The business situation - 1st quarter, 1987

Survey of Current Business, July, 1987

the BUSINESS SITUATION

THE pace of U.S. production slowed in the second quarter. Real GNP increased at an annual rate of 2 1/2 percent, following an increase of 4 1/2 percent in the first quarter (chart 1).1 The first-quarter estimates of real GNP and other national income and product account (NIPA) estimates have been revised as part of the regular annual revision presented later in this issue.

1. Quarterly estimates in the national income and product accounts are expressed at seasonally adjusted annual rates, and quarterly changes in them are differences between these rates. Quarter-to-quarter percent changes are annualized. Real, or constant-dollar, estimates are expressed in 1982 dollars.

The preliminary GNP estimates for the second quarter are based on the following major source data: For personal consumption expenditures (PCE), retail sales through June, and unit auto and truck sales through June; for nonresidential fixed investment, the same information for autos and trucks as for PCE, construction put in place for April and May, and manufacturers' shipments of machinery and equipment for April and May; for residential investment, construction put in place for April and May, and housing starts through June; for change in business inventories, book values for manufacturing and trade for April and May, and unit auto inventories through June; for net exports of goods and services, merchandise exports and merchandise imports for April and May, and fragmentary information on investment income for the quarter; for government purchases of goods and services, Federal unified budget outlays for April and May, and State and local construction put in place for April and May; and for GNP prices, the Consumer Price Index for April and May, the Producer Price Index through June, and the unit-value index for petroleum imports for April and May. Some of the source data are subject to revision.

U.S. demand also slowed and, for the third consecutive quarter, increased less than U.S. production. As measured by real gross domestic purchases, demand increased 1 1/2 percent, following a 2 1/2-percent increase in the first quarter. The difference between U.S. production and U.S. demand is net foreign demand for U.S. goods and services (that is, net exports). Net foreign demand has increased substantially in the past three quarters, largely reflecting the cumulative depreciation of the dollar; in the second quarter, real net exports increased $7 1/2 billion after a $16 1/2 billion increase in the first and a $10 billion increase in the fourth quarter of 1986.

Both the GNP price index (fixed weights) and the price index for gross domestic purchases (fixed weights) increased 4 1/2 percent in the second quarter; in the first quarter, the GNP price index had also increased at this rate, while the purchases price index had increased 5 1/2 percent.

Real GNP

Personal consumption expenditures

Real personal consumption expenditures (PCE) increased 2 percent in the second quarter after declining slightly in the first; increased expenitures on durables and services more than offset lower expenditures on nondurables (table 1).

Although PCE for motor vehicles and parts accounts for only about 7 percent of total PCE, movements in this item have shaped the quarterly path of total PCE in recent quarters. If PCE expenditures for motor vehicles and parts are excluded, a deceleration is apparent over the past several quarters; in the second quarter, the increase in PCE excluding motor vehicles and parts slowed to 1 percent from 3 percent in the first quarter. (A discussion of motor vehicles, in terms of units, appears at the end of this article.)

Durable goods increased 11 1/2 percent after a sharp decline. Motor vehicles and parts increased after two quarters of large declines, furniture and household equipment increased about as much as in the first quarter, and other durables increased moderately after a sharp drop.

Nondurable goods declined 4 1/2 percent in the second quarter after a modest increase in the first. Declines in food and in clothing and shoes were responsible; expenditures for energy--gasoline and oil, and fuel oil and coal--increased after a decline, while other nondurables increased slightly less than in the first quarter.

Services increased 4 percent in the second quarter after a larger increase in the first. The deceleration was attributable to the other services category; brokerage charges declined after a sharp increase. In contrast, household operation services--which includes electricity and gas--increased moderately after a sharp drop, and medical care services accelerated.

Nonresidential fixed investment

Real nonresidential fixed investment increased 8 percent in the second quarter, following a 14 1/2-percent decline in the first (table 2). Structures--which have been weak for a number of quarters--changed little, while producers' durable equipment resumed its upward path after a drop in the first quarter.

In structures, office buildings once again registered the largest decline, as previous overbuilding and high vacancy rates continued to inhibit new construction. The drop in office buildings was largely offset by a rebound in public utilities; other types of construction changed little, although petroleum exploration and drilling increased for the third consecutive quarter.