Business situation

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

Cash flow from current production, a profits-related measure of internally generated funds available for investment, increased $10.0 billion after increasing $45.3 billion. The ratio of cash flow to nonresidential fixed investment, an indicator of the share of the current level of investment that could be financed by internally generated funds, increased to 83.9 percent from 82.9 percent. These levels are near the low end of the range in which the ratio has fluctuated during most of this decade but are substantially higher than the values typically posted in the 1980's.

Industry profits. - Industry profits increased $1.9 billion in the fourth-quarter after increasing $54.2 billion in the third.(8)

The fourth-quarter increase was more than accounted for by profits from the rest of the world. This component of profits measures receipts of profits from foreign affiliates of U.S. corporations less payments of profits by U.S. affiliates of foreign corporations. Receipts increased sharply in the fourth quarter, and payments decreased. In contrast to the strength in profits abroad, domestic profits decreased. As already mentioned, financial profits were hit hard by claims arising from Hurricane Opal, which cut a swath from the Florida panhandle to North Carolina in early October; resulting losses for property, casualty, and life insurance carriers are currently estimated at $7.8 billion (annual rate). Nonfinancial profits decreased slightly, as drops in the transportation and utilities group and in retail trade more than offset increases in manufacturing and in the "other" nonfinancial group.

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The very large third-quarter increase, in contrast, had been more than accounted for by domestic profits. Of the industries for which quarterly estimates are published, only three failed to post increases: Primary and fabricated metal manufacturers and food manufacturers.

Related measures. - Profits before tax (PBT) increased $1.4 billion in the fourth quarter after increasing $21.2 billion in the third. The difference between the slowdown in PBT and the much bigger one in profits from current production is due to inventory profits, which are represented in the NIPA'S (with the sign reversed) by the inventory valuation adjustment. Inventory profits had dropped sharply in the third quarter, affecting PBT but not current-production profits (from which they are excluded). This drop in inventory profits reflected a substantial moderation in the rate of inventory price change; for example, the Producer Price Index (PPI) for intermediate materials, supplies, and components increased 0.9 percent (annual rate) in the third quarter after increasing 5.2 percent in the second, and the PPI for crude materials for further processing decreased 2.6 percent after increasing 4.9 percent.

Government Sector

The fiscal position of the government sector improved slightly in the fourth quarter of 1995, as the combined "current" deficit of the Federal Government and State and local governments decreased $0.8 billion, to $66.9 billion (table 10).(9) A decrease in the Federal Government current deficit was nearly offset by a decrease in the State and local government current surplus.