5). The acceleration reflected an acceleration in spending on equipment; spending on structures turned down.

Over the past four quarters, nonresidential fixed investment has increased at an average annual rate of 8.2 percent. The strength in recent quarters partly reflected strength in some of the factors that affect investment spending (chart 3). Over the past four quarters, real final sales of domestic product increased 4.2 percent, and domestic corporate profits increased 5.1 percent. In contrast, the capacity utilization rate declined to 80.4 percent from 82.3 percent, and long-term interest rates increased; for example, the yield on high-grade corporate bonds increased to 6.88 percent from 6.55 percent.

Producers' durable equipment (PDE) jumped 15.9 percent after increasing 9.5 percent. The acceleration was accounted for by an upturn in transportation and related equipment, by an acceleration in information processing and related equipment, and by an upturn in industrial equipment. The upturn in transportation and related equipment reflected upturns in aircraft and in autos; trucks, buses, and trailers slowed. The acceleration in information processing and related equipment reflected step-ups in communications equipment and in computers and peripheral equipment. "Other" PDE turned down./7/

Structures decreased 1.2 percent after increasing 5.7 percent. The downturn was more than accounted for by nonresidential buildings. Mining exploration, shafts, and wells and "other" structures turned up, and utilities increased about the same as in the first quarter./8/

Residential investment

Real private residential investment increased 7.7 percent in the second quarter after increasing 15.4 percent in the first (table 5). The slowdown was accounted for by single-family structures, which increased much less than in the first quarter, and by multifamily structures, which changed little after increasing.

"Other" residential investment increased 16.8 percent after increasing 7.5 percent; the acceleration was more than accounted for by an upturn in brokers' commissions on home sales./9/ The upturn in brokers' commissions partly reflected an increase in sales of new and existing homes of 408,000 units (seasonally adjusted annual rate) in the second quarter after a decrease of 100,000 units in the first; the upturn was largely accounted for by existing home sales. In the second-quarter, home sales increased despite an increase in the commitment rate on 30-year, fixed-rate mortgages from 6.9 percent to 7.2 percent (chart 4).

Inventory investment

Real inventory investment—that is, the change in business inventories—decreased $26.6 billion in the second quarter, as inventory accumulation slowed to $12.1 billion from $38.7 billion; inventory investment had decreased $5.5 billion in the first quarter (table 6). The second-quarter slowdown in inventory accumulation mainly reflected a swing in retail trade inventories from substantial accumulation to modest liquidation.

Retail trade inventories decreased $4.1 billion after increasing $16.1 billion. Inventories of durable goods industries decreased $6.4 billion after increasing $6.3 billion; inventories of motor vehicle dealers accounted for most of the downturn. Inventories of nondurable goods industries increased $2.5 billion after increasing $9.9 billion; most categories of stores contributed to the slowdown.

Wholesale trade inventories increased $9.6 billion, about the same as in the first quarter. Inventories of durable goods industries increased a little more than in the first quarter, and inventories of nondurable goods industries increased a little less.

Manufacturing inventories decreased $4.3 billion after decreasing $3.3 billion. Inventories of durable goods industries decreased more than in the first quarter; the larger second-quarter decrease mainly resulted from downturns in inventories of industrial machinery and of instrument manufacturers. In the nondurable goods industries, inventories increased after decreasing; the upturn reflected an upturn in inventories of chemical manufacturers and slower liquidation of inventories of apparel and tobacco manufacturers. In contrast, liquidation of petroleum inventories increased.

"Other" nonfarm inventories increased less than in the first quarter./10/

Farm inventories increased $2.9 billion after increasing $3.6 billion. Crop inventories more than accounted for both increases.

In the second quarter, the ratio of real nonfarm inventories to real final sales of domestic businesses decreased to 2.22, its lowest level in more than 6 years, from 2.23 in the first quarter. The inventory-sales ratio that includes only final sales of goods and structures decreased to 3.91, its lowest level in more than 25 years, from 3.93./11/

Exports and imports

Real exports of goods and services increased in the second quarter after decreasing in the first, and real imports of goods and services increased slightly more in the second quarter than in the first (table 7).

Exports of goods and services increased 4.3 percent after decreasing 5.1 percent. The upturn was accounted for by an upturn in goods. Services increased less than in the first quarter.

Exports of goods increased 4.8 percent after decreasing 8.7 percent. The upturn was primarily accounted for by upturns in industrial supplies and materials, in automotive, engines, and parts, and in foods, feeds, and beverages and by a sharp acceleration in computers, peripherals, and parts.

Exports of services increased 3.1 percent after increasing 4.3 percent. The slowdown was accounted for by a slowdown in "other private services" and by downturns in transfers under U.S. military agency sales contracts and in "other transportation."

Imports of goods and services jumped 14.4 percent after increasing 13.5 percent. Goods increased more than in the first quarter, but services increased much less.

Imports of goods jumped 16.9 percent after increasing 13.8 percent. An acceleration in computers, peripherals, and parts accounted for most of the step-up, but several other components also contributed. In contrast, automotive vehicles, engines, and parts and other consumer goods except automotive increased less than in the first quarter.

Imports of services increased only 1.9 percent after jumping 11.8 percent. The slowdown was accounted for by a downturn in passenger fares, by slowdowns in travel and in royalties and license fees, and by a larger second-quarter decrease in "other transportation."

Government spending

Real government consumption expenditures and gross investment decreased 1.7 percent in the second quarter after increasing 4.2 percent in the first (table 8). Federal Government spending decreased more in the second quarter than in the first, and State and local government spending turned down.

Federal nondefense spending decreased 3.5 percent after increasing 7.4 percent. Investment spending turned down, reflecting spending for equipment, which decreased sharply after increasing substantially. In contrast, consumption spending increased slightly more than in the first quarter.

Federal defense spending decreased 3.4 percent after decreasing 6.6 percent. Consumption expenditures decreased less than in the first quarter, reflecting an upturn in spending for goods. Investment spending increased more than in the first quarter; the acceleration was accounted for by equipment.

State and local government spending decreased 0.7 percent after increasing 7.7 percent. Investment decreased after increasing; the downturn was attributable to structures. Consumption expenditures increased less than in the first quarter.

Revisions

As noted earlier, the preliminary estimate of a 1.8-percent increase in real GDP in the second quarter is 0.5 percentage point lower than the advance estimate (table 9); for 1978–98, the average revision, without regard to sign, from the advance estimate to the preliminary estimate was 0.5 percentage point.

The downward revision to real GDP primarily reflected an upward revision to imports, which are subtracted in the calculation of GDP, and a downward revision to nonfarm inventory investment; these revisions were partly offset by an upward revision to consumer spending for durable goods.

The upward revision to imports mainly reflected the incorporation of newly available Census Bureau data on international trade in goods for June. For the advance estimate, BEA had assumed an increase in goods imports in June of slightly less than 1.0 percent (monthly rate), but newly available data indicate an unusually large increase of 4.4 percent.

The downward revision to nonfarm inventory investment primarily reflected the incorporation of revised data for May and newly available data for June on change in manufacturing and trade inventories from the Census Bureau.

The upward revision to PCE for durables goods was to motor vehicles and to "other" durable goods. The upward revision to motor vehicles reflected the incorporation of newly available auto and truck registration data for June, which are used to allocate purchases among consumers, businesses, and government; the upward revision to the consumers' share of motor vehicle purchases was offset by a downward revision to businesses' share, which resulted in a downward revision to business investment in motor vehicles. The upward revision to "other" durable goods reflected the incorporation of revised retail sales data from the Census Bureau.

The preliminary estimate of the increase in the price index for gross domestic purchases (2.1 percent) was the same as the advance estimate, and the preliminary estimate of the increase in the price index for GDP (1.5 percent) was 0.1 percentage point lower than the advance estimate.

The preliminary estimate of the increase in real DPI was 2.4 percent, and that of the increase in current-dollar DPI was 4.9 percent, both of which were the same as the advance estimates. The preliminary estimate of the personal saving rate was -1.3 percent, 0.2 percentage point lower than the advance estimate.

Corporate Profits

In the second quarter, profits from current production decreased $9.2 billion (or 1.1 percent at a quarterly rate) after increasing $47.1 billion (5.7 percent) in the first quarter (table 10)./12/ Profits of domestic nonfinancial corporations decreased $3.8 billion (0.6 percent) after increasing $29.0 billion (4.9 percent); in the second quarter, unit profits decreased, reflecting a smaller increase in unit prices than in unit costs. Profits of domestic financial corporations decreased $3.0 billion (2.1 percent) after increasing $13.4 billion (10.3 percent). Profits from the rest of the world decreased $2.2 billion (2.2 percent) after increasing $4.6 billion (4.7 percent); the downturn was more than accounted for by receipts of earnings from foreign affiliates./13/

Cash flow from current production, a profits-related measure of internally generated funds available for investment, decreased $13.3 billion after increasing $34.7 billion./14/ The ratio of cash flow to nonresidential fixed investment, an indicator of the share of the current level of investment that could be financed by internally generated funds, decreased to 83.8 percent, its lowest level since 1990, from 87.1 percent; its average level for 1990–98 was 89.9 percent.

Domestic industry profits and related measures.—Domestic industry profits decreased $10.9 billion after increasing $38.1 billion./15/ Profits of domestic nonfinancial corporations decreased $7.7 billion after increasing $24.9 billion. The downturn in domestic nonfinancial profits was widespread; manufacturing, the transportation and utilities group, retail trade, and wholesale trade all contributed. In the first quarter, the increase had partly represented a rebound from a fourth quarter in which profits were depressed by payments of tobacco companies to States under the terms of various settlement agreements. Profits of domestic financial corporations decreased $3.2 billion after increasing $13.2 billion.

Profits before tax (PBT) increased $15.6 billion after increasing $44.5 billion. The difference between the $15.6 billion increase in PBT and the $9.2 billion decrease in profits from current production mainly reflected a sharp decrease in the inventory valuation adjustment (IVA), which removes inventory profits and losses from business income./16/ In the second quarter, inventory profits amounted to $17.1 billion; in the first quarter, inventory losses had been $11.6 billion. A sharp upswing in energy prices was mainly responsible for the swing from inventory losses to profits; the companies that were most affected were in petroleum extraction and refining, in "other" retail, and in transportation.

Government Sector

The combined current surplus of the Federal Government and of State and local governments—the NIPA measure of net saving by government—increased $18.5 billion, to $310.9 billion, in the second quarter after increasing $56.1 billion in the first (table 11)./17/ The deceleration was accounted for by a slowdown in the Federal Government current surplus; the State and local government current surplus changed little in both quarters./18/

Federal

The Federal Government current surplus increased $18.1 billion, to $140.8 billion, in the second quarter after increasing $56.9 billion in the first. The deceleration resulted from an upturn in current expenditures and a slowdown in receipts.

Receipts.—Federal receipts increased $32.2 billion in the second quarter after increasing $44.3 billion in the first. The deceleration was more than accounted for by slowdowns in contributions for social insurance and in corporate profits tax accruals.

Contributions for social insurance increased $8.1 billion after increasing $16.5 billion. The deceleration was mostly attributable to contributions for social security (old-age, survivors, disability, and health insurance), which increased $8.0 billion after increasing $15.0 billion. In the first quarter, contributions had been boosted by an increase in the social security taxable wage base. In addition, wage and salary disbursements decelerated slightly in the second quarter.

Corporate profits tax accruals increased $5.7 billion after increasing $12.8 billion, reflecting a deceleration in domestic corporate profits before tax. The first-quarter increase followed fourth-quarter settlement payments to the States by tobacco companies that had dampened corporate profits and thus corporate profits tax accruals.

Personal tax and nontax receipts increased $18.0 billion after increasing $15.4 billion. The acceleration was mostly accounted for by estate and gift taxes, which increased $2.7 billion after increasing $0.3 billion.

Current expenditures.—Current expenditures increased $14.1 billion in the second quarter after decreasing $12.6 billion in the first./19/ The upturn reflected turnarounds in subsidies less the current surplus of government enterprises and in net interest paid, and it reflected accelerations in transfer payments (net) and in grants-in-aid to State and local governments.

Subsidies less the current surplus of government enterprises increased $6.9 billion after decreasing $10.9 billion. The upturn was largely accounted for by subsidies, which increased $7.9 billion after decreasing $8.0 billion. Within subsidies, agricultural subsidies increased $7.8 billion after decreasing $8.0 billion (annual rate). The changes in agricultural subsidies largely reflected the timing of special payments to farmers under the Omnibus Consolidated and Emergency Supplemental Appropriations Act for Fiscal Year 1999; these payments amounted to $11.8 billion in the fourth quarter and $6.5 billion in the second.

Net interest paid increased $0.6 billion after decreasing $7.1 billion. The turnaround was mostly attributable to interest paid to persons and business, which decreased $0.3 billion after a decrease of $7.6 billion.

Transfer payments (net) increased $4.3 billion after increasing $0.6 billion. The acceleration was more than accounted for by an upturn in transfer payments to the rest of the world, which increased $1.5 billion after decreasing $12.7 billion. The first-quarter decrease had followed a large fourth-quarter increase that included a payment to Israel of $3.0 billion—$12.0 billion at an annual rate—in economic support and other payments. Transfer payments to persons increased $2.8 billion after increasing $13.3 billion. In the first quarter, payments of social security benefits (old-age, survivors, and disability insurance), Federal employee pension benefits, veterans pension benefits, and supplemental security income benefits were boosted by a 1.3-percent cost-of-living adjustment that went into effect in January. In addition, first-quarter transfer payments were boosted by a $3.4 billion increase in earned income tax credits.

Grants-in-aid to State and local governments increased $4.4 billion after an increase of $3.7 billion. Grants for highways, for medical research, for mass transit, for food and nutrition, and for other programs turned up; grants for education and for cash assistance turned down.

Consumption expenditures decreased $2.2 billion after increasing $1.2 billion. The downturn was mostly accounted for by nondefense consumption expenditures, which increased $1.6 billion after increasing $4.0 billion. The deceleration was more than accounted for by services, which increased $0.4 billion after increasing $3.8 billion; within services, compensation of employees decreased $0.7 billion after increasing $3.5 billion in the first quarter, when employee compensation was boosted by a pay raise in January. Nondurable goods increased $1.2 billion after increasing $0.2 billion; the acceleration was mostly accounted for by the Commodity Credit Corporation inventory change, which increased $1.1 billion after increasing $0.2 billion.

Defense consumption expenditures decreased $3.7 billion after decreasing $3.0 billion. Services decreased $5.7 billion after decreasing $1.9 billion. Within services, compensation of employees decreased $0.6 billion after increasing $3.0 billion in the first quarter, when employee compensation was boosted by military and civilian pay raises in January. Nondurable goods increased $1.1 billion after decreasing $0.4 billion, and durable goods increased $0.9 billion after decreasing $0.6 billion. Within nondurable goods, expenditures for petroleum and for ammunition turned up; the upturn was partly attributable to spending for the U.S. military action in Kosovo. Within durable goods, expenditures for aircraft parts increased $0.9 billion after decreasing $0.6 billion.

State and local

The State and local government current surplus increased $0.5 billion, to $170.2 billion, in the second quarter after decreasing $0.8 billion in the first. Receipts and current expenditures both increased more in the second quarter than in the first.

Receipts.—State and local government receipts increased $15.0 billion after increasing $9.8 billion. The acceleration was more than accounted for by an upturn in indirect business tax and nontax accruals.

Indirect business tax and nontax accruals increased $8.2 billion after decreasing $1.2 billion. The upturn was more than accounted for by nontax accruals, which increased $1.6 billion after decreasing $11.2 billion; the first-quarter decrease followed a large increase of $12.7 billion in the fourth quarter that was attributable to tobacco settlement payments of $13.5 billion.

Federal grants-in-aid increased $4.4 billion after increasing $3.7 billion. Corporate profits tax accruals increased $1.0 billion after increasing $2.4 billion, reflecting the deceleration in domestic corporate profits before tax.

Personal tax and nontax receipts increased $0.6 billion after increasing $3.9 billion. The deceleration was mostl

-- Stan Faryna (info@giglobal.com), September 23, 1999

Answers

Personal tax and nontax receipts increased $0.6 billion after increasing $3.9 billion. The deceleration was mostly attributable to income taxes, which decreased $0.5 billion after increasing $2.8 billion. The downturn was attributable to an acceleration in "special" State tax refunds, which increased $3.1 billion after increasing $0.8 billion; these special refunds were enacted by State legislatures to return unneeded revenue to taxpayers.

Current expenditures.Current expenditures increased $14.6 billion after increasing $10.6 billion. The acceleration was more than accounted for by consumption expenditures.

Consumption expenditures increased $13.4 billion after increasing $9.0 billion. The acceleration was mainly attributable to an acceleration in nondurable goods. Expenditures for petroleum increased $3.4 billion after decreasing $0.2 billion.

-end-

-- Stan Faryna (info@giglobal.com), September 23, 1999.

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