REAL GNP increased at an annual rate of 2-1/2 percent in the thirdquarter, marking the eight consecutive quarter of increase. Thisincrease–1 percentage point less than that reported a month ago in the”flash” estimate–followed increases of 7 percent and 10percent in the second and first quarters, respectively (table 1).
Overthe two quarters of progressive deceleration, final sales and businessinventory investment each shifted sharply but in opposite directions.In the second quarter, final sales accelerated from an increase of 3-1/2percent to one of 10-1/2 percent, but were more than offset in theireffect on GNP by inventories. In the third quarter, final sales slowedto a standstill, and were only partly offset in their effect on GNP byinventories.
Within final sales, all components except residentialinvestment contributed to the third-quarter deceleration; personalconsumption expenditures (PCE) accounted for about one-half (chart 1). Over the eight quarters since the trough in real GNP in the thirdquarter of 1982, real GNP increased at an annual rate of 5-1/2 percent(table 2). (This period is hereafter referred to as recovery, eventhough real GNP surpassed its previous peak, and thus moved intoexpansion, in the second quarter of 1983). This rate of increase isabout the same as that for the median of the seven preceding recoveriesand for the 1975-77 recovery. The 1975–77 recovery is singled outbecause it followed a recession similar in depth and duration to the onepreceding the current recovery. The rate of increase in final sales wasalso about the same in the current recovery as in the median of theseven preceding and 1975-77 recoveries. Thus, inventory investmentcontributed about as much to the increase in GNP in the current recoveryas in the median and 1975-77 recoveries.
Within final sales, the positive and negative contributions offixed investment and net exports, respectively, stand out. The rates ofincrease in fixed investment, and in its nonresidential and residentialcomponents, were much higher in the current recovery than in the medianof recoveries–indeed, they were highest among all seven precedingrecoveries. Net exports reflectd a much higher rate of increase inimports–more than twice as strong as in the median and, in fact,strongest among all seven preceding recoveries–and a lower rate ofincrease in exports. (Developments over the current recovery in fixedinvestment and in net exports are highlighted in the section on real GNPthat follows.) The rate of increase in PCE in the current recovery wassomewhat more than in the median, but somewhat less than in 1975-77, andthe rate of increase in government purchases was higher than in themedian and 1975-77 recoveries. Table 3 shows an alternative breakdown of GNP, which sheds light ondevelopments in the various sectors.
As is typical of most recoveries,the business sector, and its nonfarm and nonfarm less housingsubsectors, increased more than GNP, at annual rates of 6-1/2 to 7percent. However, the amount by which these rates of increase exceededthe rate of increase in GNP was somewhat larger in the current recoverythan in the median of earlier recoveries. Thus, the nonbusiness sectorscontributed less to GNP growth than is typical. Rest-of-the-worldproduct declined.
Product originating in government–that is, thecompensation of government employees–showed only a very small increase,a Federal, State, and local governments held down employment. At anannual rate of only 1 percent, the increase in product originating inhouseholds and institutions, was below its trend rate. Motor vehicle output, which is the value of new autos and trucksproduced plus the margin on the sale of used autos by business, is shownin the addenda to table 3. It increased at an annual rate of 17-1/2percent in the current recovery. The recovery covers roughly the sameperiod as model years 1983 and 1984, which–as described in the articleon motor vehicles later in this issue–showed strong increases in bothauto and truck production. Prices.
–Inflation continued moderate. The GNP fixed-weightedprice index increased 4 percent in the third quarter, followingincreases of 4-1/2, percent and 5 percent in the second and firstquarters, respectively (table 4). The third-quarter rate was about thesame as the average annual rate of the 2 years of recovery.
Inflationhad averaged about 2 percentage points more in the 1975-77 recovery. In the current recovery, the prices of most of the items shown inthe table registered increases within a few percentage points of theincrease in GNP prices: PCE prices increased at about the same rate,prices of fixed investment increased somewhat less, and those paid bygovernment increased somewhat more. Import prices were the only pricesthat declined over the period; the decline partly reflected theappreciation of the dollar against most foreign currencies. Productivity and costs. –Table 5 shows changes in real grossproduct, aggregate hours, and compensation in the business economy otherthan farm and housing. Productivity, as measured by real product perhour, was flat in the third quarter, following increases in recentquarters. The slowing froma 5-1/2-percent increase in the secondquarter reflected sharper deceleration in real product than in aggregatehours.
Over the 2 years of recovery, productivity, which typicallyincreases during recoveries, increased at an annual rate of 3-1/2percent–the strongest sustained growth since the 1975-77 recovery. Realproduct 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, whenaggregate hours grew at a much slower rate than i n the currentrecovery.
Unit labor cost increased 4 percent–more than in recent quarters.However, the average increase for the 2 years of recovery–1 percent atan annual rate–was by far the lowest sustained rate in a decade, andcontributed substantially to the low rate of inflation in final productprices. In the 1975-77 recovery, unit labor cost had increased at anannual rate of about 4 percent; compensation had increased more, andreal product less, than in the current recovery.
Employment and unemployment. –The civilian unemployment rate wasunchanged at 7.5 percent in the third quarter, following declines of 0.4and 0.6 percentage points in the second and first quarters,respectively.
The third-quarter unemployment rate was about the same asthat prior to the recessionary runup in 1981-82 (chart 2). The declinein the unemployment rate in the current recovery–whether measured as2.5 percentage points from the third-quarter 1982 trough in real GNP oras 3.
1 points from the fourth-quarter 1982 peak in unemployment–wasmore than double the decline in the 1975-77 recovery. Employment gains in the third quarter, as measured by both thehousehold and the establishment surveys, quarters. Over the 2 years ofthe current recovery, employment increased at an annual rate of 3percent–about the same as in the 1975-77 recovery. Average weekly hours for private nonfarm production workersdeclined slightly in the third quarter.
This decline was the firstsince the fourth quarter of 1982. Over the 2 years, hours increased 0.4to 35.2; the increase was much stronger than that in the 1975-77recovery. Real GNP The third-quarter deceleration in real GNP was in all majorcomponents of final sales except residential investment. PCE changedlittle, after an unusually large increase in the second quarter; netexports declined much more than in the second quarter; andnonresidential fixed investment and government purchases were up muchless.
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 asharp decline in the second. Personal consumption expenditures Real PCE changed little in the third quarter, after an increase of8 percent in the second. Several factors may have led to thethird-quarter flattening in PCE, to which all three of its majorcomponents contributed. Real disposable personal income deceleratedsharply in both the second and third quarters, and consumerconfidence–as measured, for example, by the Conference Board’sconsumer confidence index–slipped in the third quarter. Both hadincreased during 1983 and the early part of 1984. Also, to some extent,the flattening may have been an aftereffect of the unusually largesecond-quarter increase. Expenditures for durable goods declined 3-1/2 percent in the thirdquarter, after very strong–but decelerating–increases in each of thepreceding three quarters.
The decline was spread across all majorcategories: motor vehicles, furniture and household equipment, and otherdurable goods. A sharp falloff in expenditures for nondurable goods accounted forabout one-half the slowdown in total PCE. Expenditures for nondurableswere down slightly in the third quarter, following an increase of 10-1/2percent. A decline in purchases of clothing and shoes, which hadregistered a large increase in the second quarter, accounted for most ofthe swing. Food, energy, and other nondurables all increased moderatelyin the third quarter. Expenditures for services increased 2 percent, following anincrease of 4-1/2 percent in the second quarter.
Purchases ofelectricity and gas, which had surged in the second quarter, declined inthe third. The decline reflected mild summer weather in many parts ofthe country. A slowdown in foreign travel by U.S. residents and apickup in travel in the United States by foreigners also contributed tothe deceleration in services. Nonresidential fixed investment Real nonresidential fixed investment increased 8 percent in thethird quarter, following an increase of 21 percent in the second.Producers’ durable equipment (PDE) and structures, which had bothincreased 21 percent in the second quarter, increased 10-1/2 percent and2 percent, respectively, in the third.
The third-quarter slowdown in PDE was in motor vehicles; other PDEregistered another sharp increase. Despite a third-quarter drop, motorvehicles contributed substantially to the strength in PDE over most ofthe recovery (table 6). Since the GNP trough, motor vehicles–which hadamounted to 15 percent of PDE at the trough–accounted for one-third ofthe increase in PDE. Another one-third of the increase was accountedfor by office, computing, and accounting machinery; this category, whichconsists mainly of computers, had amounted to 25 percent of PDE at thetrough.
Most of the sharp third-quarter slowdown in structures was incommercial buildings, which increased slightly, following a 57-percentincrease in the second quarter. This component also dominatedstructures over most of the recovery. Since the GNP trough, commercialbuildings–which amounted to 32 percent of structures at thetrough–accounted for most of the increase in structures. Over the first eight quarters of recovery, nonresidentialinvestment and its PDE component both increased at rates substantiallyhigher than those in all seven preceding recoveries.
The rate of growthof structures was higher than in all but two. Investment was especially strong during the second four quarters ofthe current recovery. PDE grew almost twice as fast during the secondfour quarters as during the first four. Structures turned around froman 8-percent decline in the first four quarters, to an 18-percentincrease in the second four. Many factors contributed to the surge in investment over the eightquarters.
Some of the major ones may be identified, although it wouldbe difficult to determine their relative importance. After-tax corporateprofits and the net cash flow of corporations, both in constant dollars,increased rapidly. (The Economic Recovery Tax Act of 1981, whichshortened service lives for many types of capital, contributed toimproved cash flow.
) Yields on corporate bonds–despite erratic upwardmovement during much of the recovery–averaged several percentage pointslower than during the preceding recession. Appreciation of the dollaragainst major foreign currencies reduced the price of imported capitalequipment. Capital stocks had increased very slowly in the 2 years priorto the recovery, and, as a result, pent-up demand for modernization mayhave developed. Further, the rate of capacity utilization inmanufacturing increased rapidly and, although it remained below previouspeaks, may have triggered spending for additional capacity.
Residential investment Real residential investment increased 3 percent in the thirdquarter, following an even smaller increase in the second. Multifamilyconstruction 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)changed little. Over the eight quarters of recovery, residential investmentincreased faster than it had in the seven earlier recoveries.
Single-family and multifamily construction both increased at annualrates of about 40 percent, and both decelerated significantly in thesecond four quarters of the recovery (table 6). Construction ofsingle-family units increased much faster than construction ofmultifamily units in the first four quarters, and accounted for abouttwo-thirds of the increase in residential investment. In the secondfour quarters, the reverse was true, as multifamily constructionaccounted for about four-fifths of the (much smaller) increase inresidential investment. Financial conditions played an important role in the growth ofresidential investment in the recovery.
Interest rates fell early inthe recovery (chart 3). From more than 16 percent at the GNP trough,the mortgage commitment rate fell to less than 13 percent three quarterslater, before increasing about 1 percentage point in the third quarterof 1983. The slower growth of residential investment over the secondfour quarters of the recovery was associated with mortgage commitmentrates 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 1982helped depository institutions attract funds for mortgage loans duringthe recovery. A steadily increasing share of these loans was writtenwith adjustable rate provisions, which are widely credited with givingconsiderable support to residential investment. Adjustable ratemortgages, which had accounted for 44 percent of conventional mortgageloans closed in the third quarter of 1982, accounted for 67 percent inthe third quarter of 1984. Change in business inventories Real business inventories increased $31 billion in the thirdquarter, after increasing $20-1/2 billion in the second (table 7).
Bothfarm and nonfarm inventories contributed to the $11 billion step-up inthe rate of accumulation. Nonfarm inventories increased $27 billion in the third quarter, $8billion more than in the second. The pickup was most evident inwholesale trade, where durables contributed twice as much asnondurables. Inventory investment in manufacturing and in retail tradechanged little. In retail trade, a reduction in the rate of inventoryliquidation by auto dealers was largely offset by lower rates ofaccumulation in inventories of nondurables and other durables. Largely reflecting the course of its nonfarm component, inventoryinvestment has passed through three phases, since the GNP trough. In thefirst three quarters of the recovery, inventories were liquidated at anaverage annual rate of $15-1/2 billion. The next two quarters of therecovery saw moderate accumulation that averaged $4 billion.
In themost recent three quarters, inventory investment increasedsignificantly, averaging $27-1/2 billion. Farm inventory investment followed a different course. Farminventories were reduced substantially in each of the first fourquarters after the GNP trough, as farmers used inventories to supplementproduction, which fell as a result of drought and Federal acreagereduction programs. In the most recent four quarters, farm inventoriesincreased erratically; in the fourth quarter of 1983 and the firstquarter of 1984, they were boosted substantially by transfers of cropsfrom the Commodity Credit Corporation (CCC) to farmers under thepayment-in-kind (PIK) program.
In the first three quarters of recovery, large inventoryliquidation, combined with a moderate increase in final sales, led to asharp drop in inventory/sales ratios. Chart 4 shows two of theseratios: the ratio of constant-dollar business inventories to totalbusiness final sales, and the ratio of nonfarm business inventories tofinal sales of goods and structures. The former dropped from 3.30 inthe third quarter of 1982 to 3.08 three quarters later; the latterdropped from 4.68 to 4.36 over the same period. Declines in both ratioscontinued in the next two quarters of the recovery, as the moderateincreases in inventories were more than balanced by increases in sales.
In the most recent three quarters, both ratios fluctuated; at the end ofthe period, both remained far below their 1972-82 average levels. Bothratios, therefore, suggest that the high rates of inventory investmentin these quarters are largely adjustments toward desired inventory-salesrelationships. Net exports Real net exports declined $11-1/2 billion–to –$22-1/2 billion–inthe third quarter, follwoing a $3 billion decline in the second (table8).
Exports were up $5-1/2 billion in the third quarter, but importsjumped $16-1/2 billion. The third-quarter deterioration in net exports was again in themerchandise trade balance. Merchandise exports registered a smallincrease in the third quarter, primarily in industrial supplies andmaterials, automotive goods, and capital goods. A sharp increase inmerchandise imports was spread across most major end-use categories; theincrease in capital goods was especially strong. In the current recovery, net exports declined each quarter, turningnegative in the first quarter of 1984 and becoming progressively morenegative. The deterioration amounted to $48-1/2 billion and wasconcentrated in the merchandise trade balance, which declined $40billion.
Factor income contributed $3 billion to the deterioration, andother services (such as U.S. Government transactions, largely those ofdefense agencies, and expenditures for travel and transportation)contributed $5 billion. Major factors that discouraged exports andencouraged imports were appreciation of the dollar and faster economicgrowth in the United States than abroad.
Government purchases Real government purchases increased 8-1/2 percent in the thirdquarter, following increases of 18-1/2 percent and 1 percent in thesecond and first quarters, respectively. The quarterly pattern ofincreases in 1984 largely reflected operations of the CCC, primarilyunder the PIK program. (Transfers of crops to farmers from CCCinventories are treated in the national income and product accounts asnegative Federal purchases.) Reductions in CCC inventories werelarge–$9 billion–in the first quarter, as they had been in the fourth.In the second quarter, CCC inventories were unchanged, as the PIKprogram would down; CCC incentories increased $2 billion in the thirdquarter. Other Federal nondefense purchases increased 5 percent in the thirdquarter, following a 4-1/2-percent decline in the second quarter and nochange in the first. Federal defense purchases increased 7 percent inthe third quarter, about the average increase of the preceding twoquarters. Purchases by State and local governments increased 5 percent in thethird quarter, following increases of 3-1/2 percent in the first andsecond quarters.
The acceleration was in purchases of structures. The Federal sector. –Changes in current-dollar Federal receiptsand expenditures on a NIPA basis are shown in table 9. Amongexpenditures, purchases were up $11-1/2 billion; defense and nondefensepurchases were each up less than in the second quarter. Transferpayments 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 foreignpayments. Net interest paid increased strongly–$10 billion. a $2-1/2billion decline in subsidies less the current surplus of Governmententerprises was much less than that in the second quarter, which hadreflected the winding down of PIK payments to farmers.
(The PIK subsidy payments are offset by the reductions in CCC inventories due to PIK, sothese transactions have no effect on total Federal expenditures.) Thesechanges and smaller changes in other components sum to a third-quarterincrease in expenditures of $21 billion. Among receipts, an increase of $11 billion in personal tax andnontax payments was largely due to continued growth in the taxable wagebase. Indirect business taxes were up about the same as in the secondquarter; contributions for social insurance were up, but less than inany quarter since the fourth quarter of 1982. Estimates of corporateprofits, and thus of corporate profits tax accruals, are not yetavailable. It is likely that profits before tax, and thus profits taxaccruals, declined. The third-quarter decline in corporate profits taxaccruals can be approximated by using a residual calculation ofcorporate profits that assumes that the statistical discrepancy in thenational income and product accounts was the same as in the precedingquarter.
On the basis of this calculation of corporate profits taxaccruals, total receipts probably increased only $5 to $10 billion inthe third quarter. An increase of this size in receipts would be considerably lessthan that in expenditures, so the deficit on a NIPA basis would increaseabout $10 to $15 billion from the $163-1/2 billion registered in thesecond quarter. Personal Income 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 farmproprietors’ income. Wage and salary disbursements were up $25-1/2 billion in the thirdquarter, $12 billion less than in the second. Wages and salaries in allmajor private industry groups were up less than in the second quarter;the deceleration was due to the weaker increases in employment andearnings and the decline in average hours worked.
Wages and salarieslost due to the auto strike were minimal. The increase in governmentwages and salaries was about the same as in the second quarter. Farm proprietors’ income increased $5 billion in the thirdquarter, after dropping $9 billion in the second. It had nearlydoubled–up $15 billion–in the first quarter. The quarter-to-quartervolatility in farm income largely reflected the pattern of agriculturalsubsidies, mainly under the PIK program.
Payments under PIK increased $6billion to $19 billion in the first quarter, and then fell to $1-1/2billion in the second and to $1/2 billion in the third. The strength infarm income in 1984 largely reflected a step-up in crop production. Other components of personal income registered third-quarterincreases that were about the same as, or only moderately smaller orlarger than, those in the second quarter. A deceleration in nonfarmproprietors’ income was largely in retail trade and construction.Personal interest income registered another strong increase of $21-1/2billion. Transfer payments increased slightly more in the third quarterthan in the second, and personal contribution for socialinsurance–which are substracted in deriving the personal incometotal–increased slightly less.
Largely reflecting the growth in the taxable wage base, increasesin personal tax and nontax payments have been in the range of$10-1/2-$12-1/2 billion in the past several quarters. Disposablepersonal income increased $50-1/2 billion, or 8 percent, in the thirdquarter–only slightly less than it had in the second. Real disposablepersonal income decelerated more sharply than did current-dollardisposable income, due to an acceleration in the PCE implicit pricedeflator. Real disposable income increased 3-1/2 percent in the thirdquarter 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 morethan in the eight quarters of the 1975-77 recovery. In contrast, theincrease in current-dollar disposable income–9 percent–over thecurrent recovery was smaller than the 10-percent increase registered inthe 1975-77 recovery.
The better performance of real income in 1982-84is accounted for by the lower rate of inflation in the PCE implicitprice 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 aswing in personal saving from a decline to a substantial increase. Thepersonal 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 of1984, the personal saving rate has increased – steadily since the secondquarter of 1983, when it was only 4 percent–the lowest rate in morethan 30 years. In contrast, in the 1975-77 recovery, the rate haddeclined steadily except in the initial quarter.