Business situation: final estimates for the first quarter of 2005

Survey of Current Business, July, 2005 by Brian C. Moyer, Shelly Smith

ACCORDING to the "final" estimates of the national income and product accounts (NIPAs), real gross domestic product (GDP) increased 3.8 percent in the first quarter of 2005, the same as in the fourth quarter of 2004 (table 1 and chart 1). (1) The "preliminary" estimates of first-quarter GDP released in May had shown a 3.5-percent increase. In the final estimates, upward revisions to exports of services and to residential fixed investment were partly offset by a downward revision to exports of goods (table 2).

[GRAPHIC OMITTED]

* Prices of goods and services purchased by U.S. residents increased 2.7 percent, 0.2 percentage point less than in the preliminary estimate. In the fourth quarter, prices had increased 2.9 percent. The deceleration mainly reflected a deceleration in energy prices.

* Real disposable personal income (DPI) decreased 1.4 percent, 0.2 percentage point more of a decrease than in the preliminary estimate. Real DPI had increased 10.8 percent in the fourth quarter, largely reflecting a special dividend payment by the Microsoft Corporation. (2)

The growth rate of real GDP in the first quarter was the same as that in the fourth quarter. In the first quarter, a smaller decrease in net exports and pickups in residential fixed investment and in inventory investment were offset by slowdowns in business investment in equipment and software, in consumer spending, and in government spending. (3)

* Net exports subtracted 0.58 percentage point from first-quarter GDP growth after subtracting 1.35 percentage points from fourth-quarter growth. Exports in the first quarter picked up, increasing 8.9 percent after increasing 3.2 percent, and they added 0.87 percentage point to GDP growth after adding 0.32 percentage point. Imports slowed, increasing 9.6 percent after increasing 11.4 percent, and they subtracted 1.46 percentage points from growth after subtracting 1.67 percentage points.

* Residential fixed investment increased 11.5 percent after increasing 3.4 percent and added 0.64 percentage point to GDP growth after adding 0.19 percentage point.

* Inventory investment added 0.72 percentage point to GDP growth after adding 0.46 percentage point. Real inventory stocks increased more in the first quarter ($66.8 billion) than in the fourth quarter ($47.2 billion).

* Business investment in equipment and software slowed sharply, increasing 6.1 percent after increasing 18.4 percent, and added 0.50 percentage point to GDP growth after adding 1.41 percentage points.

* Consumer spending increased 3.6 percent after increasing 4.2 percent and contributed 2.52 percentage points to GDP growth after contributing 2.92 percentage points.

* Government spending slowed, increasing 0.2 percent after increasing 0.9 percent, and added 0.03 percentage point after adding 0.16 percentage point.

The final estimates for the first quarter also show the following:

* Real final sales of domestic product (GDP less the change in private inventories) increased 3.0 percent in the first quarter after increasing 3.4 percent in the fourth quarter.

* Real gross domestic purchases (GDP less net exports) increased 4.1 percent after increasing 5.0 percent.

* Real gross national product (GNP) increased 3.9 percent after increasing 3.5 percent. (4) The first-quarter increase in GNP is 0.1 percentage point more than the increase in GDP; a decrease in income payments to the rest of the world was partly offset by a decrease in income receipts from the rest of the world.

* The gross saving rate (saving from all sources as a percentage of gross national income) increased to 14.7 percent in the first quarter from 14.4 percent in the fourth quarter, and the net saving rate increased to 3.3 percent from 2.8 percent. (5)

* The personal saving rate decreased to 0.9 percent in the first quarter from 2.2 percent in the fourth quarter. The higher fourth-quarter rate primarily reflected a special dividend payment by the Microsoft Corporation.

Corporate Profits

Profits from current production increased $76.1 billion (6.0 percent at a quarterly rate) in the first quarter of 2005 after increasing $150.8 billion (13.5 percent) in the fourth quarter of 2004 (table 3). (6) The large fourth-quarter increase in profits partly reflected a rebound from the effects of the four hurricanes that had reduced third-quarter profits by $79.7 billion (annual rate); excluding the effects of these hurricanes, profits from current production increased 5.9 percent in the fourth quarter.

In the first quarter, both profits of domestic industries and profits from the rest of the world increased. In the fourth quarter, profits of domestic industries increased, and profits from the rest of the world were unchanged. (7)

The first-quarter increase in profits of domestic industries was accounted for by both profits of financial corporations, which increased $36.7 billion (10.1 percent) after increasing $84.1 billion (30.1 percent), and profits of non financial corporations, which increased $24.5 billion (3.4 percent) after increasing $66.7 billion (10.3 percent). Real gross value added of nonfinancial corporations increased. Profits per unit also increased; the increase reflected an increase in unit prices that was partly offset by an increase in unit labor costs. Unit nonlabor costs decreased.