Business situation.

Moran, Larry R. ; Larkins, Daniel ; Morris, Ralph W. 等

Real gross domestic product (GDP) increased 4.8 percent in the first quarter of 1998, according to the "preliminary" estimates of the national income and product accounts (NIPA's), after increasing 3.7 percent in the fourth quarter (table 1 and chart 1); the "advance" NIPA estimate of real GDP, reported in the May "Business Situation," had shown a 4.2-percent first-quarter increase.(1) The upward revision to real GDP reflected a sharp upward revision to inventory investment that was partly offset by an upward revision to imports, which are subtracted in the calculation Of GDP. (The sources of the revisions are discussed in the "Revisions" section.)

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The picture of the economy presented by the preliminary estimates is somewhat changed from that presented by the advance estimates. As in the advance estimates, real GDP growth accelerated in the first quarter, and the acceleration was more than accounted for by a sharp step-up in consumer spending and by an upturn in business spending for equipment.(2) However, the "preliminary" estimates show faster accelerations in real GDP and in real gross domestic purchases and a slower acceleration in real final sales of domestic product than were shown by the advance estimates.(3) According to the preliminary estimates, real gross domestic purchases increased 7.3 percent after increasing 3.4 percent, and real final sales of domestic product increased 3.4 percent after increasing 2.3 percent; the advance first-quarter estimates had indicated a 6.1-percent increase in real gross domestic purchases and a 4.1-percent increase in real final sales of domestic product.

The price index for gross domestic purchases was unchanged in the first quarter after increasing 1.4 percent in the fourth. The price index for GDP increased 1.0 percent after increasing 1.4 percent. The major reason for the difference in the first-quarter changes in these price measures was a large decrease in the prices for imports of goods and services, which are included in gross domestic purchases prices but not in GDP prices.

Personal consumption expenditures

Real personal consumption expenditures (PCE) increased 6.1 percent in the first quarter after increasing 2.5 percent in the fourth (table 2). The large first-quarter increase continues a pattern of strong growth that began in the first quarter Of 1997 after modest growth in 1995 and 1996. Over the past five quarters, real PCE increased at an annual rate of 4.1 percent, compared with a 2.4-percent rate over the preceding 2 years.

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The recent strength in real PCE reflects strength in several of the factors usually considered in analyses of PCE. Since the fourth quarter of 1996, real disposable personal income has increased at an annual rate of 3.9 percent, compared with a 2.2-percent rate over the preceding 2 years. The unemployment rate fell to 4-7 percent in the first quarter of 1998--the lowest rate in more than 25 years--from 5.3 percent in the fourth quarter of 1996; 2 years earlier, the unemployment rate was 5.6 percent. The Index of Consumer Sentiment (prepared by the University of Michigan's Survey Research Center) has increased at an annual rate Of 8.4 percent since the fourth quarter of 1996, compared with a 2.3-percent rate over the preceding 2 years (chart 2). In addition, consumer spending may have been stimulated by the large increases in stock market prices that have increased consumer wealth.

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In the first quarter of 1998, expenditures for durable goods accelerated sharply, and expenditures for nondurable goods turned up; in contrast, expenditures for services increased somewhat less than in the fourth quarter. Expenditures for durable goods jumped 15.9 percent in the first quarter after increasing 1.9 percent in the fourth. Motor vehicles and parts increased after decreasing; the upturn mainly reflected upturns in used and new autos, as trucks increased less than in the fourth quarter. Furniture and household equipment increased substantially more than in the fourth quarter; most of the acceleration was accounted for by consumer electronics, including computers.

Expenditures for nondurable goods increased 6.5 percent after decreasing 1.2 percent. The upturn mainly reflected an upturn in clothing and shoes, but "other" nondurable goods and food also turned up.

Expenditures for services increased 4.0 percent after increasing 4.4 percent. The deceleration reflected a downturn in household operation, particularly in electricity and gas; the decrease in electricity and gas reflected a decrease in demand for heating services due to warmer-than-normal winter weather. In contrast, medical care and "other" services, primarily brokerage and investment counseling, increased more than in the fourth quarter.

Nonresidential fixed investment

Real private nonresidential fixed investment jumped 17.2 percent in the first quarter after edging down 0.8 percent in the fourth (table 3). Producers' durable equipment (PDE) more than accounted for the upturn; structures decreased more than in the fourth quarter.

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Factors that affect investment spending have been generally favorable over the past four quarters: Real final sales of domestic product increased 3.2 percent; long-term interest rates decreased--for example, the yield on high-grade corporate bonds decreased to 6.64 percent from 7.67 percent; domestic corporate profits increased 6.1 percent; and the capacity utilization rate in manufacturing was little changed at 81.5 percent.

PDE jumped 27.5 percent in the first quarter after edging down 0.3 percent in the fourth. All components except trucks, buses, and truck trailers contributed to the upturn, but by far the largest contribution was from computers and peripheral equipment, which accelerated sharply to a record quarterly increase.

Structures decreased 7.4 percent after decreasing 2.3 percent. The larger first-quarter decrease was more than accounted for by a downturn in "other" structures that reflected the fourth-quarter sale of the Naval Petroleum Reserve at Elk Hills, California, by the Federal Government to a private business. (For more information on this sale, see the "Business Situation" in the March 1998 Survey of Current Business.) Nonresidential buildings and mining exploration, shafts, and wells decreased less than in the fourth quarter, and utilities increased more than in the fourth quarter.

Residential investment

Real residential investment increased 16.1 percent in the first quarter after increasing 9.1 percent in the fourth (table 3). The acceleration was accounted for by single-family structures and by "other" residential investment, both of which increased more than in the fourth quarter.(4)

Single-family structures increased 22.2 percent after increasing 8.4 percent. Single-family housing starts increased more than in the fourth quarter, to a level of 1.20 million units (seasonally adjusted annual rate) (chart 3).(5)

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"Other" residential investment increased 9.4 percent after increasing 6.3 percent. The acceleration was accounted for by step-ups in home improvements and in brokers' commissions. The step-up in brokers' commissions reflected an acceleration in home sales to a level of 5.42 million units (seasonally adjusted annual rate)--4.57 million-unit sales of existing residences and 0.85 million-unit sales of new residences. The commitment rate on 30-year, fixed-rate mortgages decreased slightly to 7.10 percent from 7.20 percent (chart 4).

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Multifamily construction increased 17.0 percent after increasing 34.8 percent.

Inventory investment

Real inventory investment--that is, the change in business inventories--increased $26.7 billion in the first quarter, as inventory accumulation picked up to $100.7 billion from $74.0 billion (table 4). Inventory investment had increased virtually the same amount in the fourth quarter, as accumulation had picked up from $47.5 billion in the third quarter.

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Manufacturing inventories increased $38.3 billion in the first quarter after increasing $21.5 billion in the fourth. Most of the step-up was in durable goods industries, reflecting an upturn in motor vehicles and step-ups in fabricated metals, in electronic machinery, and in industrial machinery. In the nondurable goods industries, the largest step-ups were in petroleum and in chemicals.

Wholesale trade inventories increased $29.3 billion after increasing $19.7 billion. Among merchant wholesalers, a sharp step-up in durable goods was partly offset by a slowdown in nondurable goods. In durable goods, sizable increases followed relatively small decreases in professional and commercial equipment (which includes computers), in motor vehicles, and in electrical goods. In nondurable goods, inventories turned down in farm products, in apparel, and in "other nondurables" Among nonmerchant wholesalers, a step-up was mainly accounted for by an upturn in durable goods.(6)

Retail trade inventories increased $16-3 billion after increasing $17.0 billion, as a slowdown in durable goods was nearly offset by a step-up in nondurable goods. The slowdown in durable goods was dominated by inventories of motor vehicle dealers. The step-up in nondurable goods was widespread.

"Other" nonfarm inventories increased somewhat more than in the fourth quarter.(7)

Farm inventories increased $8.9 billion after increasing $9.8 billion. As in the fourth quarter, an increase in crop inventories more than offset a small decrease in livestock inventories.

The ratio of real nonfarm inventories to real final sales of domestic businesses increased from 2.29 in the fourth quarter to 2.31 in the first, its highest level since the fourth quarter of 1991; the ratio has trended up over the past six quarters, increasing 0.06 over that time. A ratio in which final sales include only goods and structures increased to 4.17 from 4.14. This ratio has also trended up over the past six quarters, increasing 0.10 over that time; however, this ratio was no higher in the first quarter than it had been in the second quarter of 1995.

Exports and imports

Real exports of goods and services decreased 3.0 percent in the first quarter after increasing 8.3 percent in the fourth (table 5). Real imports of goods and services jumped 17.7 percent after increasing 5.3 percent.

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Real exports of goods decreased 5.4 percent after jumping 14.1 percent, exports of both nonagricultural and agricultural goods turned down. The weakness in nonagricultural exports was widespread among all goods except computers, peripherals, and parts. Exports of services increased 3.3 percent after decreasing 5.1 percent; most of the upturn was accounted for by upturns in transfers under U.S. military agency sales contracts and in "other private services" (which includes education, financial, and telecommunications services).

Real imports of goods jumped 17.3 percent after increasing 6.2 percent; imports of nonpetroleum products accelerated, and imports of petroleum and products turned up. Most of the acceleration in nonpetroleum products was accounted for by computers, peripherals, and parts; by automotive vehicles, engines, and parts; and by industrial supplies and materials, imports of services jumped 20.0 percent after edging UP 0.3 percent; most of the acceleration was accounted for by upturns in "other private service and in royalties and license fees, primarily reflecting payments for the Winter Olympics.

Government spending

Real government consumption expenditures and gross investment decreased 3.0 percent in the first quarter after edging UP 0.3 percent in the fourth (table 6). Federal Government spending decreased more than in the fourth quarter, and State and local government spending increased less.

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Federal defense spending fell 18.4 percent after increasing 1.0 percent. Both consumption expenditures and investment decreased after increasing. The downturn in consumption expenditures was mostly accounted for by contractual services other than compensation of employees. The downturn in investment spending was accounted for by equipment, primarily aircraft.

Federal nondefense spending increased 10.1 percent after decreasing 8.6 percent. Both consumption expenditures and investment increased after decreasing. The upturn in investment spending was attributable to structures.

State and local government spending increased 0.9 percent after increasing 1.8 percent. Investment spending decreased more than in the fourth quarter, reflecting a larger decrease in structures in the first quarter than in the fourth. Consumption expenditures increased the same amount in both quarters.

Revisions

As noted earlier, the preliminary estimate of a 4.8-percent increase in real GDP in the first quarter is 0.6 percentage point higher than the advance estimate (table 7); for 1976-97, the average revision, without regard to sign, from the advance estimate to the preliminary estimate was 0.5 percentage point. The upward revision to GDP in the first quarter reflected a sharp upward revision to inventory investment that was partly offset by an upward revision to imports. Revisions to other components of GDP were relatively small.

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The upward revision to inventory investment primarily reflected the incorporation of newly available Census Bureau inventory data for February (revised) and March, which showed a large increase; for the advance estimates, BEA had assumed a small decrease. In addition, the revision reflected the incorporation of revised Census Bureau inventory data for wholesale and retail trade that are based on annual surveys for 1996; BEA incorporates data from such surveys on a "best-change" basis, which allows the use of newly available data for the preceding quarter in the calculation of change from that quarter to the current quarter. The revised Census Bureau data for 1995-97 will be incorporated at the time of the annual NIPA revision at the end of July.

The upward revision to imports reflected the incorporation of newly available Census Bureau data for imports of goods for March, which showed a large increase; for the advance estimates, BEA had assumed little change.

The preliminary estimate of the price index for gross domestic purchases shows no change from the fourth quarter, the same as the advance estimate, and the preliminary estimate of the increase in the GDP price index was 1.0 percent, 0.1 percentage point higher than the advance estimate.

The preliminary estimate of the increase in real disposable personal income (DPI) was 4.7 percent, 2.1 percentage points lower than the advance estimate. Current-dollar personal income was revised down slightly; current-dollar DPI was revised down more, reflecting a large upward revision to personal tax and nontax payments that reflected the incorporation of newly available data from the Monthly Treasury Statement on Federal nonwithheld income taxes through April. The preliminary estimate of the personal saving rate--personal savings as a percentage of current-dollar DPI--was 3.7 percent, 0.5 percentage point lower than the advance estimate.

Corporate Profits

Profits from current production increased $4.4 billion in the first quarter after decreasing $9.2 billion in the fourth (table 8).(8) Profits of domestic industries increased $1.7 billion after decreasing $5.7 billion. Profits of domestic nonfinancial corporations edged up $0.7 billion after decreasing $10.7 billion, as an increase in real product offset a decrease in unit profits; the decrease in unit profits resulted from an increase in unit labor costs, while unit prices changed little. Profits of domestic financial corporations increased $1.0 billion after increasing $5.0 billion. Profits from the rest of the world increased $2.7 billion after decreasing $3.6 billion; receipts turned up, while payments decreased about as much as in the fourth quarter.(9)

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Cash flow from current production, a profits-related measure of internally generated funds available for investment, increased $11.2 billion after decreasing $4.5 billion. 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 for the fourth consecutive quarter, to 79.7 percent from 81.0 percent. This ratio, which averaged 84.7 percent in 1990-97, was last below go percent in the first quarter of 1995.

Industry profits and related measures.--Industry profits increased $2.1 billion after decreasing $10.6 billion.(10) Profits of domestic nonfinancial corporations decreased less than in the fourth quarter, largely reflecting an upturn in trade profits. In contrast, profits of domestic financial corporations increased less than in the fourth quarter. As already noted, profits from the rest of the world turned up.

Profits before tax (PBT) decreased $18.9 billion after decreasing $16.1 billion. The difference between the $18.9 billion decrease in PBT and the $4.4 billion increase in profits from current production mainly reflected a $21.0 billion decrease in inventory profits.(11)

Rates of Return for Domestic Nonfinancial Corporations, 1960-97

For domestic nonfinancial corporations, property income's rate of return increased to 9.8 percent in 1997 from 9.5 percent in 1996, and property incomes share of domestic income edged up to 19.2 percent from 19a percent (chart 5 and table 9). For both measures, the 1997 levels were the highest in almost 30 years.

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The rate of return is defined here as the ratio of property income to the stock of net reproducible tangible assets--the replacement-cost value of structures, equipment, and inventories. For purposes of this article, property income is defined as the sum of profits from current production--corporate profits with inventory valuation and capital consumption adjustments--and net interest payments (table 10).(12) in other contexts, different definitions may be appropriate. For example, in "Foreign Direct Investment in the United States" in this issue, rates of return for nonfinancial U.S. affiliates are calculated on the basis of all assets, not just reproducible tangible assets, and in "Gross State Product, 1977-96," property income is defined to include proprietors' income, rent, and consumption of fixed capital.

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This measure of rate of return has several useful features. First, it captures the total return to investment, regardless of the mix of equity and debt used to finance the investment. Second, the numerator is not affected by inventory profits or by depreciation schedules used in preparing the underlying tax returns; rather, it reflects the current-replacement costs of inventory withdrawals and of capital used up in production. Third, because assets in the denominator are also measured at current-replacement cost, the ratio is an estimate of the current average profitability of investment. (Alternative measures of rate of return were described in the June 1997 Survey, page 10.)

The ratio of property income to domestic income is property income's "share"--that is, the portion of domestic income that is not used to compensate labor.

Q-type ratios

A related ratio of analytical interest is "Tobin's-Q" or simply "Q," which compares the valuation of assets in financial markets with the replacement cost of assets.

In principle, the par value of the q-ratio is 1. At

that value, financial markets would simply be

reflecting the current prices of the assets to

which stocks and bonds are titles. Values

above 1 would encourage, and values below 1

discourage, companies' acquisitions of newly

produced physical assets, especially assets

similar to the existing ones the markets are

evaluating.(13)

The precise formula for calculating Q varies from analyst to analyst (but the general pattern of the ratio over time is relatively insensitive to the fine points of measurement). All analysts would include the market value of equities outstanding in the numerator; estimates for these data are readily available in the flow of funds accounts maintained by the Federal Reserve Board. Many analysts (Tobin included) would also include the value of corporate bond obligations in the numerator; including bonds makes the ratio invariant to shifts in the mix of equity and debt used to finance investment. Alternatively, the numerator could include all corporate debt, not just bonds.(14)

The denominator of Q should certainly include reproducible tangible assets valued at replacement cost; estimates for this series were used in calculating the rate of return.(15) The denominator might also include other assets, such as land and financial assets; it might also include intellectual property (including software), which is not, in general, capitalized.

However, these additional series, which might be used to augment the market value of equities (in the numerator) and the replacement-cost value of reproducible tangible assets (in the denominator), are generally available only on a historical-cost basis. The use of historical-cost estimates is obviously inconsistent with the underlying rationale for Q--a comparison of market valuation and replacement costs. However, analysts may differ on whether it is preferable to use some historical-cost components or to omit them and thereby exclude some potentially important variables.

Fortunately, ratios constructed from various definitions all display quite similar patterns, and, in light of measurement problems for both numerators and denominators, the patterns of movement may be more important than the levels of the ratios. Three variants of the measure for domestic nonfinancial corporations are shown in chart 6; others could be added without changing the overall picture. All the ratios drop sharply in the early 1970's, stay relatively low until the early 1980's, and then increase more or less rapidly through 1997. In 1997, two of the ratios were at historic highs, and all three describe dramatic improvements in recent years in the climate for business investment in newly produced tangible assets.

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Government Sector

The combined current surplus, which measures the net saving of the Federal Government and State and local governments, grew $58.6 billion, to a record $156.6 billion, in the first quarter after declining $2.6 billion in the fourth (table 11).(16) The strong first-quarter rebound was attributable to the Federal sector, which also registered a record surplus(17). The State and local government current surplus decreased slightly.

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Federal

Fueled by a sharp downturn in current expenditures and an acceleration in receipts, the fiscal position of the Federal Government shifted from a current deficit of $12.1 billion to a current surplus of $49.0 billion--the first current surplus since the first quarter of 1969. In the fourth quarter, the deficit had edged up $1.3 billion.

Receipts.--Federal receipts increased $43.0 billion in the first quarter after increasing $25.6 billion in the fourth. The acceleration resulted from accelerations in personal tax and nontax receipts and in contributions for social insurance that more than offset a larger decrease in corporate profits tax accruals in the first quarter than in the fourth.

Personal tax and nontax receipts increased $34.8 billion after increasing $19.1 billion. Receipts from income taxes increased $32.9 billion after increasing $18.4 billion; the acceleration was attributable to a pickup in "estimated income tax payments and final settlements, less refunds" that more than offset a deceleration in withheld income taxes.(18) "Estimated income tax payments and final settlements, less refunds" increased $22.5 billion after increasing $1.5 billion; the pickup was tempered only slightly by the effect of provisions of the Taxpayer Relief Act of 1997--primarily the provision that modified the estimated-tax requirements for high-income taxpayers. The deceleration in withheld income taxes mainly reflected the effect of the annual indexation for inflation on the 1998 withholding tables and the effect of certain provisions of the Taxpayer Relief Act of 1997--primarily the provisions that established child tax credits.

Contributions for social insurance increased $15.0 billion after increasing $10.4 billion. The acceleration primarily reflected the effect of an increase in the social security taxable wage base that boosted contributions by employers, employees, and the self-employed to the old-age, survivors, and disability insurance trust funds.

Corporate profits tax accruals decreased $6.8 billion after decreasing $3.8 billion, reflecting a larger decrease in domestic corporate profits before tax.

Current expenditures.--Current expenditures fell $18.1 billion in the first quarter after increasing $26.9 billion in the fourth.(19) The downswing was accounted for by downturns in consumption expenditures, in grants-in-aid to State and local governments, and in net interest paid and by a deceleration in transfer payments (net).

Consumption expenditures dropped $11.8 billion, the largest decrease since the fourth quarter Of 1995, after increasing $3.7 billion. The downturn was accounted for by defense consumption expenditures, which dropped $13.0 billion after increasing $2.8 billion, reflecting a downturn in "other" services. Within "other" services, defense expenditures for research and development turned down. Compensation of employees increased $2.1 billion after decreasing $1.0 billion; it was boosted by January 1998 pay raise for defense employees. In contrast, consumption expenditures for nondefense increased $1.2 billion after increasing $0.9 billion. The slight acceleration mainly resulted from an upturn in compensation for nondefense employees, who also received a pay raise in January.

Transfer payments (net) increased $1.9 billion after increasing $15.7 billion. A sharp downturn in transfer payments to the rest of the world more than offset an acceleration in transfer payments to persons. Transfer payments to the rest of the world fell $11.8 billion after increasing $11.6 billion; the fourth-quarter increase was attributable to the yearly payment to Israel of $3.0 billions--$12.0 billion at an annual rate--in economic support and other payments. Transfer payments to persons increased $13.7 billion after increasing $4.1 billion. The step-up mainly reflected a 2.1-percent cost-of-living adjustment in January that boosted social security (old-age, survivors, and disability insurance), Federal employee pension, veterans pension, and supplemental security income benefits by $9..9 billion.

Grants-in-aid to State and local governments fell $4.7 billion after increasing $6.4 billion. The downturn was mostly accounted for by grants for medicaid, which decreased $4.0 billion after increasing $6.1 billion. Grants for family assistance and health care also turned down, and grants for highways decreased more in the first quarter than in the fourth. In contrast, grants for education and other programs turned up.

Net interest paid decreased $3.2 billion after increasing $0.1 billion. The downturn mainly reflected a downturn in gross interest paid, which decreased $3.8 billion after increasing $0.3 billion.

State and local

The State and local government current surplus decreased $2.5 billion, to $107.6 billion, in the first quarter after decreasing $1.3 billion in the fourth. The larger decrease was accounted for by a larger deceleration in receipts than in current expenditures.

Receipts increased $7.3 billion after increasing $12.6 billion. The deceleration was more than accounted for by the downturn in Federal grants-in-aid; indirect business tax and nontax accruals accelerated sharply.

Federal grants-in-aid fell $4.7 billion after increasing $6.4 billion. Personal tax and nontax receipts increased $2.7 billion after increasing $5.0 billion; the deceleration was primarily attributable to State tax law changes that reduced income taxes in several States. Corporate profits tax accruals decreased $1.3 billion after decreasing $0.8 billion; the larger decrease reflected the pattern of domestic corporate profits before tax. Indirect business tax and nontax accruals increased $9.0 billion after increasing $0.5 billion; the pickup was largely attributable to an upturn in "other tax and nontax accruals" and to an acceleration in sales taxes. "Other tax and nontax accruals" increased $2.6 billion after decreasing $2.8 billion; the turnaround was partly caused by out-of-court settlement payments of $1.4 billion (annual rate) by tobacco companies to three States. Settlement payments of $3.7 billion were made in the third quarter, but none were made in the fourth. Sales taxes increased $3.8 billion after increasing $0.9 billion the acceleration primarily reflected an acceleration in retail sales.

Current expenditures increased $9.9 billion after increasing $13.8 billion; the deceleration was accounted for by a slowdown in consumption expenditures. Consumption expenditures increased $6.3 billion after increasing $10.3 billion; the deceleration reflected a downturn in nondurable goods, mainly in petroleum, and a deceleration in services. Transfer payments to persons increased $4.8 billion after increasing $4.7 billion.

(1.) Quarterly estimates in the NIPA's are expressed at seasonally adjusted annual rates, and quarterly charges am differences between these rates. Quarter-to-quarter percent changes are annualized. Real estimates are expressed in chained (1992) dollars. Price indexes am chain-type indexes.

(2.) NIPA table 8.2 (on page D-25 in this issue) shows the contributions of the major components to the quarter-to-quarter percent change in real GDP.

(3.) Gross domestic purchases--a measure of purchases by U.S. residents regardless of where the purchased goods and services am produced--is calculated as GDP less exports of goods and services plus imports of goods and services. Final sales of domestic product is calculated 25 GDP less the change in business inventories.

(4.) "Other" residential investment includes home improvements, new mobile home sales, broker's commissions on home sales, residential equipment, and other residential structures (which consists primarily of dormitories, fraternity and sorority houses, and nurses' homes).

(5.) The estimate of single-family structures for a quarter largely reflect starts in the first 2 months of that quarter and in the last 2 months of the preceding quarter therefore, structures; in the first quarter largely reflected starts from November 1997 through February 1998, and structures in the fourth quarter largely reflected starts from August 1997 through November 1997.

(6.) Nonmerchant wholesalers, in contrast to merchant wholesalers, do not take tide to the goods they sell; nonmerchant wholesalers include sales offices and branches of manufacturing, refining, or mining enterprises that are separate from their plants and mines, as well as agents, brokers, and commission merchants.

(7.) `Other' nonfarm inventories includes inventories held by the following industries: Mining, construction; public utilities; transportation; communication; finance; insurance; and real estate; and services.

(8.) 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 in NIPA tables 1.9, 1.14, 1.16, and 6.16C (see "Selected NIPA Tables," which begin on page D-2 of this issue) as corporate profits with inventory valuation and capital consumption adjustments.

(9.) Profits from the rest of the world is calculated as (1) receipts by U.S. residents of earnings from their foreign affiliates plus dividends received by U.S. residents from unaffiliated foreign corporations minus (2) payments by U.S. affiliates of earnings to their foreign parents plus dividends paid by U.S. corporations to unaffiliated foreign residents. These estimates are derived from BEA's international transactions accounts.

(10.) Industry profits, which are estimated as the sum of corporate profits before tax and the inventory valuation adjustment, are shown in NIPA table 6.16c (on page D-16 of this issue). Estimates of the capital consumption adjustment are available only for total financial and total nonfinancial industries.

(11.) As prices damage, companies that value inventory withdrawals at original acquisition (historical) costs may realize inventory profits or losses inventory profits--a capital-gains-like element in profits--result from an increase in inventory prices, and inventory losses--a capital-loss-like element in profits--result from a decrease in inventory prices, In the NIPA's, inventory profits or losses are shown as adjustments to business income (corporate profits and nonfarm proprietors' income), as reported on tax returns of businesses; they are shown as the inventory valuation adjustment with the sign reversed.

(12.) Corporate profits and net interest are based on tabulations of "company" data rather than "establishment" data. As a result, property income for domestic nonfinancial corporations may include income earned by financial establishments of those corporations; similarly, it may exclude income earned by nonfinancial units of financial corporations.

For a discussion of the industrial distribution of NIPA series, see Eugene P. Seskin and Robert P. Parker, "A Guide to the NIPA's," Survey 79 (March 1998): 42-43. For a discussion of the wealth estimates, which are on an establishment basis, see Arnold J. Katz and Shelby W. Herman, "Improved Estimates of Fixed Reproducible Tangible Wealth, 1929 95," Survey 77 (May 1997): 69-92.

(13.) James Tobin, "Clinton's Bull Market," Wall Street Journal, November 30, 1993, page A16. Q was developed in a series of articles in professional journals; see especially the following: William C. Brainard and James Tobin. "Pitfalls in Financial model Building." American Economic Review 58 (2), May 1968: 99-122; James Tobin, "A General Equilibrium Approach to Monetary Theory," Journal of Money, Craft W. Banking 1 (1), February 1969: 15-29; James Tobin, "Monetary Policies and the Economy: The Transmission Mechanism," Southern Economic Journal 44 (1), January 1978: 421-31.

(14.) The market value of equities outstanding and other financial measures mentioned in this paragraph are available from the Federal Reserve Board. Flow of Funds, release Z.1.

(15.) In calculating Q, it is appropriate to use yearend estimates of the stock of assets because the numerator consists of stocks at the end of the year. In contrast, in calculating rate of return, it is appropriate to use the average stock of assets for the year (approximated by the average of yearend estimates) because the numerator consists of income flows over entire years.

(16.) Net government saving equals gross saving, less consumption of fixed capital. Estimates of gross saying are shown in NIPA table 5.1.

(17.) The NIPA estimates for the government sector are derived from financial statements for the Federal Government and for State and local governments but differ from them in several respects, The major differences are shown in NIPA tables 3.18B and 3.19, which reconcile the NIPA estimates with government financial statements; these tables were published in the October 1997 Survey on pages 11.13.

(18.) The first-quarter estimate for "estimated income tax payments and final settlements, less refunds" is based on data for January through April from the Department of the Treasury in conjunction with projections for the rest of 1998 that are based on historical relationships between monthly and annual collections. Earlier first-quarter estimates were largely based on information from the Executive Office of the President. Office of Management and Budget. Budget of the United States Government, Fiscal Year 1999 (Washington, DC; U.S. Government Printing Office. 1998).

(19.) For information on the definition of current expenditures as well as of other major NIPA components. See "A Guide to the NIPA's" Survey 78 (March 1998): 27-36.