A downward revision in State Essay

ACCORDING to the “flash” estimates, real GNP increased atan annual rate of 2 percent in the first quarter of 1985, compared with4-1/2 percent in the fourth quarter of 1984.

The GNP fixed-weightedprice index increased at an annual rate of 4 percent, up from 3-1/2percent in the fourth quarter (table 1). sup.1 The “flash” estimate of real GNP includes another largechange in net exports–a decline, following an increase of $13-1/2billion in the fourth quarter. Based on merchandise trade data for only1 month of the quarter, imports swung to a large increase, and exportsagain declined slight. sup.

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2 Accordingly, gross domestic purchases,which includes imports but excludes exports, increased more in the firstquarter than did GNP. As explained in table 2, gross domestic purchasesis a measure of U.S. demand for goods and services–whereverproduced–by persons, investors, and government, and GNP is a measure ofU.

S. production. Except in the fourth quarter, U.S.

demand recently hasincreased more than has U.S. production. Over the year from the firstquarter of 1984, U.S. demand increased about 4-1/2 percent and U.

S.production increased 3-1/2 percent. The corresponding final salesmeasures also show a difference of 1 percentage point. Final sales todomestic purchasers increased about 5-1/2 percent over the last year,and final sales of GNP increased about 4-1/2 percent. The first-quarter increase in U.S.

demand was largely accounted forby personal consumption expenditures (PCE). Changes in fixedinvestment, government purchases, and inventory investment were small tomoderate, and partly offsetting. U.S. demand had increased muchless–only 1 percent–in the fourth quarter, as a sharp decline ininventory investment almost offset increases in the other components. First-quarter developments in the components of real GNP, in GNPprices, and in personal income are sketched below on the basis of dataavailable as of mid-March. * PCE increased more than the 3-1/2 percent registered in thefourth quarter. Although durable goods increased less than in thefourth quarter, non-durable good swung from a small decline to a sizable increase, and services increased slightly more than in the fourthquarter.

In durables, motor vehicles–largely due to trucks–were upmore than in the fourth quarter, but furniture and equipment were upsubstantially less than in that quarter. In nondurables, the swing waslargely due to an increase in food following a decline in the fourthquarter; swings in energy–gasoline as well as fuel oil and coal–alsocontributed. In services, electricity and gas increased after a slightdecline in the fourth quarter, reflecting the effects of unseasonable weather on heating ependitures. In the fourth quarter, the weather wasmild in the Eastern part of the country; in the early part of the firstquarter, severe cold was widespread. * Nonresidential fixed investment was flat after an 8-1/2-percentincrease in the fourth quarter. Structures increased, although slightlyless than the 17-percent increase in the fourth quarter. This patternlargely reflected that of commercial structures; other types ofstructures have registered smaller, and partly offsetting, changes inrecent quarters.

A decline in producers’ durable equipment wasmore than accounted for by equipment other than motor vehicles. Adecline in equipment other than motor vehicles–the first in over 2years–was largely due to a sharp drop in computers. * Residential investment was unchanged following two consecutivequarters of decline. Construction of multifamily housing, which hadheld up earlier, slipped in the first quarter. Single-family housingstabilized, reflecting the lagged effect of the decline in mortgagerates since last July. The “other” component (largelyadditions and alterations, mobile homes, and commisssions on house(sales) again changed little.

* Business inventories appear to have accumulated at a moderatelyfaster rate than in the fourth quarter. Motor vehicle inventories–theonly part of inventories based on more than 1 month of source data forthe first quarter–registered another substantial increase, asautomakers continued to build inventories from a low level at thebeginning of the 1985 model year. Only fragmentary information isavailable about farm inventories; it appears that accumulation continuedin the first quarter. Nonfarm inventories other than motor vehiclesappear to have increased somewhat more than the $5-u/2 billionregistered in the fourth quarter. It is likely that the ratio of totalbusiness inventories to total final sales moved up in the first quarter,but remained in the 3.01-3.09 range within which it has fluctuated forthe past 2 years.

* Net exports, as mentioned earlier, appear to havedeclined substantially. Imports registered a large increase, andexports registered another slight decline. In merchandise imports,which more than accounted for the increase, most nonpetroleum endusecommodity categories increased after declining in the fourth quarter;petroleum imports declined.

Investment income payments appear to havedeclined again, partly reflecting lopwer interest rates on portfolioinvestment. In exports, a decline in investment income receipts morethan offset in increase in merchandise trade. * Government purchases increased less than the 6 percent registeredin the fourth quarter. The slowing was in Federal purchases, bothdefense and nondefense. Defense purchases, which tend to be erratic,had increased 17-1/2 percent in the fourth quarter; a much smallerincrease in the first reflected smaller increases in purchases ofdurable goods and services. Nondefense purchases showed little changeacross the several categories of purchases, including those of theCommodity Credit Corporation. State and local purchases increasedslightly, reflecting slight increases in the several categories, exceptstructures. In the fourth quarter, a decline in structures had offsetslight increases in the other categories.

* The GNP fixed-weighted price index increased 4 percent, up from3-1/2 percent in the fourth quarter. The first-quarter increase wasboosted 0.5 percentage point by a Federal pay raise in January, which isreflected in the prices of employee services purchased by the FederalGovernment. Thus, other GNP prices in total increased about as much asin the fourth quarter. Among them, prices of fixedinvestment–especially residential–accelerated slightly; PCEprices–largely due to energy prices, which declined–deceleratedslightly. * Personal income increased about $47-1/2 billion, only slightlyless than the $49 billion registered in ther fourth quarter. A numberof special factors contributed to substantially different movements inseveral components in the two quarters.

Without these special factors,personal income would have increased $40-1/2 billion, compared with $52billion in the fourth quarter. Wages and salaries in government and government enterprises in thefirst quarter included the Federal pay raise, which added $3 billion,and a retroactive payment and pay raise for Postal Service employees,which added $1-1/2 billion. Farm proprietors’ income included asmall decline in subsidies after a $5 billion increase in the fourthquarter. Among transfer payments, military retirement pay included a$5-1/2 billion increase, following a decline in the fourth quarter ofthe same amount, because the Deficit Reduction Act of 1984 shifted thepayment of benefits scheduled for December 31, 1984 to January 1, 1985.The impact on transfer payments of this shift was partly offset by adecline in retroactive Social Security benefit payments of $2-1/2billion, following an increase of the same amount in the fourth quarter.

These payments result largely from the recalculation of the earningsbase underlying benefits for retirees whose post-retirement work raisesthe base. Finally, cost-of-living adjustments added a total of $8-1/2billion to benefit payments under Social Security and several otherretirement and income-support programs. A change in the Social Securitywage base and tax rate added $8-1/2 billion to the increase incontributions for social insurance, which are deducted in derivingpersonal income. With the exception of personal interest income, other components ofpersonal income increased roughly as much as they had in the fourthquarter. Personal interest income again decelerated, reflecting thewidespread decline in interest rates.

The first-quarter increase wasless than the $6-1/2 billion increase in the fourth quarter, which, inturn, was down from increases that had exceeded $20 billion in thesecond and third quarters. Beginning in the first quarter, personal taxes reflected theindexing of Federal income taxes under the Economic Recovery Tax Act of1981. Indexing lowered personal taxes $7 billion, so–despite aslightly larger increase in the tax base than in the fourthquarter–they increased less than in the fourth quarter. Thus, theincrease in disposable personal income was about the same in bothquarters. In real terms, however, the increase was less than the 3-1/2percent registered in the fourth quarter, because prices–as measured bythe implicit price deflator for PCE–increased more.

The first-quarterincrease in personal outlays–in which PCE predominates–was large.Accordingly, after a small decline in the fourth quarter, personalsaving dropped sharply in the first. The saving rate, which had been6.

2 percent in the fourth quarter, fell several tenths of a percentagepoint. The Fourth Quarter: Corporate Profits and the Government Sector Preliminary estimates of corporate profits for the fourth quarterof 1984 have been completed. Their compilation makes it possible toestimate corporate profits tax accruals for the fourth quarter, roundingout the estimates of receipts and expenditures of the government sector. The 75-day revisions of the national income and product accountsfor the fourth quarter are shown in table 3. Corporate profits Profits from current production–profits with inventory valuationadjustment (IVA) and capital consumption adjustment (CCAdj)–increased$10-1/2 billion, to $293-1/2 billion, in the fourth quarter, followingan $8 billion decline in the third. Domestic profits of financialcorporations were unchanged in the fourth quarter; those of nonfinancialcorporations were up $14 billion; and those from the rest of the worldwere down $3-1/2 billion.

Real gross product of domestic0 nonfinancial corporations hadremained unchanged in the third quarter and increased 5-1/2 percent inthe fourth. The larger product and increased profits per unit ofproduct together boosted total profits of nonfinancial corporations inthe fourth quarter. Unit prices received by corporations and unit costspaid by them both increased, but prices increased more. Labor andnonlabor costs increased at about the same rate. Adjustment and disposition of profits its before tax.–Profitsbefore tax–profits without IVA and CCAdj–increased $6 billion, to$230-1/2 billion, following a $21-1/2 billion decline. The IVA andCCAdj convert inventories and depreciation reported by business for taxpurposes to those used in the national income and product accounts(NIPA’s). The CCAdj was up $6 billion, to $64-1/2 billion, in thefourth quarter, matching the third-quarter increased and somewhat abovethe increases in the first two quarters.

The steady increases reflectmainly the effect of shorter service lives for depreciation of capitalpermitted by the Economic Recovery Tax Act of 1981 (ERTA). The effectsof ERTA have become more pronounced as proportionately more investmentshave become eligible for shorter service lives. The CCAdj accounted forabout 20 percent of profits from current production in the third andfourth quarters. In the fourth quarter, the IVA declined $1-1/2 billion. In thethird quarter, it had increased $7 billion. The fourth-quarter IVAreflects relative stability of inventory prices during the quarter.

Corporate profits tax liability increased $5 billion in the fourthquarter, to $88-1/2 billion, following a $12-1/2 billion decline. Thefluctuation in tax liability reflects that in profits before tax.Dividends increased $2 billion, to $83 billion, matching the previousincrease. Undistributed profits declined $1 billion, to $59 billion,following a $10 billion decline.

Profits by industry.–Profits with IVA but without CCAdj–thevariant of profits available by industry–increased $4-1/2 billion inthe fourth quarter, to $229 billion, following a $14 billion decline. Domestic profits of financial corporations were unchanged, at$26-1/2 billion, following a $2-1/2 billion decline. Domestic profitsof nonfinancial corporations increased $8 billion, to $181-1/2 billion,following a $15 billion decline. Manufacturing and trade accounted formost of the increase.

Widespread increases in durable goodsmanufacturing more than offset a decline in nondurable goodsmanufacturing–largely in petroleum and food. Both wholesale and retailtrade profits were up. Government sector The fiscal position of the government sector in the national incomeand product accounts deteriorated in the fourth quarter; the combineddeficit of the Federal Government and of the State and local governmentsincreased $8-1/2 billion to $141-1/2 billion. A $16-1/2 billionincrease in the Federal deficit was partly offset by an $8 billionincrease in the State and local government surplus. However, for theyear 1984, the fiscal position of the government sector improved; thecombined deficit, at $122-1/2 billion, was $12 billion lower than in1983. This improvement was largely accounted for by an increase in theState and local government surplus. The Federal sector.–The Federal Government deficit increased$16-1/2 billion in the fourth quarter to $197-1/2 billion, asexpenditures increased more than receipts.

For the year 1984, thedeficit was $175-1/2 billion, down $3 billion from 1983. Receipts increased $16 billion, compared with $2 billion in thethird quarter; the acceleration was accounted for by corporate profitstax accruals, which increased $4-1/2 billion following a $10-1/2 billiondecline in the third quarter. Personal tax and nontax receiptsincreased $8-1/2 billion, contributions for social insurance increased$4 billion, and indirect business tax and nontax accruals wereunchanged. Expenditures increased $33 billion, compared with $19 billion inthe third quarter; the acceleration was largely accounted for bynational defense purchases of goods and services, which increased$11-1/2 billion following a $1/2 billion decline in the third quarter.

The acceleration in defense purchases was attributable to a strongrebound in the delivery of military equipment, which declined sharply inthe third quarter. Third-quarter deliveries were depressed by severalfactors; a major one was the postponement of deliveries while qualitycontrol problems were resolved. The fourth-quarter rebound alsoreflected the delivery of the first B1 bomber (over $i billion at anannual rate).

Transfer payments to foreigners increased $5-1/2 billionas the result of a large payment to Israel. Grants-in-aid to State andlocal governments increased $5 billion and included increases inmedicaid, highways, and education. Net interest paid and subsidies lessthe current surplus of government enterprises increased $4-1/2 billioneach; the latter was largely for subsidies to farmers. All otherexpenditures increased $2-1/2 billion.

Cyclically adjusted Federal budget.–When measured using cyclical adjustments based on middle-expansion trend GNP, the Federal fiscalposition moved from a deficit of $180 billion in the third quarter to adeficit of $202 billion in the fourth (see table 3 on page 17). Thecyclically adjusted deficit as a percentage of middle-expansion trendGNP increased from 4.

9 percent in the fourth–a move toward a moreexpansionary fiscal position. The State and local sector.–The State and local government surplusincreased $8 billion, to $56 billion, as receipts increased more thanexpenditures.

Most of the increase–$6-1/2 billion–was in the surplusof “other” funds, that is, other than social insurance, funds.For the year 1984, the surplus was $53 billion, up $9 billion from 1983.Of that increase, $5 billion was in the social insurance fund surplusand $4 billion was in the other funds surplus. Receipts increased $15 billion, compared w with $4 billion in thethird quarter. The acceleration was largely accounted for by Federalgrants-in-aid and by corporate profits tax accruals. Federal grants, asmentioned, increased $5 billion; corporate profits taxes increased $1billion, following a $2-1/2 billion decline in the third quarter.Indirect business tax and nontax accruals increased $6 billion, of which$3 billion was in sales taxes. Personal tax and nontax receiptsincreased $2-1/2 billion, and contributions for social insuranceincreased $1 billion.

Expenditures increased $7 billion, compared with $11 billion in thethird quarter; this deceleration was accounted for by a substantialslowdown in purchases of goods and services. Purchases increased $6billion in the fourth quarter, compared with $11-1/2 billion in thethird quarter. This decelaration was largely attributable to thepurchase of structures, which declined $1-1/2 billion, following a $3billion increase; highways accounted for the shift. All otherexpenditures increased $1 billion in the fourth quarter.

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