The business situation.

Fox, Douglas R. ; Larkins, Daniel ; Dobbs, David T. 等

the BUSINESS SITUATION

PRELIMINARY estimates show that real GNP--a measure of U.S. production--increased at an annual rate of 1.7 percent in the third quarter of 1990, slightly less than the 1.8-percent increase reported in the advance estimates issued a month ago. (1) The increase in real gross domestic purchases--a measure of U.S. demand--was revised down considerably more, from 2.5 percent to 1.8 percent. Among the components that are included in both measures, the largest downward revisions were in personal consumption expenditures (PCE) and inventory investment. In GNP, the downward revisions were offset by a sizable upward revision in net exports; net exports is not included in gross domestic purchases (see table 1 on page 24).

Revisions in price measures were quite small. The third-quarter increases in the GNP price index (fixed weights) and in the gross domestic purchases price index (fixed weights) were each revised up 0.1 percentage point--to 4.2 percent and 5.1 percent, respectively.

Revisions in components of real GNP.--Net exports was revised up $7-1/2 billion in the third quarter. A $4-1/2 billion upward revision in exports was more than accounted for by a revision in incomes on investment. A $2-1/2 billion downward revision in imports was attributable to revisions in merchandise trade. Within merchandise imports, a sharp downward revision in nonpetroleum products (mainly capital goods, except autos) more than offset an upward revision in petroleum and products.

Among the other components of GNP, a $3 billion downward revision in PCE was more than accounted for by services (mainly electricity and gas); nondurables (mainly food) was revised up. A $2-1/2 billion downward revision in inventory investment--that is, the change in business inventories--was traceable to nonfarm inventories (mainly retail). Residential investment was revised down $2 billion, and government purchases was revised down $1-1/2 billion.

Real GNP

Real GNP increased 2 percent in the third quarter after increasing 1/2 percent in the second (table 1); the third quarter was the sixth consecutive quarter in which real GNP grew at a rate of 2 percent or less.

Before discussing third-quarter developments in the conventional GNP components, it is useful to comment on recent changes in real GNP expressed on a command basis. As was noted in last month's "Business Situation," the turmoil in the Middle East and the associated jump in crude oil prices in August and September had little identifiable effect on GNP growth in the third quarter; however, these developments did affect command-basis GNP growth. Command-basis GNP is a measure of U.S. production expressed in terms of its purchasing power in world markets; changes in it reflect changes in the U.S. terms of trade (the ratio of the implicit price deflator for exports to the implicit price deflator for imports). The U.S. terms of trade, shown in the addendum to table 1, has swung sharply in recent quarters, largely in response to movements in imported petroleum prices. Reflecting the jump in petroleum prices in the third quarter, command-basis GNP increased only 1/2 percent; in the second quarter, it had increased 2 percent.

Personal consumption expenditures

Real personal consumption expenditures (PCE) increased 3 percent in the third quarter--the largest increase in a year--after changing little in the second (table 2); however, PCE was only 1 percent above its year-earlier level. The third-quarter pickup was traceable to upswings in both durable and nondurable goods; services increased less in the third quarter than in the second.

The pickup in PCE in the third quarter was at odds with weakness in many of the factors usually associated with consumer spending: Real disposable personal income declined 1/2 percent in the third quarter after increasing only 1/2 percent in the second; the unemployment rate rose to 5.6 percent after being 5.3 percent or below for seven consecutive quarters; and the Index of Consumer Sentiment (prepared by the University of Michigan's Survey Research Center) fell 13 percent to its lowest level since the first quarter of 1983.

Expenditures for durable goods increased 2-1/2 percent in the third quarter after falling 9-1/2 percent in the second; motor vehicles and parts accounted for more than one-half of the upswing. Motor vehicles and parts have fluctuated widely during the past year, but the trend has been down: A 31-percent plunge in the fourth quarter of 1989, a 24-1/2-percent jump in the first quarter of 1990, a 12-1/2-percent drop in the second quarter, and a 3-1/2-percent increase in the third. In the third quarter, consumer purchases of new domestic cars and trucks increased after dropping sharply in the second; however, the increases were modest in the light of sales-incentive programs that were among the most attractive ever offered by manufacturers. Consumer purchases of imported cars, which were covered by less extensive sales-incentive programs, declined after changing little. (Additional information on motor vehicle sales appears in the article "Motor Vehicles, Model Year 1990" in this issue.) Furniture and household equipment slipped 1 percent after declining 3 percent; consumer electronics, the only durable goods component that has had sustained growth during the past 3 years, declined in the third quarter. A third-quarter upswing in "other" durable goods was accounted for by jewelry and by wheel goods, toys, and sporting equipment.

Expenditures for nondurable goods increased 3 percent in the third quarter after declining 2 percent in the second. Clothing and shoes, energy, and "other" nondurables all increased after declining; food increased less in the third quarter than in the second.

Expenditures for services increased 3-1/2 percent in the third quarter after increasing 5 percent in the second. The deceleration was largely accounted for by expenditures for electricity and gas and for "other" services, both of which increased much less than in the second quarter. Within "other" services, recreation services and brokers' commissions both declined after increases. Medical care services increased 8-1/2 percent in the third quarter--the fourth consecutive quarter in which it increased 5 percent or more. Transportation services increased a little more than in the second quarter, largely in response to extensive discounts on airline passenger fares.

Nonresidential fixed investment

Real nonresidential fixed investment increased 8 percent in the third quarter after declining 4-1/2 percent in the second; both structures and producers' durable equipment increased after declines (table 3).

Structures increased 2-1/2 percent in the third quarter after declining 9 percent in the second. All of the major subcomponents of structures except public utilities contributed to the upswing; oil well drilling--up in the third quarter after a sharp decline in the second--made the biggest contribution.

Producers' durable equipment (PDE) increased 10 percent in the third quarter after declining 3-1/2 percent in the second. Transportation equipment, which increased sharply after a moderate increase, accounted for most of the upswing; the other major PDE categories were down in both quarters. Third-quarter transportation equipment was dominated by aircraft and autos. Aircraft is quite volatile and is characterized by long lags between orders and shipments; it is, therefore, difficult to interpret. The third-quarter step-up in autos appears to have reflected, at least in part, aggressive marketing of fleets by auto manufacturers that may have shifted some business purchases of autos that normally would have occurred in the fourth quarter into the third. (See the article "Motor Vehicles, Model Year 1990" in this issue.)

Factors that are usually considered in assessing the outlook for investment spending are generally discouraging. For more than a year, corporate profits and cash flow have been weak, real final sales have increased at an annual rate of less than 2 percent, and interest rates (as measured by the yield on new issues of high-grade corporate bonds) have risen. The rate of capacity utilization in manufacturing, which had drifted down since the beginning of 1989, dropped in October. The most recent Census Bureau survey of plant and equipment expenditures reported that businesses plan to increase these expenditures in the fourth quarter; however, this survey was taken in July and August and, therefore, does not reflect the impact of the turmoil in the Middle East.

Residential investment

Real residential investment declined 19 percent in the third quarter after declining 11 percent in the second (table 3). Residential investment has declined in six of the last seven quarters. Single-family construction, multifamily construction, and the "other" component (which includes additions and alterations, major replacements, mobile homes, and brokers' commissions) all contributed to the third-quarter decline.

Single-family construction again dropped sharply in the third quarter; at $84-1/2 billion, it was 15-1/2 percent below its peak in the fourth quarter of 1987. The pattern in single-family construction largely mirrored changes in single-family starts (chart 2). These starts declined 13 percent in the third quarter to 858,000 (seasonally adjusted annual rate), the lowest level in nearly 8 years; in the second quarter, they had plunged 53 percent. Continued declines in the average size of houses under construction also contributed to the drops in single-family construction. Market conditions for new houses continue to be unfavorable: Sales of single-family houses fell 12,000, to 528,000 (seasonally adjusted annual rate), in the third quarter, the fourth consecutive decline; and the ratio of houses for sale to houses sold continued to climb, reaching 8.3 in September.

Multifamily construction dropped sharply for the third time in the past four quarters. Since its peak in the second quarter of 1986, multifamily construction has declined 50 percent. Overbuilding, which traces back to the mid-1980's, caused vacancy rates to rise, which, in turn, has kept rent increases down. These developments--along with other developments, such as the curtailment of tax incentives that favored multifamily construction--continue to cloud the outlook for multifamily construction.

The "other" component declined 8-1/2 percent in the third quarter after a small increase in the second. The decline reflected a drop in brokers' commissions, which depend largely upon the volume of sales and the sales price of existing homes. Sales of existing homes fell 11 percent to 3,266,000 (seasonally adjusted annual rate) in the third quarter, despite a drop in mortgage interest rates (chart 3); sales of these homes had declined slightly in the second quarter. The average price of an existing home increased 4 percent after increasing 4-1/2 percent.

Inventory investment

Real inventory investment--that is, the change in business inventories--declined $4-1/2 billion in the third quarter, as inventory accumulation slipped to $5 billion from $9-1/2 billion in the second quarter (table 4). In contrast, inventory investment had increased $11-1/2 billion in the second quarter.

Nonfarm inventories increased $5 billion in the third quarter after increasing $11-1/2 billion in the second. The slowdown was more than accounted for by a downswing in retail trade inventories other than those held by auto dealers. Inventories of retailers of durable goods and of nondurable goods both decumulated in the third quarter after accumulating in the second. Retail inventories of auto dealers increased at about the same rate in both quarters.

Wholesale trade inventories increased $2-1/2 billion in the third quarter, about the same as in the second. Within merchant wholesaling, inventories of merchant wholesalers of durables increased sharply after little change, and inventories of merchant wholesalers of nondurables declined substantially after an increase. Inventories of nonmerchant wholesalers increased less than in the second quarter.

Manufacturing inventories increased $1-1/2 billion after declining $2-1/2 billion. Inventories of durables increased after three quarters of decumulation; the turnaround reflected small changes in most durables categories. Inventories of nondurables declined after an increase; the downswing was more than accounted for by petroleum and coal products.

Farm inventories changed little in the third quarter after a moderate decumulation in the second. Inventories of crops declined again in the third quarter, reflecting net placements of crops with the Commodity Credit Corporation. Inventories of livestock increased after little change.

The constant-dollar ratio of nonfarm business inventories to final sales of business held steady at 2.82. Since the first quarter of 1988, the ratio has been in the narrow range of 2.81 to 2.84.

Net exports

Real net exports declined $1/2 billion in the third quarter after declining $9 billion in the second (table 5). Exports were up $6-1/2 billion after declining $8 billion; imports were up $7 billion after increasing $1 billion.

Merchandise exports increased $2 billion (or 2 percent) in the third quarter after declining twice that much in the second. Both agricultural and nonagricultural exports contributed to the upswing. Agricultural exports declined less in the third quarter--$1-1/2 billion--than in the second--$3-1/2 billion. The third-quarter decline partly reflected lower soybean exports to Eastern Europe. Nonagricultural exports increased $3-1/2 billion after declining $1/2 billion. Within nonagricultural exports, all the major end-use categories except autos registered either an upswing in the third quarter or a larger increase in the third quarter than in the second; auto exports declined after a sharp increase.

Merchandise imports increased $11 billion (or 9 percent) in the third quarter after declining $2-1/2 billion in the second. Both petroleum and nonpetroleum imports contributed to the upswing. Petroleum imports increased $4 billion after declining that much; nonpetroleum imports increased $7 billion after increasing $1 billion. Within nonpetroleum imports, autos and consumer goods accounted for most of the step-up.

Third-quarter changes in exports of services--up $4-1/2 billion--and in imports of services--down $4 billion--were dominated by changes in factor incomes. (2) On the export side, factor income registered a $5 billion increase after a $4-1/2 billion decline. The third-quarter increase partly reflected a rebound in the profits of petroleum affiliates and dollar depreciation that raised the dollar value of earnings denominated in foreign currencies. On the import side, factor income registered a $2-1/2 billion decline after a $3-1/2 billion increase. The third-quarter decline reflected a drop in interest payments on foreign-held U.S. bonds and weaker profits of U.S. affiliates.

Government purchases

Real government purchases increased 1/2 percent in the third quarter after increasing 6 percent in the second (table 6). The slowdown largely reflected the pattern of changes in inventories of farm products held by the Commodity Credit Corporation (CCC); "other" Federal Government purchases also contributed. State and local government purchases increased after a small decline.

The level of CCC inventories increased $1-1/2 billion in the third quarter after increasing $1 billion in the second. The modest increases in both quarters reflected net placements of crops by farmers with the CCC under the commodity loan program. In the first quarter, CCC inventories had decumulated substantially.

Federal defense purchases were flat in the third quarter after increasing $2 billion in the second. In the third quarter, an increase in purchases of military equipment was offset by declines in purchases of nondurables and of services other than compensation of employees. Military equipment purchases increased considerably more than in the second quarter; the step-up was concentrated in aircraft, missiles, and electronic equipment. Purchases of nondurables declined after increasing. The downswing was largely accounted for by petroleum products; purchases of fuel appear to have been held down by the use of fuel from government inventories. Although U.S. troops were deployed to the Middle East in August and September, compensation of employees changed little in the third quarter. Most of the compensation paid to these forces would have been paid even if the troops had not been deployed; in addition, increases in compensation associated with the deployment--such as hazardous duty pay--were relatively small. Services other than compensation of employees declined even more in the third quarter than in the second; the larger third-quarter decline was accounted for by a downswing in contractual research and development spending. Among other services, transportation of materiel and travel of persons both picked up in the third quarter, reflecting expenditures related to the deployment of U.S. troops.

Federal nondefense purchases excluding CCC inventory change declined in the third quarter after increasing in the second. Purchases of nondurables and compensation of employees were the largest contributors to the downswing. The movements in employee compensation, up $1-1/2 billion in the second quarter and down $1 billion in the third, largely reflected the hiring and subsequent release of temporary workers for the 1990 Census of Population and Housing.

State and local government purchases increased $2-1/2 billion in the third quarter after declining $1/2 billion in the second. The upswing was accounted for by a rebound in structures, mainly school buildings.

Corporate Profits

Preliminary estimates, based on incomplete data, show that profits from current production--profits before tax plus inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj)--declined $11-1/2 billion, to $295 billion, in the third quarter of 1990 after increasing $10 billion in the second (table 7).

Profits of domestic nonfinancial corporations were down $2-1/2 billion in the third quarter after increasing $11-1/2 billion in the second. The decline reflected a drop in profits per unit of output that was caused by a bigger increase in unit costs than in unit prices. Both unit labor cost and unit nonlabor cost increased. Profits of domestic financial corporations increased $2-1/2 billion, the same as in the second quarter, and profits from the rest of the world increased $7-1/2 billion after declining $4 billion.

Cash flow from current production, a profits-related measure of internally generated funds available to corporations for investment, declined $13 billion after increasing $7 billion.

Profits by industry.--Profits from current production is not available by industry; profits before tax with IVA is the best available measure of industry profits.

This measure of the profits of domestic nonfinancial corporations declined $16-1/2 billion after increasing $15 billion. All four major industry groups registered declines in the third quarter; in the second quarter, most had posted increases.

Profits of domestic financial corporations increased $3-1/2 billion after increasing $2 billion.

Profits from the rest of the world increased $7-1/2 billion after declining $4 billion. This component of profits measures receipts of profits from foreign affiliates of U.S. corporations less payments of profits by U.S. affiliates of foreign corporations. In the third quarter, receipts increased and payments edged down. The increase in receipts reflected, at least in part, a rebound in profits of petroleum affiliates of U.S. corporations and a depreciation of the dollar. (When the dollar depreciates against a foreign currency, a given level of profits denominated in that currency translates into a higher dollar-level of profits.)

Profits before tax and related measures.--Profits before tax (PBT) increased $16 billion after increasing $2-1/2 billion. The difference between the $11-1/2 billion decline in profits from current production and the $16 billion increase in PBT reflected declines in the IVA and in the CCAdj.

The IVA is an estimate of inventory profits with sign reversed. Inventory profits increased $22 billion, reflecting a sharp pickup in the rate of increase in prices of inventoried goods, especially petroleum and petroleum products. The CCAdj, which declined $6 billion, is the difference between the predominantly tax-based depreciation measure that underlies PBT, on the one hand, and BEA's approximation of economic depreciation, on the other.

Profits tax liability increased $5 billion, to $138 billion. As a percentage of PBT, tax liability has fluctuated between 43 percent and 45 percent since the beginning of 1988. As a percentage of profits from current production, in contrast, tax liability has increased from 39 percent to 47 percent; the increase is mainly attributable to a downtrend in the CCAdj. (CCAdj has trended down largely because the Tax Reform Act of 1986 brought the service lives used in calculating depreciation allowances for tax purposes closer to those BEA uses in calculating economic depreciation.)

Government Sector

The fiscal position of the government sector improved in the third quarter of 1990, as the combined deficit of the Federal Government and State and local governments decreased $23-1/2 billion, to $104 billion (table 8). Almost all of the decrease was in the Federal Government deficit; the State and local government surplus increased slightly.

The Federal sector.--The Federal Government deficit decreased $23 billion, to $143 billion, as receipts increased and expenditures declined.

Receipts increased $19 billion in the third quarter after increasing $25 billion in the second. Personal tax and nontax receipts increased $8 billion after increasing $18-1/2 billion; the deceleration was more than accounted for by estate and gift tax payments, which declined $4-1/2 billion after increasing $6 billion. The second-quarter increase in estate and gift taxes was boosted by unusually large gift taxes for gifts made in 1989, so the third-quarter decline resulted from a return to a more normal level. Other personal tax and nontax payments increased $12-1/2 billion in each quarter. Contributions for social insurance increased $6-1/2 billion in the third quarter, reflecting continued growth in incomes. Corporate profits tax accurals increased $4-1/2 billion, and indirect business tax and nontax accruals increased $1/2 billion.

Expenditures declined $4 billion in the third quarter after increasing $23 billion in the second. Purchases of goods and services, subsidies less the current surplus of government enterprises, and transfer payments were responsible for the downswing.

Purchases of goods and services slowed to a $2-1/2 billion increase from an $11-1/2 billion increase. Nondefense purchases increased $1 billion after increasing $9 billion; the deceleration was in purchases of agricultural

commodities by the Commodity Credit Corporation (CCC) and in purchases related to the 1990 Census of Population and Housing. Defense purchases increased $1-1/2 billion, somewhat less than in the second quarter.

Subsidies less the current surplus of government enterprises fell $11 billion after declining $4-1/2 billion. In the current surplus of government enterprises, the deficit of the CCC declined $2-1/2 billion after an increase. Agricultural subsidies declined in both quarters--$8-1/2 billion in the third and $7 billion in the second. The level of net payments to farmers was negative in the third quarter, an unusual occurrence that resulted from farmers refunding overpayments of 1988 deficiency payments.

Transfer payments declined $1/2 billion after increasing $7 billion. The downswing was more than accounted for by payments to foreigners, which declined $5 billion after an even larger increase; the second-quarter increase included unusually large foreign assistance payments. Transfer payments to persons increased $4-1/2 billion after a small increase; the second-quarter increase was held down by the phaseout of the catastrophic medical insurance program.

Among other expenditures, net interest paid increased $6-1/2 billion, about the same as in the second quarter. Grants-in-aid to State and local governments declined $1-1/2 billion after increasing in the second quarter; the turnaround was in grants for education, medicaid, and highways.

Cyclically adjusted surplus or deficit.--When measured using cyclical adjustments based on a 6-percent unemployment rate trend GNP, the Federal defict on the national income and product accounts basis decreased from $182 billion in the second quarter to $155-1/2 billion in the third (see table 3 on page 25). The cyclically adjusted deficit as a percentage of the 6-percent unemployment rate trend GNP declined from 3.4 percent in the second quarter to 2.8 percent in the third.

The State and local sector.--The State and local government surplus increased $1/2 billion, to $39 billion, as receipts increased more than expenditures.

Receipts increased $16-1/2 billion in the third quarter after increasing $8-1/2 billion in the second. Indirect business tax and nontax accruals increased $11-1/2 billion after increasing $1-1/2 billion. The acceleration largely stemmed from two sources: An unusual number of law changes in the third quarter that resulted in increases of $2 billion in general sales taxes, $1 billion in gasoline taxes, $1/2 billion in tobacco taxes, and $1 billion in other indirect business taxes; and a $1 billion payment from a major petroleum company to Alaska in settlement of a royalty lawsuit. Personal tax and nontax receipts increased $5 billion after increasing $3 billion; most of the acceleration was attributable to unusually large refunds paid in the second quarter. Contributions for social insurance increased $1 billion in each quarter, and corporate profits tax accruals increased $1/2 billion in each quarter. Grants-in-aid declined $1-1/2 billion after increasing $3 billion.

Expenditures increased $16 billion in the third quarter, twice the increase in the second. The acceleration was in purchases of goods and services, which increased $13 billion after increasing $5 billion. Current-dollar purchases of petroleum increased $2 billion (reflecting higher petroleum prices) after a $1 billion decline. Education construction increased $1 billion after a $1/2 billion decline, and highway construction decreased $1/2 billion after a $3-1/2 billion decrease. All other categories of expenditures combined increased $3-1/2 billion, about the same as in the second quarter.

(1) Quarterly estimates in the national income and product accounts are expressed at seasonally adjusted annual rates, and quarterly changes are differences between these rates. Quarter-to-quarter percent changes are annualized. (Dollar figures shown in the text are rounded to the nearest $1/2 billion.)

Real, or constant-dollar, estimates are expressed in 1982 dollars and are based on 1982 weights. (Alterantive measures based on more current weights are shown in tables 4 and 5 on page 26.)

(2) On the export side, factor income consists lawrgely of receipts by U.S. residents of property income (profits and interest) from direct and portfolio investment abroad. On the import side, factor income consists largely of payments to foreigners of property income from similar investment in the United States. For more detail, see the following BEA publications: Foreign Transactions, Methodology Paper Series MP-3 (Washington, DC: U.S. Government Printing Office, May 1987); and The Balance of Payments of the United States (Washington, DC: U.S. Government Printing Office, May 1990). Order information is on the inside back cover of this issue.

Douglas R. Fox prepared the sectionon the revisions in the national income and product accounts, the staff of the Current Business Analysis Division prepared the section on real GNP, Daniel Larkins prepared the section on corporate profits, and David T. Dobbs prepared the section on the government sector.