The business situation - 1st quarter, 1987

Survey of Current Business, July, 1987

The sharp changes in DPI carried through to real DPI, which declined 3 percent in the second quarter after increasing 2 1/2 percent in the first. Without the special factors, the quarterly pattern in real DPI would have been reversed--increasing 1 1/2 percent in the second after declining 1 1/2 percent in the first.

Reflecting both the sharp deceleration in DPI and an acceleration in personal outlays, personal saving fell $38 billion in the second quarter after increasing $29 1/2 billion in the first. The personal saving rate dropped 1.2 percentage points to 3.2 percent in the second quarter.

Motor Vehicles

Sales of new cars increased to 10.0 million units (seasonally adjusted annual rate) from 9.5 million in the first quarter; sales of domestic cars increased to 7.0 million from 6.7 million, and sales of imports increased to 3.0 million from 2.8 million. Domestic car inventories were unchanged at 1.80 million units in the second quarter, and the inventory-sales ratio fell to 3.08 from 3.21 in the first; although still substantially above the 2.0 level generally considered normal by industry observers, the ratio may not be so very far out of line with industry wishes in light of upcoming labor negotiations at two of the major U.S. automakers.

New car sales remained considerably below the sales levels for most of the 1984-86 period despite the second-quarter increase. A number of factors contributed to this weakness. Sales-incentive programs and tax law changes in 1986 resulted in some sales being made last year that otherwise would have occurred early in 1987; most of this effect probably had dissipated by the middle of the second quarter of this year. In the second quarter, however, consumers may have postponed purchases in anticipation of new incentive programs; a recent survey commissioned by a domestic automaker found that nearly one-half of all potential car buyers expect incentive programs to become more attractive over the next several months. Moreover, in recent years, consumers have substituted purchases of light trucks (including pickups, recreational vehicles, and vans) for cars; sales of light trucks increased to 4.7 million units-- considerably above the sales levels for most of the 1984-86 period--in the second quarter from 4.1 million in the first. Finally, the weakness in auto sales may have reflected the weakness in real disposable personal income that has damped overall consumer spending for the past several quarters and concern about debt positions on the part of potential buyers.

Inventories remain high despite a cut in production to 7.1 million units in the second quarter from 7.9 million in the first; further cuts are likely: production schedules call for a decline to 6.4 million in the third quarter. The second-quarter cut was accomplished by temporary plant closings and by early and extended plant conversions for new models.

Unit sales of new trucks increased to 5.0 million in the second quarter from 4.4 million in the first; light trucks accounted for the increase. Sales of domestic trucks increased to 4.1 million in the second quarter from 3.7 million in the first. Sales of imported trucks increased to 0.9 million from 0.7 million.