Business situation: final estimates for the first quarter of 2004.

Larkins, Daniel

ACCORDING to the "final" estimates of the national income and product accounts (NIPAs), real GDP increased 3.9 percent in the first quarter of 2004 (table 1 and chart 1). (1) The "preliminary" estimates released in May showed a 4.4-percent increase for the quarter. The downward revision to GDP mainly reflected revisions to imports and to consumer spending for services that were partly offset by a revision to exports (table 2). (2)

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* The first-quarter real GDP increase of 3.9 percent was similar to the 4.1-percent increase in the fourth quarter of 2003. (The average annual rate of growth of real GDP over the past 10 years was 3.3 percent.)

* Prices of goods and services purchased by U.S. residents increased 3.5 percent, 0.2 percentage point more than in the preliminary estimate. In the fourth quarter of 2003, prices had increased 1.3 percent. The step-up from the fourth quarter to the first partly reflected an upturn in energy prices.

* Real disposable personal income (DPI) increased 4.9 percent, unrevised from the preliminary estimate. In the fourth quarter, DPI had increased 1.2 percent.

Most major components of GDP contributed to the 3.9-percent first-quarter increase; the contributions of these components were partly offset by imports, which are subtracted in the calculation of GDP.

* Consumer spending increased 3.8 percent in the first quarter and contributed 2.64 percentage points to GDP growth, a little more than it had contributed to fourth-quarter growth. Purchases of services and of nondurable goods stepped up, but purchases of durable goods turned down.

* Exports increased 7.5 percent after increasing 20.5 percent and contributed 0.72 percentage point to GDP growth. Most of the slowdown was accounted for by exports of nonautomotive capital goods and of services.

* Investment in private inventories increased about as much in the first quarter as in the fourth and contributed 0.65 percentage point to GDP growth.

* Nonresidential fixed investment increased 5.3 percent, about half as much as in the fourth quarter, and it contributed 0.54 percentage point to GDP growth. Investment in equipment and software slowed, and investment in structures decreased more than in the fourth quarter.

* Government spending increased 3.0 percent after little change in the fourth quarter, and it also contributed 0.54 percentage point to GDP growth. The increase was more than accounted for by national defense spending; Federal nondefense spending and spending by state and local governments each decreased slightly.

* Residential investment increased 4.6 percent after increasing 7.9 percent and contributed 0.24 percentage point to GDP growth. The slowdown was more than accounted for by single-family construction.

* Imports increased 10.4 percent after increasing 16.4 percent and subtracted 1.43 percentage points from GDP growth. The biggest contributions to the slowdown were made by autos, by nonautomotive consumer goods, and by nonautomotive capital goods; petroleum imports turned up.

The final estimates for the first quarter also show the following:

* Real final sales of domestic product (GDP less the change in private inventories) increased 3.2 percent after increasing 3.4 percent.

* Real gross domestic purchases increased 4.4 percent after increasing 4.3 percent.

* Real gross national product (GNP) increased 3.4 percent after increasing

5.5 percent. (3) The smaller first-quarter increase in GNP than in GDP reflected a slight decrease in income receipts from the rest of the world and a moderate increase in income payments to the rest of the world.

* Motor vehicle output turned down. Excluding motor vehicles, real GDP increased 4.4 percent after increasing 4.2 percent.

Corporate Profits

Profits from current production increased $20.9 billion (1.7 percent at a quarterly rate) in the first quarter of 2004 after increasing $81.4 billion (7.2 percent) in the fourth quarter of 2003 (table 3). (4) The slowdown was mostly accounted for by a downturn in profits from the rest of the world; profits of domestic industries increased almost as much as in the fourth quarter. (5)

The revised first-quarter estimate of profits from current production is $6.5 billion higher than the preliminary estimate released a month ago. Profits from the rest of the world were revised up $11.5 billion, and the upward revision more than offset a $5.1 billion downward revision to profits of domestic industries. The upward revision to profits from the rest of the world was more than accounted for by receipts from foreign affiliates. The downward revision to profits of domestic industries was more than accounted for by financial corporations.

Taxes on corporate income increased slightly in the first quarter. After-tax profits from current production increased $20.4 billion (2.1 percent).

The first-quarter decrease in rest-of-the-world profits reflected a larger increase in payments by domestic affiliates to foreign parents than in receipts from foreign affiliates of domestic parents.

Profits of domestic financial corporations increased $19.6 billion (6.4 percent).

Profits of domestic nonfinancial corporations increased $11.7 billion (1.7 percent), reflecting an increase in real output. (6) Unit profits were unchanged in the first quarter, as an increase in unit prices was matched by an increase in unit costs.

Net cash flow from current production, a profits-related measure of internally generated funds available for investment, increased $20.1 billion. (7) The ratio of cash flow to nonresidential fixed investment, an indicator of the extent to which the current level of investment could be financed by internally generated funds, held at the record level of 110.2 that was set in the preceding quarter; the ratio has been above 100 for four consecutive quarters.

Industry profits. The current-production measure of profits is not available at the detailed industry level, because estimates of the capital consumption adjustment (CCAdj) are not available at this level. (CCAdj is only available for total financial industries and for total nonfinancial industries). Consequently, industry profits are best measured by profits with inventory valuation adjustment (IVA).

In the first quarter, domestic industry profits with IVA decreased $32.6 billion.

For domestic nonfinancial industries, profits with IVA decreased $43.3 billion. About half of the decrease was accounted for by manufacturing; manufacturers of "other durable" goods and of "other nondurable" goods posted the biggest decreases. Wholesale trade and the information industry also posted notable decreases (chart 2).

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For domestic financial industries, profits with IVA increased $10.7 billion. Almost half of the increase was accounted for by corporations (including bank holding companies) that manage companies and enterprises. Increases were also posted by corporations that handle security and commodity investments and insurance.

Table 1. Real Gross Domestic Product and Components

[Seasonally adjusted at annual rates]

 Change from
 preceding period
 (percent)

 2003 2004

 II III IV I

 Gross domestic product (GDP) 3.1 8.2 4.1 3.9
Personal consumption expenditures 3.3 6.9 3.2 3.8
 Durable goods 17.7 28.0 0.7 -3.7
 Nondurable goods 1.2 7.3 5.4 6.9
 Services 1.7 2.8 2.8 3.9
Gross private domestic investment 4.7 14.8 14.9 9.4
 Fixed investment 6.1 15.8 9.9 5.0
 Nonresidential 7.0 12.8 10.9 5.3
 Structures 3.9 -1.8 -1.4 -7.4
 Equipment and software 8.0 17.6 14.9 9.2
 Residential 4.5 21.9 7.9 4.6
 Change in private inventories
Net exports of goods and services
 Exports -1.1 9.9 20.5 7.5
 Goods -1.7 8.6 21.3 9.4
 Services 0.2 12.7 18.9 3.3
 Imports 9.1 0.8 16.4 10.4
 Goods 13.7 -1.5 18.3 12.2
 Services -10.9 13.4 7.5 1.9
Government consumption expenditures
 and gross investment 7.4 1.8 -0.1 3.0
 Federal 23.5 1.2 0.7 8.5
 National defense 41.9 -1.3 3.0 13.2
 Nondefense -5.0 6.5 -3.7 -0.3
 State and local -0.8 2.1 -0.5 -0.3

 Contribution to percent
 change in real GDP
 (percentage points)

 2003 2004

 II III IV I

 Gross domestic product (GDP) 3.1 8.2 4.1 3.9
Personal consumption expenditures 2.34 4.89 2.29 2.64
 Durable goods 1.38 2.23 0.06 -0.32
 Nondurable goods 0.25 1.48 1.07 1.36
 Services 0.71 1.19 1.16 1.61
Gross private domestic investment 0.73 2.17 2.19 1.43
 Fixed investment 0.90 2.30 1.48 0.78
 Nonresidential 0.68 1.25 1.08 0.54
 Structures 0.09 -0.04 -0.03 -0.18
 Equipment and software 0.59 1.30 1.11 0.71
 Residential 0.22 1.05 0.40 0.24
 Change in private inventories -0.17 -0.13 0.71 0.65
Net exports of goods and services -1.34 0.80 -0.32 -0.71
 Exports -0.11 0.92 1.81 0.72
 Goods -0.11 0.56 1.29 0.62
 Services 0.01 0.36 0.52 0.10
 Imports -1.24 -0.12 -2.14 -1.43
 Goods -1.51 0.18 -1.96 -1.39
 Services 0.27 -0.30 -0.17 -0.05
Government consumption expenditures
 and gross investment 1.36 0.34 -0.01 0.54
 Federal 1.46 0.09 0.05 0.57
 National defense 1.58 -0.06 0.13 0.58
 Nondefense -0.12 0.15 -0.09 -0.01
 State and local -0.10 0.25 -0.06 -0.03

 Share of
 current-
 dollar
 GDP
 (percent)

 2004

 I

 Gross domestic product (GDP) 100.0
Personal consumption expenditures 70.3
 Durable goods 8.4
 Nondurable goods 20.3
 Services 41.6
Gross private domestic investment 15.9
 Fixed investment 15.6
 Nonresidential 10.3
 Structures 2.3
 Equipment and software 8.0
 Residential 5.4
 Change in private inventories 0.2
Net exports of goods and services -4.7
 Exports 10.0
 Goods 6.9
 Services 3.0
 Imports 14.7
 Goods 12.2
 Services 2.4
Government consumption expenditures
 and gross investment 18.5
 Federal 7.0
 National defense 4.7
 Nondefense 2.3
 State and local 11.5

NOTE. Percent changes are from NIPA table 1.1.1, and contributions to
percent change are from NIPA table 1.1.2. Shares are from NIPA table
1.1.10.

Table 2. Final and Preliminary Estimates for the First Quarter of 2004

[Seasonally adjusted at annual rates]

 Percent change from
 preceding quarter

 Final
 Prelimi- minus
 Final nary prelimi-
 estimate estimate nary

 Gross domestic product 3.9 4.4 -0.5
Personal consumption
 expenditures 3.8 3.9 -0.1
 Durable goods -3.7 -4.2 0.5
 Nondurable goods 6.9 6.6 0.3
 Services 3.9 4.2 -0.3
Gross private domestic
 investment 9.4 10.1 -0.7
 Private fixed investment 5.0 5.1 -0.1
 Nonresidential 5.3 5.8 -0.5
 Structures -7.4 -7.0 -0.4
 Equipment and software 9.2 9.8 -0.6
 Residential 4.6 3.8 0.8
 Change in private inventories
Net exports of goods and
 services
 Exports 7.5 4.9 2.6
 Goods 9.4 6.3 3.1
 Services 3.3 1.8 1.5
 Imports 10.4 5.9 4.5
 Goods 12.2 6.6 5.6
 Services 1.9 2.6 -0.7
Government consumption
 expenditures and gross
 investment 3.0 2.9 0.1
 Federal 8.5 9.2 -0.7
 National defense 13.2 13.2 0.0
 Nondefense -0.3 1.5 -1.8
 State and local -0.3 -0.7 0.4
Addenda:
 Final sales of domestic product 3.2 3.7 -0.5
 Gross domestic purchases price
 index 3.5 3.3 0.2
 GDP price index 2.8 2.6 0.2

 Contribution to percent
 change in real GDP

 Final
 Prelimi- minus
 Final nary prelimi-
 estimate estimate nary

 Gross domestic product 3.9 4.4 -0.5
Personal consumption
 expenditures 2.64 2.71 -0.07
 Durable goods -0.32 -0.36 0.04
 Nondurable goods 1.36 1.32 0.04
 Services 1.61 1.76 -0.15
Gross private domestic
 investment 1.43 1.55 -0.12
 Private fixed investment 0.78 0.80 -0.02
 Nonresidential 0.54 0.59 -0.05
 Structures -0.18 -0.17 -0.01
 Equipment and software 0.71 0.76 -0.05
 Residential 0.24 0.20 0.04
 Change in private inventories 0.65 0.75 -0.10
Net exports of goods and
 services -0.71 -0.35 -0.36
 Exports 0.72 0.47 0.25
 Goods 0.62 0.42 0.20
 Services 0.10 0.05 0.05
 Imports -1.43 -0.82 -0.61
 Goods -1.39 -0.76 -0.63
 Services -0.05 -0.06 0.01
Government consumption
 expenditures and gross
 investment 0.54 0.54 0.00
 Federal 0.57 0.62 -0.05
 National defense 0.58 0.58 0.00
 Nondefense -0.01 0.04 -0.05
 State and local -0.03 -0.08 0.05
Addenda:
 Final sales of domestic product 3.25 3.69 -0.44
 Gross domestic purchases price
 index
 GDP price index

NOTE. The final estimates for the first quarter of 2004 incorporate the
following revised or additional major source data that were not
available when the preliminary estimates were prepared.

Personal consumption expenditures: Retail sales for March (revised) and
bank services data for the quarter.

Nonresidential fixed investment: Construction put-in-place data for
February and March (revised), manufacturers' shipments of machinery and
equipment for March (revised), and exports and imports of machinery for
March (revised).

Residential fixed investment: Construction put-in-place data for
February and March (revised).

Change in private inventories: Manufacturing and trade inventories for
March (revised) and stocks of coal and petroleum at electric utilities
for February.

Exports and imports of goods and services: Exports and imports of goods
and services for October 2003 through March 2004 (revised) reflecting
(on a "best-change basis") the results of the annual revision of BEA's
international transactions accounts.

Government consumption expenditures and gross investment: State and
local construction put-in-place for February and March (revised).

Wages and salaries: Revised employment, average hourly earnings, and
average weekly hours for March.

GDP prices: Export and import prices for January through March
(revised), unit-value index for petroleum imports for March (revised),
prices of single-family houses under construction for the quarter
(revised), and bank services data for the quarter.

Table 3. Corporate Profits

[Seasonally adjusted]

 Billions of dollars

 Change from
 Level preceding quarter

 2004 2003 2004

 I II III IV I

Current production
 measures:
 Corporate profits 1,226.5 95.7 101.4 81.4 20.9
 Domestic industries 1,031.6 95.9 92.2 33.9 31.2
 Financial 324.0 11.2 19.6 5.2 19.6
 Nonfinancial 707.7 84.7 72.6 28.7 11.7
 Rest of the world 194.8 -0.2 9.2 47.5 -10.4
 Receipts from the
 rest of the
 world 291.0 5.4 15.4 49.1 5.7
 Less: Payments to
 the rest of the
 world 96.2 5.7 6.1 1.7 16.1
 Less: Taxes on
 corporate income 244.1 -2.5 19.2 13.1 0.4
 Equals: Profits after
 tax 982.3 98.1 82.4 68.2 20.4
 Net dividends 449.8 7.2 6.8 7.5 8.0
 Undistributed
 profits from
 current production 532.5 90.9 75.5 60.9 12.3
 Net cash flow 1,297.3 86.1 77.2 70.6 20.1
Industry profits:
 Profits with IVA 893.4 12.7 70.6 72.2 -43.0
 Domestic industries 698.6 13.0 61.3 24.8 -32.6
 Financial 288.7 -1.2 14.0 3.4 10.7
 Nonfinancial 409.9 14.2 47.3 21.4 -43.3
 Utilities 26.0 -7.0 0.4 5.2 -0.7
 Manufacturing 98.8 -6.8 17.4 23.4 -22.3
 Wholesale trade 40.1 2.8 8.4 -2.8 -8.1
 Retail trade 78.9 12.1 -0.7 -6.1 0.7
 Transportation
 and ware-
 housing 10.8 7.3 1.8 -0.2 -3.7
 Information -11.6 3.4 10.3 -7.0 -6.9
 Other non-
 financial 167.0 2.6 9.5 8.9 -2.1
 Rest of the world 194.8 -0.2 9.2 47.5 -10.4
Addenda:
 Profits before tax
 (without IVA and
 CCAdj) 932.7 -16.5 73.4 92.2 -25.4
 Profits after tax
 (without IVA and
 CCAdj) 688.5 -14.0 54.4 79.1 -26.0
 IVA -39.3 29.3 -3.0 -19.9 -17.6
 CCAdj 333.1 82.9 30.9 9.1 63.9

 Percent change from
 preceding quarter

 2003 2004

 II III IV I

Current production
 measures:
 Corporate profits 10.3 9.9 7.2 1.7
 Domestic industries 12.3 10.5 3.5 3.1
 Financial 4.2 7.0 1.7 6.4
 Nonfinancial 16.6 12.2 4.3 1.7
 Rest of the world -0.2 6.2 30.1 -5.1
 Receipts from the
 rest of the
 world 2.5 6.9 20.8 2.0
 Less: Payments to
 the rest of the
 world 8.6 8.4 2.1 20.1
 Less: Taxes on
 corporate income -1.2 9.0 5.7 0.2
 Equals: Profits after
 tax 13.8 10.1 7.6 2.1
 Net dividends 1.7 1.6 1.7 1.8
 Undistributed
 profits from
 current production 31.0 19.7 13.2 2.4
 Net cash flow 8.3 6.8 5.9 1.6
Industry profits:
 Profits with IVA 1.6 8.9 8.4 -4.6
 Domestic industries 2.1 9.5 3.5 -4.5
 Financial -0.5 5.4 1.2 3.8
 Nonfinancial 3.8 12.3 5.0 -9.6
 Utilities -25.1 1.8 24.6 -2.9
 Manufacturing -7.8 21.7 23.9 -18.4
 Wholesale trade 7.0 19.8 -5.5 -16.8
 Retail trade 16.6 -0.8 -7.3 0.9
 Transportation
 and ware-
 housing 129.0 14.0 -1.1 -26.0
 Information
 Other non-
 financial 1.7 6.3 5.6 -1.3
 Rest of the world -0.2 6.2 30.1 -5.1
Addenda:
 Profits before tax
 (without IVA and
 CCAdj) -2.0 9.3 10.6 -2.7
 Profits after tax
 (without IVA and
 CCAdj) -2.4 9.4 12.4 -3.6
 IVA
 CCAdj 56.7 13.5 3.5 23.7

NOTE. Levels of these and other profits series are shown in NIPA tables
1.12, 1.14, 1.15, and 6.16D.

IVA Inventory valuation adjustment

CCAdj Capital consumption adjustment

(1.) Quarterly estimates in the NIPAs are expressed at seasonally adjusted annual rates, unless otherwise specified. Quarter-to-quarter dollar changes are differences between these published estimates. Percent changes are calculated from unfounded data and annualized. "Real" estimates are in chained (2000) dollars, and price indexes are chain-type measures.

(2.) In this article, "consumer spending" is shorthand for the NIPA series "personal consumption expenditures," "inventory investment" is shorthand for "change in private inventories," and "government spending" is shorthand for "government consumption expenditures and gross investment."

(3.) GNP is a measure of the goods and services produced by labor and property supplied by U.S. residents regardless of where they are located; in contrast, GDP is a measure of the goods and services produced by labor and property in the United States, regardless of nationality. The two measures are related as follows: GNP equals GDP plus income receipts from the rest of the world minus income payments to the rest of the world.

(4.) Profits from current production is estimated as the sum of profits before tax, the inventory valuation adjustment, and the capital consumption adjustment; it is shown as "corporate profits with inventory valuation and capital consumption adjustments" in NIPA tables 1.7.5, 1.10-1.12, 1.14-1.16, and 6.16D.

Percent changes in profits are shown at quarterly, not annual, rates.

(5.) Profits from the rest of the world is the difference between (1) receipts by U.S. residents of earnings from foreign affiliates plus dividends received by U.S. residents from unaffiliated foreign corporations and (2) payments by U.S. affiliates of earnings to foreign parents plus dividends paid by U.S. corporations to unaffiliated foreign residents. These estimates include capital consumption adjustments (but not inventory valuation adjustments) and are derived from BEA's international transactions accounts.

(6.) "Output" here is shorthand for "gross value added of nonfinancial corporate business" (see NIPA table 1.14).

(7.) Cash flow from current production is undistributed profits with inventory valuation and capital consumption adjustments plus the consumption of fixed capital.