REAL GNP increased at an annual rate of 2-1/2 percent in the third
quarter, marking the eight consecutive quarter of increase. This
increase–1 percentage point less than that reported a month ago in the
“flash” estimate–followed increases of 7 percent and 10
percent in the second and first quarters, respectively (table 1). Over
the two quarters of progressive deceleration, final sales and business
inventory investment each shifted sharply but in opposite directions.
In the second quarter, final sales accelerated from an increase of 3-1/2
percent to one of 10-1/2 percent, but were more than offset in their
effect on GNP by inventories. In the third quarter, final sales slowed
to a standstill, and were only partly offset in their effect on GNP by
inventories. Within final sales, all components except residential
investment contributed to the third-quarter deceleration; personal
consumption expenditures (PCE) accounted for about one-half (chart 1).
Over the eight quarters since the trough in real GNP in the third
quarter of 1982, real GNP increased at an annual rate of 5-1/2 percent
(table 2). (This period is hereafter referred to as recovery, even
though real GNP surpassed its previous peak, and thus moved into
expansion, in the second quarter of 1983). This rate of increase is
about the same as that for the median of the seven preceding recoveries
and for the 1975-77 recovery. The 1975–77 recovery is singled out
because it followed a recession similar in depth and duration to the one
preceding the current recovery. The rate of increase in final sales was
also about the same in the current recovery as in the median of the
seven preceding and 1975-77 recoveries. Thus, inventory investment
contributed about as much to the increase in GNP in the current recovery
as in the median and 1975-77 recoveries.
Within final sales, the positive and negative contributions of
fixed investment and net exports, respectively, stand out. The rates of
increase in fixed investment, and in its nonresidential and residential
components, were much higher in the current recovery than in the median
of recoveries–indeed, they were highest among all seven preceding
recoveries. Net exports reflectd a much higher rate of increase in
imports–more than twice as strong as in the median and, in fact,
strongest among all seven preceding recoveries–and a lower rate of
increase in exports. (Developments over the current recovery in fixed
investment and in net exports are highlighted in the section on real GNP
that follows.) The rate of increase in PCE in the current recovery was
somewhat more than in the median, but somewhat less than in 1975-77, and
the rate of increase in government purchases was higher than in the
median and 1975-77 recoveries.
Table 3 shows an alternative breakdown of GNP, which sheds light on
developments in the various sectors. As is typical of most recoveries,
the business sector, and its nonfarm and nonfarm less housing
subsectors, increased more than GNP, at annual rates of 6-1/2 to 7
percent. However, the amount by which these rates of increase exceeded
the rate of increase in GNP was somewhat larger in the current recovery
than in the median of earlier recoveries. Thus, the nonbusiness sectors
contributed less to GNP growth than is typical. Rest-of-the-world
product declined. Product originating in government–that is, the
compensation of government employees–showed only a very small increase,
a Federal, State, and local governments held down employment. At an
annual rate of only 1 percent, the increase in product originating in
households and institutions, was below its trend rate.
Motor vehicle output, which is the value of new autos and trucks
produced plus the margin on the sale of used autos by business, is shown
in the addenda to table 3. It increased at an annual rate of 17-1/2
percent in the current recovery. The recovery covers roughly the same
period as model years 1983 and 1984, which–as described in the article
on motor vehicles later in this issue–showed strong increases in both
auto and truck production.
Prices. –Inflation continued moderate. The GNP fixed-weighted
price index increased 4 percent in the third quarter, following
increases of 4-1/2, percent and 5 percent in the second and first
quarters, respectively (table 4). The third-quarter rate was about the
same as the average annual rate of the 2 years of recovery. Inflation
had averaged about 2 percentage points more in the 1975-77 recovery.
In the current recovery, the prices of most of the items shown in
the table registered increases within a few percentage points of the
increase in GNP prices: PCE prices increased at about the same rate,
prices of fixed investment increased somewhat less, and those paid by
government increased somewhat more. Import prices were the only prices
that declined over the period; the decline partly reflected the
appreciation of the dollar against most foreign currencies.
Productivity and costs. –Table 5 shows changes in real gross
product, aggregate hours, and compensation in the business economy other
than farm and housing. Productivity, as measured by real product per
hour, was flat in the third quarter, following increases in recent
quarters. The slowing froma 5-1/2-percent increase in the second
quarter reflected sharper deceleration in real product than in aggregate
Over the 2 years of recovery, productivity, which typically
increases during recoveries, increased at an annual rate of 3-1/2
percent–the strongest sustained growth since the 1975-77 recovery. Real
product increased 7 percent; aggregate hours increased 3-1/2 percent,
reflecting increases in employment and average weekly hours.
Productivity had increased faster during the 1975-77 recovery, when
aggregate hours grew at a much slower rate than i n the current
Unit labor cost increased 4 percent–more than in recent quarters.
However, the average increase for the 2 years of recovery–1 percent at
an annual rate–was by far the lowest sustained rate in a decade, and
contributed substantially to the low rate of inflation in final product
prices. In the 1975-77 recovery, unit labor cost had increased at an
annual rate of about 4 percent; compensation had increased more, and
real product less, than in the current recovery.
Employment and unemployment. –The civilian unemployment rate was
unchanged at 7.5 percent in the third quarter, following declines of 0.4
and 0.6 percentage points in the second and first quarters,
respectively. The third-quarter unemployment rate was about the same as
that prior to the recessionary runup in 1981-82 (chart 2). The decline
in the unemployment rate in the current recovery–whether measured as
2.5 percentage points from the third-quarter 1982 trough in real GNP or
as 3.1 points from the fourth-quarter 1982 peak in unemployment–was
more than double the decline in the 1975-77 recovery.
Employment gains in the third quarter, as measured by both the
household and the establishment surveys, quarters. Over the 2 years of
the current recovery, employment increased at an annual rate of 3
percent–about the same as in the 1975-77 recovery.
Average weekly hours for private nonfarm production workers
declined slightly in the third quarter. This decline was the first
since the fourth quarter of 1982. Over the 2 years, hours increased 0.4
to 35.2; the increase was much stronger than that in the 1975-77
The third-quarter deceleration in real GNP was in all major
components of final sales except residential investment. PCE changed
little, after an unusually large increase in the second quarter; net
exports declined much more than in the second quarter; and
nonresidential fixed investment and government purchases were up much
less. Residential investment registered little change in both quarters.
In contrast with final sales, change in business inventories–that is,
inventory investment–was up sharply in the third quarter, following a
sharp decline in the second.
Personal consumption expenditures
Real PCE changed little in the third quarter, after an increase of
8 percent in the second. Several factors may have led to the
third-quarter flattening in PCE, to which all three of its major
components contributed. Real disposable personal income decelerated
sharply in both the second and third quarters, and consumer
confidence–as measured, for example, by the Conference Board’s
consumer confidence index–slipped in the third quarter. Both had
increased during 1983 and the early part of 1984. Also, to some extent,
the flattening may have been an aftereffect of the unusually large
Expenditures for durable goods declined 3-1/2 percent in the third
quarter, after very strong–but decelerating–increases in each of the
preceding three quarters. The decline was spread across all major
categories: motor vehicles, furniture and household equipment, and other
A sharp falloff in expenditures for nondurable goods accounted for
about one-half the slowdown in total PCE. Expenditures for nondurables
were down slightly in the third quarter, following an increase of 10-1/2
percent. A decline in purchases of clothing and shoes, which had
registered a large increase in the second quarter, accounted for most of
the swing. Food, energy, and other nondurables all increased moderately
in the third quarter.
Expenditures for services increased 2 percent, following an
increase of 4-1/2 percent in the second quarter. Purchases of
electricity and gas, which had surged in the second quarter, declined in
the third. The decline reflected mild summer weather in many parts of
the country. A slowdown in foreign travel by U.S. residents and a
pickup in travel in the United States by foreigners also contributed to
the deceleration in services.
Nonresidential fixed investment
Real nonresidential fixed investment increased 8 percent in the
third quarter, following an increase of 21 percent in the second.
Producers’ durable equipment (PDE) and structures, which had both
increased 21 percent in the second quarter, increased 10-1/2 percent and
2 percent, respectively, in the third.
The third-quarter slowdown in PDE was in motor vehicles; other PDE
registered another sharp increase. Despite a third-quarter drop, motor
vehicles contributed substantially to the strength in PDE over most of
the recovery (table 6). Since the GNP trough, motor vehicles–which had
amounted to 15 percent of PDE at the trough–accounted for one-third of
the increase in PDE. Another one-third of the increase was accounted
for by office, computing, and accounting machinery; this category, which
consists mainly of computers, had amounted to 25 percent of PDE at the
Most of the sharp third-quarter slowdown in structures was in
commercial buildings, which increased slightly, following a 57-percent
increase in the second quarter. This component also dominated
structures over most of the recovery. Since the GNP trough, commercial
buildings–which amounted to 32 percent of structures at the
trough–accounted for most of the increase in structures.
Over the first eight quarters of recovery, nonresidential
investment and its PDE component both increased at rates substantially
higher than those in all seven preceding recoveries. The rate of growth
of structures was higher than in all but two.
Investment was especially strong during the second four quarters of
the current recovery. PDE grew almost twice as fast during the second
four quarters as during the first four. Structures turned around from
an 8-percent decline in the first four quarters, to an 18-percent
increase in the second four.
Many factors contributed to the surge in investment over the eight
quarters. Some of the major ones may be identified, although it would
be difficult to determine their relative importance. After-tax corporate
profits and the net cash flow of corporations, both in constant dollars,
increased rapidly. (The Economic Recovery Tax Act of 1981, which
shortened service lives for many types of capital, contributed to
improved cash flow.) Yields on corporate bonds–despite erratic upward
movement during much of the recovery–averaged several percentage points
lower than during the preceding recession. Appreciation of the dollar
against major foreign currencies reduced the price of imported capital
equipment. Capital stocks had increased very slowly in the 2 years prior
to the recovery, and, as a result, pent-up demand for modernization may
have developed. Further, the rate of capacity utilization in
manufacturing increased rapidly and, although it remained below previous
peaks, may have triggered spending for additional capacity.
Real residential investment increased 3 percent in the third
quarter, following an even smaller increase in the second. Multifamily
construction more than accounted for the third-quarter increase;
single-family construction fell, and the “other” component
(which includes additions and alterations, sales of new mobile homes,
and brokers’ commissions on sales of new and existing residences)
Over the eight quarters of recovery, residential investment
increased faster than it had in the seven earlier recoveries.
Single-family and multifamily construction both increased at annual
rates of about 40 percent, and both decelerated significantly in the
second four quarters of the recovery (table 6). Construction of
single-family units increased much faster than construction of
multifamily units in the first four quarters, and accounted for about
two-thirds of the increase in residential investment. In the second
four quarters, the reverse was true, as multifamily construction
accounted for about four-fifths of the (much smaller) increase in
Financial conditions played an important role in the growth of
residential investment in the recovery. Interest rates fell early in
the recovery (chart 3). From more than 16 percent at the GNP trough,
the mortgage commitment rate fell to less than 13 percent three quarters
later, before increasing about 1 percentage point in the third quarter
of 1983. The slower growth of residential investment over the second
four quarters of the recovery was associated with mortgage commitment
rates that hovered in the neighborhood of 13-1/2 percent until mid-1984,
when they increased to 14-1/2 percent.
The introduction of money market deposit accounts in December 1982
helped depository institutions attract funds for mortgage loans during
the recovery. A steadily increasing share of these loans was written
with adjustable rate provisions, which are widely credited with giving
considerable support to residential investment. Adjustable rate
mortgages, which had accounted for 44 percent of conventional mortgage
loans closed in the third quarter of 1982, accounted for 67 percent in
the third quarter of 1984.
Change in business inventories
Real business inventories increased $31 billion in the third
quarter, after increasing $20-1/2 billion in the second (table 7). Both
farm and nonfarm inventories contributed to the $11 billion step-up in
the rate of accumulation.
Nonfarm inventories increased $27 billion in the third quarter, $8
billion more than in the second. The pickup was most evident in
wholesale trade, where durables contributed twice as much as
nondurables. Inventory investment in manufacturing and in retail trade
changed little. In retail trade, a reduction in the rate of inventory
liquidation by auto dealers was largely offset by lower rates of
accumulation in inventories of nondurables and other durables.
Largely reflecting the course of its nonfarm component, inventory
investment has passed through three phases, since the GNP trough. In the
first three quarters of the recovery, inventories were liquidated at an
average annual rate of $15-1/2 billion. The next two quarters of the
recovery saw moderate accumulation that averaged $4 billion. In the
most recent three quarters, inventory investment increased
significantly, averaging $27-1/2 billion.
Farm inventory investment followed a different course. Farm
inventories were reduced substantially in each of the first four
quarters after the GNP trough, as farmers used inventories to supplement
production, which fell as a result of drought and Federal acreage
reduction programs. In the most recent four quarters, farm inventories
increased erratically; in the fourth quarter of 1983 and the first
quarter of 1984, they were boosted substantially by transfers of crops
from the Commodity Credit Corporation (CCC) to farmers under the
payment-in-kind (PIK) program.
In the first three quarters of recovery, large inventory
liquidation, combined with a moderate increase in final sales, led to a
sharp drop in inventory/sales ratios. Chart 4 shows two of these
ratios: the ratio of constant-dollar business inventories to total
business final sales, and the ratio of nonfarm business inventories to
final sales of goods and structures. The former dropped from 3.30 in
the third quarter of 1982 to 3.08 three quarters later; the latter
dropped from 4.68 to 4.36 over the same period. Declines in both ratios
continued in the next two quarters of the recovery, as the moderate
increases in inventories were more than balanced by increases in sales.
In the most recent three quarters, both ratios fluctuated; at the end of
the period, both remained far below their 1972-82 average levels. Both
ratios, therefore, suggest that the high rates of inventory investment
in these quarters are largely adjustments toward desired inventory-sales
Real net exports declined $11-1/2 billion–to –$22-1/2 billion–in
the third quarter, follwoing a $3 billion decline in the second (table
8). Exports were up $5-1/2 billion in the third quarter, but imports
jumped $16-1/2 billion.
The third-quarter deterioration in net exports was again in the
merchandise trade balance. Merchandise exports registered a small
increase in the third quarter, primarily in industrial supplies and
materials, automotive goods, and capital goods. A sharp increase in
merchandise imports was spread across most major end-use categories; the
increase in capital goods was especially strong.
In the current recovery, net exports declined each quarter, turning
negative in the first quarter of 1984 and becoming progressively more
negative. The deterioration amounted to $48-1/2 billion and was
concentrated in the merchandise trade balance, which declined $40
billion. Factor income contributed $3 billion to the deterioration, and
other services (such as U.S. Government transactions, largely those of
defense agencies, and expenditures for travel and transportation)
contributed $5 billion. Major factors that discouraged exports and
encouraged imports were appreciation of the dollar and faster economic
growth in the United States than abroad.
Real government purchases increased 8-1/2 percent in the third
quarter, following increases of 18-1/2 percent and 1 percent in the
second and first quarters, respectively. The quarterly pattern of
increases in 1984 largely reflected operations of the CCC, primarily
under the PIK program. (Transfers of crops to farmers from CCC
inventories are treated in the national income and product accounts as
negative Federal purchases.) Reductions in CCC inventories were
large–$9 billion–in the first quarter, as they had been in the fourth.
In the second quarter, CCC inventories were unchanged, as the PIK
program would down; CCC incentories increased $2 billion in the third
Other Federal nondefense purchases increased 5 percent in the third
quarter, following a 4-1/2-percent decline in the second quarter and no
change in the first. Federal defense purchases increased 7 percent in
the third quarter, about the average increase of the preceding two
Purchases by State and local governments increased 5 percent in the
third quarter, following increases of 3-1/2 percent in the first and
second quarters. The acceleration was in purchases of structures.
The Federal sector. –Changes in current-dollar Federal receipts
and expenditures on a NIPA basis are shown in table 9. Among
expenditures, purchases were up $11-1/2 billion; defense and nondefense
purchases were each up less than in the second quarter. Transfer
payments were up $2-1/2 billion, the same increase as the second uarter;
an increase in payments to persons more than offset a decline in foreign
payments. Net interest paid increased strongly–$10 billion. a $2-1/2
billion decline in subsidies less the current surplus of Government
enterprises was much less than that in the second quarter, which had
reflected the winding down of PIK payments to farmers. (The PIK subsidy payments are offset by the reductions in CCC inventories due to PIK, so
these transactions have no effect on total Federal expenditures.) These
changes and smaller changes in other components sum to a third-quarter
increase in expenditures of $21 billion.
Among receipts, an increase of $11 billion in personal tax and
nontax payments was largely due to continued growth in the taxable wage
base. Indirect business taxes were up about the same as in the second
quarter; contributions for social insurance were up, but less than in
any quarter since the fourth quarter of 1982. Estimates of corporate
profits, and thus of corporate profits tax accruals, are not yet
available. It is likely that profits before tax, and thus profits tax
accruals, declined. The third-quarter decline in corporate profits tax
accruals can be approximated by using a residual calculation of
corporate profits that assumes that the statistical discrepancy in the
national income and product accounts was the same as in the preceding
quarter. On the basis of this calculation of corporate profits tax
accruals, total receipts probably increased only $5 to $10 billion in
the third quarter.
An increase of this size in receipts would be considerably less
than that in expenditures, so the deficit on a NIPA basis would increase
about $10 to $15 billion from the $163-1/2 billion registered in the
Personal income increased $63 billion in the third quarter,
following an increase of about the same size in the second (table 10).
The similarity of the third- and second-quarter increases masked opposite movements in wage and salary disbursements and in farm
Wage and salary disbursements were up $25-1/2 billion in the third
quarter, $12 billion less than in the second. Wages and salaries in all
major private industry groups were up less than in the second quarter;
the deceleration was due to the weaker increases in employment and
earnings and the decline in average hours worked. Wages and salaries
lost due to the auto strike were minimal. The increase in government
wages and salaries was about the same as in the second quarter.
Farm proprietors’ income increased $5 billion in the third
quarter, after dropping $9 billion in the second. It had nearly
doubled–up $15 billion–in the first quarter. The quarter-to-quarter
volatility in farm income largely reflected the pattern of agricultural
subsidies, mainly under the PIK program. Payments under PIK increased $6
billion to $19 billion in the first quarter, and then fell to $1-1/2
billion in the second and to $1/2 billion in the third. The strength in
farm income in 1984 largely reflected a step-up in crop production.
Other components of personal income registered third-quarter
increases that were about the same as, or only moderately smaller or
larger than, those in the second quarter. A deceleration in nonfarm
proprietors’ income was largely in retail trade and construction.
Personal interest income registered another strong increase of $21-1/2
billion. Transfer payments increased slightly more in the third quarter
than in the second, and personal contribution for social
insurance–which are substracted in deriving the personal income
total–increased slightly less.
Largely reflecting the growth in the taxable wage base, increases
in personal tax and nontax payments have been in the range of
$10-1/2-$12-1/2 billion in the past several quarters. Disposable
personal income increased $50-1/2 billion, or 8 percent, in the third
quarter–only slightly less than it had in the second. Real disposable
personal income decelerated more sharply than did current-dollar
disposable income, due to an acceleration in the PCE implicit price
deflator. Real disposable income increased 3-1/2 percent in the third
quarter after an increase of 6-1/2 percent in the second.
Over the eight quarters of the current recovery, real disposable,
personal income increased 5-1/2 percent, about 1 percentage point more
than in the eight quarters of the 1975-77 recovery. In contrast, the
increase in current-dollar disposable income–9 percent–over the
current recovery was smaller than the 10-percent increase registered in
the 1975-77 recovery. The better performance of real income in 1982-84
is accounted for by the lower rate of inflation in the PCE implicit
price deflator; it increased 3-1/2 percent in the current recovery,
about 2 percentage points less than in the 1975-77 recovery.
The sharp deceleration in personal outlays in the third quarter,
coupled with the slight deceleration in disposable income, resulted in a
swing in personal saving from a decline to a substantial increase. The
personal saving rate increased to 6.3 percent in the second (chart 5).
Except for a dip of one-half percentage point in the second quarter of
1984, the personal saving rate has increased – steadily since the second
quarter of 1983, when it was only 4 percent–the lowest rate in more
than 30 years. In contrast, in the 1975-77 recovery, the rate had
declined steadily except in the initial quarter.