The business situation - third quarter of 1988

Survey of Current Business, Nov, 1988

the BUSINESS SITUATION

ACCORDING to the preliminary estimates, the increases in real GNP and real gross domestic purchases in the third quarter of 1988 were slightly stronger than indicated in the advance estimates issued a month ago. The increase in real GNP was revised up 0.4 percentage point to 2.6 percent at an annual rate; the increase in real gross domestic purchases was also revised up 0.4 percentage point to 2.8 percent at an annual rate (see table 1 on page 17). Increases in the GNP price index (fixed weights) and the gross domestic purchases price index (fixed weights) were revised little at 5.1 percent at an annual rate and 4.2 percent at an annual rate, respectively.

Revisions in the major components of real GNP were small. The largest upward revisions were in personal consumption expenditures ($3.2 billion) and change in business inventories ($2.9 billion), and the largest downward revision was in government purchases ($3.3 billion). Both exports and imports were revised up ($3.7 billion and $4.0 billion, respectively), resulting in a small downward revision in net exports.

The broad picture of the economy--including the impact of the drought--that was sketched in the last month's "Business Situation" was essentially unaltered. BEA estimates that $12.8 billion of real farm output was lost as a result of this year's drought. These losses were allocated on a quarterly basis as follows: Second quarter, $2.3 billion ($9 billion annual rate); third quarter, $3.7 billion ($15 billion annual rate); and fourth quarter, the remaining $6.8 billion ($27 billion annual rate). Losses due to the drought reduced the second-quarter increase in real GNP by 0.9 percentage point and the third-quarter increase by 0.6 percentage point. In the fourth quarter, the change in real GNP will be reduced by about 1.3 percentage points; in the first quarter of 1989, when farm output returns to a level not affected by the drought, the change in real GNP will be raised by about 2.8 percentage points. (The procedure used by BEA to estimate the drought losses was described in the August 1988 "Business Situation;" the estimates are subject to further revisions as more information becomes available.)

Corporate profits.--Corporate profits from current production declined $3 billion in the third quarter, according to the first estimates made of profits for the quarter. Domestic profits of nonfinancial corporations more than accounted for the decline, as unit costs increased more than unit prices. (Profits and related estimates are shown in tables 1.14, 1.16, and 6.18B of the "Selected NIPA Tables;" industry detail on third-quarter profits will be shown next month, when the revised estimates are available.

Government sector

The fiscal position of the government sector improved in the third quarter of 1988, as the combined deficit of the Federal Government and of State and local governments decreased $8 billion. A decline in the Federal Government deficit accounted for the improvement.

The Federal sector.--The Federal Government deficit declined $8 1/2 billion to $125 billion; a decline in receipts was more than offset by a decline in expenditures.

Receipts declined $8 billion, in contrast to a $32 billion increase in the second quarter. Personal tax and nontax receipts declined $17 billion after a $20 1/2 billion increase in the second quarter. These large changes in personal taxes were due to provisions of the Tax Reform Act of 1986: Final settlements were boosted in the second quarter of 1988 by tax payments on income shifted from 1986 to 1987 to take advantage of lower tax rates. Corporate profits tax accruals increased $1 billion, compared with $4 1/2 billion in the second quarter; the deceleration reflected a slowdown in profits. Indirect business tax and nontax accruals increased $1 billion after no change in the second quarter; the acceleration was due to a rebound in customs duties and a $1/2 billion payment--included in nontaxes--by a major oil company for earlier violations of pricing regulations. Contributions for social insurance increased $6 1/2 billion, about the same as in the second quarter, and reflected continued growth in incomes.

Expenditures declined $16 1/2 billion, in contrast to a $10 billion increase in the second quarter. The third-quarter decline was more than accounted for by purchases of goods and services and by subsidies less the current surplus of government enterprises. National defense purchases declined $6 billion; declines occurred in all major categories of purchases, paced by a $2 1/2 billion decline in durable goods. Nondefense purchases declined $5 1/2 billion, including $3 billion in purchases of agricultural commodities by the Commodity Credit Corporation (CCC) and $1 billion in purchases by the National Aeronautics and Space Administration. A $10 billion decline in subsidies less current surplus reflected a $16 billion decline in subsidies to farmers partly offset by a $5 billion increase in the CCC deficit.