Business situation

Survey of Current Business, April, 1996 by Daniel Larkins, Larry R. Moran, Ralph W. Morris, Claire G. Pitzer, Deborah Sieff

According to the "final" estimates of the national income and product accounts (NIPA'S), real gross domestic product (GDP) increased 0.5 percent in the fourth quarter Of 1995; the "advance" estimate of real GDP, reported in the March "Business Situation," had shown a 0.9-percent increase.(1) The change in real final sales of domestic product was revised down to a 1.6-percent increase from the 1.8-percent increase reported a month ago. The price index for gross domestic purchases increased 2.1 percent, 0.1 percentage point more than reported a month ago. (The sources of the revisions are discussed in the section "Revisions.")

The 0.5-percent increase in real GDP was markedly lower than the 3.6-percent increase in the third quarter and was similar to the low growth rates posted in the first half of 1995 (chart 1 and table 1). All the major components of GDP except net exports contributed to the fourth-quarter slowdown. Inventory investment turned down, as inventories accumulated at a slower pace, and personal consumption expenditures decelerated. Government consumption expenditures and gross investment decreased more than in the third quarter; as explained later, about a third of the fourth-quarter decrease was accounted for by shutdowns of the e Federal Government in mid-November and late December.

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Real gross domestic purchases decreased 0.5 percent in the fourth quarter after increasing 2.8 percent in the third. Unlike GDP, gross domestic purchases includes imports and excludes exports. Exports of goods and services increased substantially more than in the third quarter, while imports posted a small increase similar to the one in the third quarter.

Gross national product (GNP). - Real GNP increased 1.3 percent in the fourth quarter, 0.8 percentage point more than real GDP (chart 2 and table 2). GNP equals GDP plus receipts of factor income from the rest of the world less payments of factor income to the rest of the world. In the fourth quarter, receipts of factor income increased much more than payments. Two-thirds of the increase in receipts was accounted for by profits earned abroad by U.S. residents, and interest income more than accounted for the small increase in payments. On a command basis, real GNP increased 1.7 percent.(2)

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Personal consumption expenditures

Real personal consumption expenditures (PCE) increased 1.2 percent in the fourth quarter after increasing 2.8 percent in the third (table 3). Most of the slowdown was accounted for by durable goods, but nondurable goods and services also contributed.

Factors usually considered in the analysis of PCE were mixed in the fourth quarter (chart 3). On the plus side, the unemployment rate edged down to 5.5 percent from 5.6 percent, and real disposable income increased 3.8 percent. On the negative side, the Index of Consumer Sentiment (prepared by the University of Michigan's Survey Research Center) fell to its lowest level in 2 years.

Expenditures for durable goods increased only 0.3 percent after jumping 9.3 percent. The slowdown was primarily accounted for by a downturn in motor vehicles and parts, which reflected a sharp drop in used autos after an increase in the third quarter; in contrast, new autos and new trucks turned up.' Furniture and household equipment increased slightly less than in the third quarter, primarily reflecting a downturn in furniture and in kitchen and household appliances Other durable goods decreased after increasing.

Expenditures for nondurable goods decreased 0.3 percent after increasing 0.5 percent. Clothing and shoes, food. and "other" nondurables each decreased after increasing. In contrast, energy turned up.

Expenditures for services increased 2.2 percent after increasing 2.6 percent. Household operation turned down as electricity and gas decreased sharply, reflecting a return to more normal temperatures after an unusually warm third quarter. "Other" services increased less than in the third quarter, primarily reflecting a slowdown in brokerage commissions. Housing increased about the same in both quarters. Transportation and medical care increased more than in the third quarter; in transportation, the step-up appears to have been a reaction to a sharp downturn in airfares.

Nonresidential fixed investment

Real private nonresidential fixed investment increased 3.1 percent in the fourth quarter after increasing 5.2 percent in the third (table 4). Most of the slowdown was accounted for by structures.

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Factors usually associated with investment spending, like those associated with PCE, were mixed in the fourth quarter. Domestic corporate profits were down. Cash flow increased but much less than in the third quarter; similarly, real final sales of domestic product increased only modestly after a substantially larger increase. The capacity utilization rate in manufacturing dropped to 82.0 percent from 82.6 percent - its third consecutive quarterly decrease. However, borrowing costs - as measured by the yield on new high-grade corporate bonds - decreased for the fourth consecutive quarter; at 7.17 percent, the yield was 160 basis points lower than in the fourth quarter of 1994.