the BUSINESS SITUATION REVISED (45-day) estimates show that real GNP increased at anannual rate of 2 percent in the third quarter of 1984 (table 1).Preliminary (15-day) estimates, published a month ago, had shown a 21/2-percent increase.1 The only sizable revisions were an upwardrevision of $3 1/2 billion in nonresidential fixed investment (mainlydue to a revision in producers’ durable equipment) and a downwardrevision of $4 billion in net exports (due to a downward revision inexports and an upward revision in imports). A small upward revision inpersonal consumption expenditures was more than accounted for byservices. Small downward revisions were in residential investment,change in business inventories (due to nonfarm inventories), andgovernment purchases (more than accounted for by national defensepurchases).
The GNP fixed-weighted price index, which registered a4-percent increase in the third quarter, was revised little. 1. Quarterly estimates in the national income and product accountsare expressed at seasonally adjusted annual rates, and quarterly changesin them are differences between these rates.
Quarter-to-quarter percentchanges are compounded to annual rates. Real, or constant-dollar,estimates are expressed in 1972 dollars. Overall, the economic picture presented in the October”Business Situation’ has not changed significantly.
Thethird-quarter increase in real GNP was a marked slowdown from increasesof 7 percent and 10 percent in the second and first quarters,respectively. A swing in final sales–to a small decline after a sharpincrease in the second quarter–more than accounted for thethird-quarter deceleration in GNP; an increase in inventory investmentprovided only a partial offset. Within final sales, all componentscontributed to the third-quarter swing; personal consumptionexpenditures contributed nearly onehalf and net exports more thanonefourth. Corporate profits Profits from current production– profits with inventory valuationadjustment (IVA) and capital consumption adjustment (CCAdj)–declined $91/2 billion in the third quarter, to $281 1/2 billion, following a $131/2 billion increase in the second quarter. Domestic profits offinancial corporations were down $2 billion; those of nonfinancialcorporations, $7 billion; and profits from the rest of the world, $1/2billion. Occasional dips in profits are not uncommon as expansionsmature; therefore, it is too early to say whether profits have peakedyet for this expansion.
Even after a peak in profits, however, GNP hastypically continued to expand for several quarters. The decline in profits follows six quarters of consecutiveincreases and reflects the progressive slowing of real GNP in 1984. Realcorporate product also slowed. In the third quarter, it increased 1/2percent, following six quarters of growth that ranged from 4 1/2 to 15percent. Per unit profits declined, more than offsetting the slight increasein real product. Costs incurred and prices received by corporations perunit of real product were up, but the increase in costs exceeded that inprices. Both labor and nonlabor costs increased– labor costs by morethan twice as much as nonlabor costs. Adjustments to profits.
–Profits before tax–profits without IVAand CCAdj–declined $22 1/2 billion to $223 1/2 billion, following a $21/2 billion increase in the second quarter. The IVA and CCAdj convertinventories and depreciation reported by business to those used in thenational income and product accounts (NIPA’s). The CCAdj was up $6billion, following a $4 1/2 billion increase; the increases mainlyreflected the effect of shorter service lives for depreciation ofcapital permitted under the Economic Recovery Tax Act of 1981.
The IVAagain increased, by $7 billion, reflecting smaller increases ininventory prices. In the second quarter, it had increased $6 billion. Disposition of profits before tax.– Corporate profits tax liability declined $11 1/2 billion, to $84 1/2 billion, following a $3billion increase. The 1984 quarterly estimates incorporate the effectsof the tax changes resulting from the Deficit Reduction Act of 1984.
(For a detailed explanation of the changes and their effects, see theAugust 1984 issue of the SURVEY.) The third-quarter decline in taxliability reflected the decline in profits before tax. Dividends wereup $1 1/2 billion, to $81 1/2 billion, following a $2 billion increase.Undistributed profits were down $12 billion, to $58 billion, following a$2 1/2 billion decline. Profits by industry.
–Profits with IVA but without CCAdj–thevariant of profits available by industry–declined $15 1/2 billion inthe third quarter, to $223 1/2 billion, following a $9 billion increasein the second quarter. Domestic profits of financial corporations were down $2 billion, to$27 billion, following no change. Savings and loan associations’profits more than accounted for the decline.
Domestic profits of nonfinancial corporations declined $13 billion,to $176 billion, following a $13 billion increase. Manufacturers’profits accounted for about three-fourths of the decline. Withinprofits of manufacturers of nondurable goods, declines were widespread;profits of manufacturers of petroleum and coal products and of chemicalsand allied products accounted for most of the decline. Profits ofdurable goods manufacturers changed little.
In nonmanufacturing industries, decreases in trade and in thetransportation, communication, and utilities group more than offset asmall increase in other nonmanufacturing industries. Within trade,retail trade more than accounted for the decline. The change in theseprofits is consistent with the third-quarter slowing in personalconsumption expenditures. Government Sector The fiscal position of the government sector in the national incomeand product accounts (NIPA’s) deteriorated in the third quarter, asthe combined deficit of the Federal Government and of the State andlocal governments increased $24 billion. The deterioration occurred atboth levels of government: The Federal Government deficit increased,and the State and local government surplus declined. However, at $131billion, the combined deficit was lower than a year earlier. Thisimprovement was more than accounted for by a $4 billion decline in theFederal deficit. The Federal sector The Federal Government deficit increased $13 billion in the thirdquarter to $177 billion, as expenditures increased more than receipts.
Receipts increased $3 billion, compared with $18 billion in the secondquarter. The slowing was largely due to corporate profits tax accruals,which declined $9 billion–reflecting the drop in corporateprofits–after a moderate increase. Personal tax and nontax receiptsagain increased $9 billion. Contributions for social insuranceincreased $3 billion, and indirect business tax and nontax accrualsincreased about $1/2 billion, both somewhat less than in the secondquarter. In the latter, a $1 billion increase in customs duties andnontaxe was partly offset by a decline in windfall profit taxes. Expenditures increased $16 1/2 billion, compared with $20 1/2billion in the second quarter. Net interest paid increased $11 billion,accounting for over two-thirds of the increase in total expenditures.Nondefense purchases increased $7 billion: Purchases by the CommodityCredit Corporation (CCC) increased $5 1/2 billion, and all otherpurchases increased $1 1/2 billion.
The increase in CCC purchases waslargely the result of regular operations; PIK transactions accounted forless than $1 billion. Transfer payments to persons increased $2 1/2billion; a $3 billion increase in Social Security benefits was partlyoffset by a $1/2 billion decline in unemployment benefits. All other categories of expenditures declined. Subsidies less thecurrent surplus of government enterprises declined $2 1/2 billion,reflecting declines in the CCC deficit ($1 1/2 billion) and inagricultural subsidies ($1/2 billion).
Grants-in-aid to State and localgovernments declined $1 billion, and transfer payments to foreigners andnational defense purchases declined $1/2 billion each. The decline innational defense purchases was more than accounted for by a significantfalloff in the delivery of all types of military equipment (see table 2on page 9). Cyclically adjusted budget.
–When measured using cyclicaladjustments based on middle-expansion trend GNP, the Federal fiscalposition moved from a deficit of $165 billion in the second quarter to adeficit of $173 billion in the third (see table 3 on page 10). Thecyclically adjusted deficit as a percentage of middle-expansion trendGNP increased from 4.5 percent in the second quarter to 4.7 percent inthe third–a move toward a more expansionary fiscal position. Fiscal year 1984.–For fiscal year 1984, which ended September 30,the Federal Government deficit (on the NIPA basis) amounted to $171billion, slightly higher than the deficit projected in the mid-sessionreview of the unified budget (see the August SURVEY for details of themidsession review).
Receipts were $6 billion lower, and expenditureswere $5 billion lower, than previously estimated. The State and local sector The State and local government surplus declined $8 1/2 billion inthe third quarter to $46 billion, as expenditures increasedsignificantly more than receipts. A large decline in the surplus of”other’ funds was partly offset by an increase in the surplusof social insurance funds. Receipts increased $2 1/2 billion, compared with $11 billion in thesecond quarter. The slowing was largely due to declines in corporateprofits tax accruals ($2 billion) and in federal grants-in-aid ($1billion).
Indirect business tax and nontax accruals increased $3 1/2billion; property taxes and sales taxes contributed $2 billion and $11/2 billion, respectively, to the increase. Personal tax and nontaxreceipts and contributions for social insurance increased $1 billioneach. Expenditures increased $11 1/2 billion, slightly more than in theprevious quarter. Purchases of goods and services more than accountedfor the increase; all other expenditures, on balance, declined $1/2billion. Within purchases, compensation increased $4 1/2 billion,construction increased $4 billion, and all other purchases increased $3billion. More than one-half of the increase in construction wasaccounted for by highway construction, which has increased sharply–$5billion –since the first quarter of 1984. Alternative measure of fiscal position. –Table 2 updates thealternative measure of the State and local government fiscal positionintroduced in the March 1984 SURVEY.
The update incorporates the NIPArevisions of July 1984, recent flow-of-funds revisions by the FederalReserve Board, and preliminary 1982-83 Governmental Finances data fromthe Census Bureau. The basic fiscal position of State and localgovernments as shown by the alternative measure is the same as shown inthe March presentation: State and local governments recorded deficits in1981 and 1982 and then swung to surplus in 1983. However, the fiscalposition in 1981 looks better than previously estimated, but the deficitin 1982 is $6 1/2 billion higher, and the surplus in 1983 is $5 1/2billion lower, than previously estimated. November ballot highlights.
–A number of state and local tax andexpenditure issues were up for voter consideration in November. Majorlimitations on taxes, expenditures, or both, appeared on ballots inCalifornia, Michigan, Nevada, and Oregon; all were defeated. Proposalsto increase general sales taxes were defeated in Arkansas and WestVirginia, as was a proposal to exempt grocery food from sales tax coverage in Idaho. In contrast, voters approved several bonded debtissues and lotteries. Bond issues on the ballots totaled almost $5 billion, the largestvolume of issues offered for approval since 1975. The largest issuesapproved were $2 1/2 billion in California for water conservancy andpollution control, schools, veterans’ loans, and hazardous waste cleanup, and over $1/2 billion in Alaska for financing veterans’housing.
Over $1/2 billion in new issues were rejected; major turndownswere in Arkansas (for waste disposal) and West Virginia (for a varietyof projects). Four States–California, Missouri, Oregon, and WestVirginia –approved new lotteries. When the new lotteries are in fulloperation (probably in the fiscal year beginning July 1986), it isestimated that they will add a total of $1/2 billion annually to staterevenues. Table: 1.–Revisions in Selected Component Series of theNIPA’s, Third Quarter of 1984 Table: 2.–Derivation of an Alternative Measure of the State andLocal Government Fiscal Position, 1980-83