the BUSINESS SITUATION REAL GNP increased at an annual rate of 4 percent according to preliminary estimates, following a modest increase of 1 1/2 percent inthe third quarter.
The two quarters taken together reflect slowereconomic growth in the second half of 1984 than in the first half (table1). GNP prices, as measured by the fixed-weighted price index,increased at an annual rate of 3 1/2 percent in the fourth quarter,continuing the recent moderation of inflation.1 1. Quarterly estimates in the national income and product accountsare expressed at seasonally adjusted annual rates, and quarterly changesin them are differences between these rates.
Quarter-to-quarter percentchanges are compounded to annual rates. Real, or constant-dollar,estimates are expressed in 1972 dollars. The fourth-quarter GNP estimates are based on the following majorsource data: For personal consumption expenditures (PCE), retail salesthrough December, and unit auto and truck sales through December; fornonresidential fixed investment, the same information for autos andtrucks as for PCE, October and November construction put in place,October and November manufacturers’ shipments of machinery andequipment, and investment plans for the quarter; for residentialinvestment, October and November construction put in place, and Octoberand November housing starts; for change in business inventories, Octoberand November book values for manufacturing and trade, and unit autoinventories through December; for net exports of goods and services,October and November merchandise trade, and fragmentary information oninvestment income for the quarter; for government purchases of goods andservices, Federal unified budget outlays for October and November, andState and local employment through December; and for GNP prices, theConsumer Price Index for October and November, the Producer Price Indexfor October and November, and unit-value indexes for exports and importsfor October and November. Some of the source data are subject torevision.
Final sales swung from a small decline to a large fourth-quarterincrease, and inventory investment swung from an increase to a decline.One-fourth of the swing in final sales is traceable to personalconsumption expenditures (PCE), which increased $10 1/2 billion,following an increase of $1 1/2 billion in the third quarter (chart 1).The remaining three-fourths came from a swing in net exports, from adecline of $15 1/2 billion in the third quarter to an increase of $12billion in the fourth. The third-quarter decline and fourth-quarterincrease were more than accounted for by imports.
Because changes in imports have been large in recent quarters, itis tempting to try to relate changes in imports to changes in GNP.However, care must be exercised. The reason is related to how importsare treated in estimating GNP. GNP is estimated as the sum ofproduct-side components, one of which is net exports–that is, exportsless imports.
Because the other components include expenditures onforeign-produced goods and services (as well as on U.S.-produced goodsand services), imports must be subtracted to get GNP, a measure of U.S.
production. Therefore, an increase (decrease) in imports has no effecton GNP because it is offset by increases (decreases) in expenditures onforeign products included in other product-side components.Accordingly, it would be a mistake to subtract–as might appeartempting–the change in imports from the change in GNP with the intentof deriving a useful analytical measure. What has just been said about GNP–that an increase (decrease) inimports has no effect–applies also to final sales of GNP.
All importsare treated as going into final sales, rather than being split betweenfinal sales and the change in business inventories; data are notavailable to make the split. Thus, final sales of GNP as a measure ofworldwide final sales of U.S. production is likely to be misstatedbecause some imports, such as consumer goods and industrial supplies, gointo inventory in the period in which they are brought into thiscountry.
That some imports go into inventory is consistent with thepositive correlation of changes in inventory investment and changes inimports, especially in recent quarters: Inventory investment and importsincreased sharply in the third quarter, and both declined sharply in thefourth. A further result of this treatment of imports is thatinventory-sales relationships as measured by the ratio of total businessinventories to total final sales is overstated to the extent thatimports go into inventories. In that ratio, all imports have beenremoved from the denominator. One measure that may help answer some of the questions being askedabout the impact of imports, and also exports, is final sales todomestic purchasers.
This measure can be viewed in two ways: either asfinal sales of GNP less exports plus imports, or as the sum of personalconsumption expenditures, gross private domestic fixed investment, andgovernment purchases (table 2). It represents final demand in theUnited States for goods and services, wherever produced. In the fourthquarter, real final sales to domestic purchasers increased 5 percent,indicating that final demand in the United States was weaker than realfinal sales of GNP, which increased 8 1/2 percent. In the thirdquarter, final sales in the United States increased 3 percent and finalsales of GNP declined 1 percent.
Productivity and costs.–Table 3 shows changes in real grossproduct, aggregate hours, and compensation in the business economy otherthan farm and housing. Productivity, as measured by real product perhour, increased 2 percent in the fourth quarter, following a 1-percentdecline in the third. The increase reflected an acceleration in realproduct; hours increased at their third-quarter rate.
The twoquarters’ performance was weaker than earlier in this recovery andexpansion, when both real product and hours had increased strongly. Unit labor cost increased 1 1/2 percent in the fourth quarter–muchless than the 5-percent rate registered in the third. Low rates ofincrease in unit labor cost have contributed substantially to themoderation in prices in recent quarters. Prices.
–GNP prices, as measured by the fixed-weighted price index,increased 3 1/2 percent in the fourth quarter after increasing 4 percentin the third (table 4). Prices paid by domestic purchasers for thegoods and services they buy–which include imports and excludeexports–also decelerated to a 3 1/2-percent increase in the fourthquarter from 4 percent in the third. The increase in PCE prices wasunchanged at 4 percent; low rates of increase in PCE food and energyprices again held down the increase in the total. Prices paid byinvestors for residential and nonresidential structures andproducers’ durable equipment decelerated in the fourth quarter, asdid prices paid by government.
Increases in these components ranged fromnegligible (nonresidential structures) to 3 1/2 percent (governmentpurchases). Employment and unemployment.– Labor market conditions improved inthe fourth quarter: Employment increases more than offset a slightshortening in the average workweek, and unemployment fell further. Thefourth-quarter civilian unemployment rate was the lowest in almost 5years (chart 2).
In the fourth quarter, the unemployment rate declined0.2 percentage point, to 7.2 percent, following a decline of 0.1percentage point in the third.
Employment increases, as measured by both the household andestablishment surveys, picked up in the fourth quarter after slowing inthe third, but did not regain the rates of increase in the first half of1984. The household measure of employment increased 0.6 million, or 21/2 percent at an annual rate, in the fourth quarter, and the payrollmeasure increased 0.9 million, or 4 percent.
Average weekly hours for private nonfarm production workersdeclined 0.1 hours to 35.2 hours in the fourth quarter, after remainingunchanged in the preceding two quarters. The fourth-quarter declinereflected widespread declines among industry groups in October; hourspicked up in November and again in December.
Components of Real GNP Among the components of real GNP, change in business inventoriesand net exports registered sharply divergent movements in the third andfourth quarters. Change in business inventories fell in the fourthquarter after increasing in the third, and net exports increased after adecline. Personal consumption expenditures increased much more in thefourth quarter than in the third. Fixed investment increased less, andgovernment purchases increased more, than in the third quarter.
Thefollowing sections discuss developments in these components and measuresrelated to them. Personal consumption expenditures Real PCE increased 4 percent in the fourth quarter, following aslight increase in the third. On a monthly basis, PCE declined inOctober, but increased strongly in November and December. Gains inemployment and continued increases in disposable personal income, alongwith recent drops in interest rates, have supported consumer confidenceand encouraged spending.
Moreover, consumers have maintained increasesin spending without reducing personal saving. The fourth-quarter pickup in PCE was strongest in durable goods,which increased 12 percent, after decreasing 3 1/2 percent in the thirdquarter. The swing in durables was evident in all major categories.Purchases of motor vehicles–which had decreased sharply in the thirdquarter–increased in the fourth, especially toward the end of thequarter.
Furniture and household equipment registered a sharp increase,following a small increase in the third quarter. Purchases of nondurable goods increased 2 percent in the fourthquarter, after decreasing 1 percent in the third. The swing was morethan accounted for by purchases of clothing and shoes, which have beenunusually erratic over the past several quarters. Food purchasesregistered a smaller increase than in the third quarter.
Services increased 2 1/2 percent, after increasing 4 percent in thethird quarter. The deceleration was largely due to a decline after anincrease in expenditures for personal business services, which includebrokerage services, bank services, and the imputed services of financialintermediaries. Electricity and natural gas purchases again declined,due to continued mild weather in the Eastern part of the country. Fixed investment Real residential investment slipped 1 1/2 percent in the fourthquarter, after declining 4 1/2 percent in the third.
In both quarters,increases in multifamily construction were more than offset by declinesin single-family construction. Increased multifamily construction inthe fourth quarter reflected high levels of multifamily starts in thefirst three quarters of the year, and the fourth-quarter decline insingle-family construction largely reflected the drop–to an annual rateof less than 1 million units–in single-family starts in the thirdquarter. Single-family starts dropped in October before increasing inNovember and December (chart 3). The increases reflected continueddeclines in interest rates, which, in turn, stimulated increasedmortgage and sales activity.
Both the commitment rate for conventional fixed-rate mortgages andthe prime rate–an indicator of the rate on construction loans–hadpeaked in July, at 14.7 percent and 13.0 percent, respectively (chart4). By December, the commitment rate was down 1 1/2 percentage points,to 13.
2 percent, and the prime was down 2 points, to 11.0 percent.Mortgage commitments made by federally insured thrift institutionsincreased in October and November–October’s increase was the firstsince May; in November outstanding commitments increased. Sales of newand existing single-family residences edged up 2 percent inOctober-November (not an annual rate), after declining 9 1/2 percent inthe third quarter.
Real nonresidential fixed investment increased 11 percent in thefourth quarter, following a 13 1/2-percent increase in the third, asstructures accelerated and producers’ durable equipment (PDE)decelerated. Structures increased 18 1/2 percent, following a 2-percentincrease in the third quarter. Commercial buildings– which account forless than two-fifths of nonresidential structures–accounted for most ofthe fourth-quarter increase. PDE increased 8 1/2 percent, following an 18 1/2-percent increasein the third quarter.
Imports of capital goods increased sharply in thethird quarter and declined in the fourth, suggesting that a major partof the deceleration in PDE was in imported equipment. Motor vehicle PDE,which had increased 9 1/2 percent in the third quarter, was unchanged inthe fourth, as increased truck purchases offset reduced auto purchases.Other PDE, which had increased 21 percent in the third quarter,increased only one-half as much in the fourth. Two-thirds of thefourth-quarter increase was accounted for by office, computing, andaccounting machinery; this category, which consists mainly of computers,accounts for one-third of other PDE.
Change in business inventories Real business inventories increased $14 billion in the fourthquarter, after increasing $30 1/2 billion in the third (table 5). Theshowdown was more than accounted for by nonfarm inventories; farminventories were up slightly more than in the third quarter. Withinnonfarm inventories, manufacturing inventories declined slightly after asubstantial increase. Manufacturing durables inventories were up lessthan in the third quarter; the slowdown was spread across most majorindustry groups.
A swing from an increase to a decline in manufacturingnondurables inventories was centered in food and chemicals. Wholesaleinventories–both durables and nondurables–were up considerably lessthan in the third quarter. A step-up in retail inventory investment wasentirely due to a rebuilding of stocks by auto dealers following strikesagainst automakers and extensive plant closings; other retailinventories were up less than in the third quarter. Reflecting variable rates of inventory accumulation andfluctuations in final sales from quarter-to-quarter, the ratio of totalinventories to total final sales fluctuated throughout 1984 within arange of 3.
01 to 3.09, but remained well below its average for 1972-82.In the fourth quarter, its decline reflected the slower rate of increasein inventory accumulation and the higher rate of increase in finalsales. Net exports Real net exports increased $12 billion –to negative $15billion–in the fourth quarter, following a $15 1/2 billion decline inthe third.
The $27 1/2 billion swing was almost entirely in merchandisetrade, specifically in merchandise imports; services, on balance,changed little over the past two quarters. Merchandise imports behaved erratically in the past two quarters–surging $16 1/2 billion in the third quarter and backtracking $11 1/2billion in the fourth. This pattern was discernible in nearly all ofthe major end-use categories except petroleum, and was particularlypronounced in capital goods, in consumer goods, and in industrialsupplies and materials. To some extent, the third-quarter surge–whichwas concentrated in July–may have reflected producers’ andretailers’ needs to replenish supplies after strong sales in thefirst half of 1984.
The fourth-quarter decline was only a partialoffset; merchandise imports were up 9 percent (annual rate) from thesecond quarter to the fourth. Merchandise exports increased $1/2 billion, following a $1 1/2billion increase in the third quarter. The fourth-quarter increase wasmore than accounted for by agricultural products; other major categorieschanged little. The weakness in merchandise exports and the strength inmerchandise imports continue to reflect the effects of cumulative dollarappreciation.
Imports of services and exports of services both increased in thethird quarter and declined in the fourth. The pattern reflected, inpart, the impact of changes in interest rates on returns on portfolioinvestment. Government purchases Real government purchases increased 6 1/2 percent in the fourthquarter following an increase of 5 1/2 percent in the third. Federalpurchases accounted for most of the fourth-quarter increase.
In Federal purchases, national defense purchases were up sharplyfollowing a small decline in the third quarter. Nondefense purchases,which had reflected sharp changes in Commodity Credit Corporationinventories earlier in the year, were up strongly, but not as much as inthe third quarter. State and local purchases were up 2 percent in the fourth quarterfollowing a 5-percent increase in the third. The increases were largelyaccounted for by highway construction.
As discussed in the article”State and Local Government Fiscal Position in 1984,’ highwayconstruction rebounded in 1984, reflecting increases in Federalgrants-in-aid in 1983 and 1984. The Federal sector.–Changes in current-dollar Federal receipts andexpenditures on a national income and product accounts (NIPA) basis areshown in table 6. Among expenditures, all components registered strongfourth-quarter increases.
Purchases were up $14 billion, much more thanin the third quarter; defense accounted for most of the increase.Transfer payments were up $4 billion, the same increase as in the thirdquarter. Grants-in-aid to State and local governments increased $3 1/2billion following a decline. Net interest paid increased $4 1/2billion–down from an unusually strong third-quarter increase, but inline with earlier increases.
A $5 billion increase in subsidies less thecurrent surplus of government enterprises was more than accounted for byincreased agricultural subsidies, primarily wheat deficiency payments.Changes in these components, along with a small change in wage accruals less disbursements, sum to a fourth-quarter increase in expenditures of$30 1/2 billion. Among receipts, a $7 1/2 billion increase in personal tax andnontax payments was due to the increase in the tax base. Indirectbusiness taxes were up $1/2 billion, and contributions for socialinsurance were up $3 1/2 billion.
Estimates of corporate profits, andthus of corporate profits tax accruals, are not yet available Corporateprofits tax accruals can be approximated by using a residual calculationof corporate profits that assumes that the statistical discrepancy inthe NIPA’s was the same as in the preceding quarter. On the basisof this calculation of corporate profits tax accruals, total receiptsincreased about $11 billion in the fourth quarter. An increase of this size in receipts would be about $20 billionless than the increase in expenditures, so the deficit on a NIPA basiswould approach $200 billion in the fourth quarter. Personal Income Personal income increased $53 billion in the fourth quarter, downabout $10 billion from the increases registered in the preceding twoquarters (table 7).
The deceleration is attributable to a slowing inpersonal interest income after two quarters of strong increases. Wage and salary disbursements were up $26 1/2 billion in the fourthquarter, the same increase as in the third. Wages and salaries in eachof the major private industry groups increased roughly as much in thefourth quarter as they did in the third: Manufacturing and serviceindustries were up a little more, and other commodity-producing anddistributive industries were up a little less. The increases in wagesand salaries were due to continued increases in employment and averagehourly earnings; average weekly hours declined.
Government wages andsalaries increased slightly less than in the third quarter. Farm proprietors’ income was up $2 1/2 billion, somewhat lessthan the increase in the third quarter. The volume of both crop andlivestock marketings increased less than in the third quarter, and cropprices dropped even more sharply. Farm income was boosted by the $5 1/2billion increase in agricultural subsidies in the fourth quarter.
Nonfarm proprietors’ income increased $4 billion after no change.The pickup was largely in retail trade, real estate, and construction. Personal interest income increased $11 billion, about one-half asmuch as in the preceding two quarters. The deceleration largelyreflected the widespread decline in interest rates, particularly onshort-term government securities, money market funds, and money marketaccounts.
Transfer payments were up $4 billion, about the same increase as inthe third quarter. Within transfers, social security benefit paymentswere up twice as much as in the third quarter due to a $3 billionstep-up in retroactive payments; these payments result largely from therecalculation of the earnings base underlying benefits for retireeswhose post-retirement work adds to that base. This step-up was more thanoffset by a reduction of $5 1/2 billion in military retirement benefits,due to a shift in the date of payment from December 31, 1984 to January1, 1985; subsequently, benefits will be paid on the first day of eachmonth. Without these two special factors, transfer payments would haveincreased $6 1/2 billion in the fourth quarter.
Largely reflecting the continued growth in the taxable wage base,personal tax and nontax payments increased $10 billion, about the sameas in the third quarter. Disposable personal income (DPI)–personalincome less taxes–increased $43 billion, or 7 percent, in the fourthquarter. It had increased 8 1/2 percent in the third. In contrast tocurrent-dollar DPI, real DPI increased at the same rate–4 percent–inboth quarters.
The better quarter-to-quarter performance of real DPIreflected a slowing in the PCE implicit price deflator (which is used todeflate current-dollar DPI) from a 4 1/2-percent increase in the thirdquarter to a 2 1/2-percent increase in the fourth. Personal outlays increased only a little less than didcurrent-dollar DPI in the fourth quarter, so personal saving was up onlyslightly. The personal saving rate was unchanged at 6.3 percent in thefourth quarter.
Table: CHART 1 Real Product: Change From Preceding Quarter Table: 1.–Real GNP: Change From Preceding Quarter Table: 2.–Measures of Production and Final Sales Table: 3.–Real Gross Product, Hours, and Compensation in theNonfarm Business Economy Less Housing: Change From Preceding Quarter Table: CHART 2 Unemployment Rate Table: 4.–Fixed-Weighted Price Indexes: Change From PrecedingQuarter Table: CHART 3 Housing Starts Table: 5.–Change in Business Inventories Table: CHART 4 Selected Interest Rates Table: 6.–Federal Government Receipts and Expenditures, NIPABasis: Change From Preceding Quarter Table: 7.–Personal Income and Its Disposition: Change FromPreceding Quarter