BUSINESS SITUATION.

Larkins, Daniel ; Morris, Ralph W. ; Argueta, Jennifer S. 等

IN the second quarter of 2001, U.S. production was virtually flat, according to the "preliminary" estimates of the national income and product accounts (NIPA's). Over the past four quarters, real gross domestic product (GDP) has increased only 1.2 percent, as investment and exports were cut back and as consumer spending eased off in the wake of below-average income growth and declining household wealth. In the previous 37 quarters of the expansion that began in the second quarter of 1991, real GDP had grown at an average annual rate of 3.6 percent.

According to the preliminary estimates,

* Real gross domestic product (GDP)--a measure of domestic production of goods and services--increased 0.2 percent in the second quarter, the weakest showing since the first quarter of 1993, when GDP decreased 0.1 percent (table 1 and chart 1).(1) The 0.2-percent increase is 0.5 percentage point less than last month's "advance" estimate for the second quarter. (The source data underlying the revision to GDP and its components are discussed in the section "Revisions.")

[GRAPH OMITTED]

Table 1.--Real Gross Domestic Product, Real Gross Domestic
Purchases, and Real Final Sales to Domestic Purchasers

[Seasonally adjusted at annual rates]

 Millions of chained (1996)
 dollars

 Change from preceding
 Level quarter

 2001 2000 2001

 II III IV I II

Gross domestic product 9,338.4 30.7 43.8 30.6 3.9

Less: Exports of goods and
 services 1,107.4 28.7 -11.8 -3.4 -36.7
Plus: Imports of goods and
 services 1,517.9 47.2 -2.1 -19.9 -30.7

Equals: Gross domestic
 purchases 9,720.4 47.0 52.9 16.0 10.0

Less: Change in private
 inventories -38.4 -27.2 -8.9 -69.9 -11.3

Equals: Final sales to
 domestic purchasers 9,744.0 68.9 64.6 76.7 20.2

 Personal consumption
 expenditures 6,427.5 65.8 49.0 47.4 39.0
 Durable goods 938.4 17.6 -4.7 23.0 16.0
 Nondurable goods 1,879.9 19.2 2.7 11.2 1.9
 Services 3,628.1 30.6 48.6 16.3 23.0
 Private fixed investment 1,695.9 10.9 2.0 8.2 -44.4
 Nonresidential 1,320.6 23.4 3.4 -0.6 -53.3
 Structures 281.4 9.7 5.1 8.4 -10.3
 Equipment and software 1,044.1 12.7 -3.0 -11.6 -43.6
 Residential 378.1 -10.2 -1.0 7.6 5.2
 Government consumption
 expenditures and
 gross investment 1,624.5 -7.2 12.8 20.6 21.1
 Federal 554.2 -15.1 6.1 4.3 2.0
 National defense 362.3 -9.7 8.7 6.5 2.0
 Nondefense 191.9 -5.5 -2.5 -2.2 0.1
 State and local 1,069.3 7.5 6.7 16.2 18.8

Addendum: Final sales of
 domestic product 9,361.8 52.8 55.4 91.1 14.0

 Percent change from
 preceding quarter

 2000 2001

 III IV I II

Gross domestic product 1.3 1.9 1.3 0.2

Less: Exports of goods and
 services 10.6 -4.0 -1.2 -12.2
Plus: Imports of goods and
 services 13.0 -0.5 -5.0 -7.7

Equals: Gross domestic
 purchases 2.0 2.2 0.7 0.4

Less: Change in private
 inventories ... ... ... ...

Equals: Final sales to
 domestic purchasers 2.9 2.7 3.2 0.8

 Personal consumption
 expenditures 4.3 3.1 3.0 2.5
 Durable goods 8.2 -2.1 10.6 7.1
 Nondurable goods 4.2 0.6 2.4 0.4
 Services 3.5 5.6 1.8 2.6
 Private fixed investment 2.5 0.5 1.9 -9.8
 Nonresidential 7.1 1.0 -0.2 -14.6
 Structures 15.2 7.6 12.3 -13.4
 Equipment and software 4.7 -1.1 -4.1 -15.1
 Residential -10.4 -1.1 8.5 5.8
 Government consumption
 expenditures and
 gross investment -1.8 3.3 5.3 5.4
 Federal -10.4 4.6 3.2 1.5
 National defense -10.4 10.5 7.5 2.2
 Nondefense -10.4 -5.1 -4.3 0.1
 State and local 3.0 2.7 6.4 7.4

Addendum: Final sales of
 domestic product 2.3 2.4 4.0 0.6

NOTE.--Chained (1996) dollar series are calculated as the product
of the chain-type quantity index and the 1996 current-dollar value
of the corresponding series, divided by 100. Because the formula for
the chain-type quantity indexes uses weights of more than one period,
the corresponding chained-dollar estimates usually are not additive.
Chained (1996) dollar levels and residuals, which measure the extent
of nonadditivity in each table, are shown in NIPA tables 1.2, 1.4,
and 1.6. Percent changes are calculated from unrounded data. Percent
changes in major aggregates are shown in NIPA table S.1. (See
"Selected NIPA Tables," which begins on page D-2 in this issue.)

* Real private inventory stocks were liquidated at a faster pace than in the first quarter and at a faster pace than had been estimated last month. The back-to-back declines in inventory stocks are the first since 1991.

* The growth of gross domestic purchases--a measure of domestic demand for goods and services regardless of where they were produced--was revised down 0.4 percentage point, to 0.4 percent.(2)

* The production of goods was revised down 1.1 percentage points to a 3.5-percent decrease, and the production of structures was revised down 1.9 percentage points to a 2.5-percent increase. In contrast, production of services was revised up 0.1 percentage point to a 2.3-percent increase.

Despite these revisions, the preliminary and advance estimates paint pictures of the economy that are similar in broad outline and in many important details. In both estimates,

* GDP growth slowed from the first quarter to the second, and the second-quarter growth was the smallest in years.

* Inventories were liquidated for the second consecutive quarter.

* The growth of final sales of domestic product--GDP less inventory investment--slowed sharply.

* The largest contributors to the second-quarter increase in real GDP were consumer spending and government spending (table 2).(3)

Table 2.--Contributions to Percent Change in Real Gross
Domestic Product

[Seasonally adjusted at annual rates]

 2000 2001

 III IV I II

Percent change at annual rate:
 Gross domestic product 1.3 1.9 1.3 0.2

Percentage points at annual rates:
 Personal consumption expenditures 2.88 2.14 2.05 1.68
 Durable goods 0.65 -0.17 0.83 0.57
 Nondurable goods 0.84 0.12 0.49 0.08
 Services 1.38 2.19 0.73 1.03
 Gross private domestic investment -0.51 -0.42 -2.28 -2.19
 Fixed investment 0.44 0.09 0.33 -1.76
 Nonresidential 0.91 0.13 -0.02 -2.00
 Structures 0.45 0.24 0.39 -0.48
 Equipment and software 0.46 -0.11 -0.41 -1.52
 Residential -0.47 -0.05 0.35 0.24
 Change in private inventories -0.95 -0.50 -2.61 -0.43
 Net exports of goods and services -0.70 -0.39 0.63 -0.26
 Exports 1.13 -0.46 -0.13 -1.41
 Goods 1.36 -0.58 -0.19 -1.46
 Services -0.22 0.12 0.06 0.05
 Imports -1.84 0.07 0.76 1.15
 Goods -1.48 0.07 0.87 1.22
 Services -0.36 0 -0.11 -0.07
 Government consumption expendi-
 tures and gross
 investment -0.32 0.58 0.92 0.94
 Federal -0.66 0.27 0.19 0.09
 National defense -0.42 0.38 0.28 0.09
 Nondefense -0.24 -0.11 -0.09 0
 State and local 0.34 0.31 0.73 0.85

NOTE.--More detailed contributions to percent change in real gross
domestic product are shown in NIPA table 8.2. Contributions to percent
change in major components of real gross domestic product are shown
in tables 8.3 through 8.6.

* GDP growth was held down by drops in business investment in equipment and software and in exports of goods.

* Real final sales of computers decreased sharply, while real motor vehicle output turned up (table 3). (In the preliminary estimate, real GDP less final sales of computers increased 0.5 percent, and real GDP less motor vehicle output decreased 0.6 percent.)

Table 3.--Real Gross Domestic Product by Type of Product

[Seasonally adjusted at annual rates]

 Billions of chained (1996) dollars

 Change from preceding
 Level quarter

 2001 2000 2001

 II III IV I II

Gross domestic product 9,338.4 30.7 43.8 30.6 3.9

 Goods 3,673.5 19.0 -22.6 -24.1 -32.7
 Services 4,843.2 13.1 57.4 26.2 27.1
 Structures 822.7 -0.3 4.4 23.3 5.1

Addenda:
 Motor vehicle output 336.4 -12.2 -19.1 -15.0 18.3
 Gross domestic product
 less motor vehicle
 output 9,001.3 42.1 61.3 44.2 -12.7

 Final sales of computers ... ... ... ... ...
 Gross domestic product
 less final sales of
 computers ... ... ... ... ...

 Percent change from
 preceding quarter

 2000 2001

 III IV I II

Gross domestic product 1.3 1.9 1.3 0.2

 Goods 2.1 -2.4 -2.6 -3.5
 Services 1.1 4.9 2.2 2.3
 Structures -0.2 2.2 12.3 2.5

Addenda:
 Motor vehicle output -12.8 -20.0 -16.9 25.1
 Gross domestic product
 less motor vehicle
 output 1.9 2.8 2.0 -0.6

 Final sales of computers 39.1 30.0 9.0 -26.4
 Gross domestic product
 less final sales of
 computers 1.0 1.6 1.2 0.5

NOTE.--See note to table 1 for an explanation of chained (1996)
dollar series. Chained (1996) dollar levels and residuals for
most items are shown in NIPA table 1.4. Detail on motor vehicle
output is shown in NIPA table 8.9B.

* The growth of real disposable personal income slowed slightly, and the personal saving rate changed little.(4) (The rate was 1.1 percent in the preliminary estimate.)

Personal Consumption Expenditures

Real personal consumption expenditures (PCE) posted a third consecutive below-average increase, 2.5 percent, in the second quarter (table 4 and chart 2).(5) Decelerations in nondurable goods and durable goods more than offset a modest acceleration in services.

[GRAPH OMITTED]

Table 4.--Real Personal Consumption Expenditures

[Seasonally adjusted at annual rates]

 Billions of chained (1996) dollars

 Change from preceding
 Level quarter

 2001 2000 2001

 II III IV I II

Personal consumption
 expenditures 6,427.5 65.8 49.0 47.4 39.0

 Durable goods 938.4 17.6 -4.7 23.0 16.0
 Motor vehicles and
 parts 362.0 8.3 -7.3 13.1 5.0
 Of which:
 New autos 104.6 -2.7 -1.2 4.1 -3.0
 New light trucks 123.2 6.4 -2.7 7.4 4.3
 Furniture and house-
 hold equipment 400.6 6.4 2.5 7.2 9.6
 Other(1) 179.5 2.8 1.1 2.1 2.0

 Nondurable goods 1,879.9 19.2 2.7 11.2 1.9
 Food 886.7 4.7 0.2 0.9 -0.6
 Clothing and shoes 344.1 6.5 0.1 2.8 1.4
 Gasoline, fuel oil,
 and other energy
 goods 149.7 1.3 -0.6 1.7 -2.9
 Other(2) 501.6 7.3 3.0 5.9 4.3

 Services 3,628.1 30.6 48.6 16.3 23.0
 Housing 864.9 3.8 4.7 4.7 3.6
 Household operation 387.5 4.2 13.6 -1.1 -4.8
 Electricity and gas 134.9 -1.1 8.6 -4.3 -5.2
 Other household
 operation 253.3 5.3 4.8 3.6 1.0
 Transportation 254.2 1.1 2.1 0.6 -0.2
 Medical care 931.1 5.2 8.1 6.6 9.5
 Recreation 232.8 0.3 1.3 3.7 0.6
 Other(3) 956.6 16.1 19.2 1.5 13.8

 Percent change from
 preceding quarter

 2000 2001

 III IV I II

Personal consumption
 expenditures 4.3 3.1 3.0 2.5

 Durable goods 8.2 -2.1 10.6 7.1
 Motor vehicles and
 parts 10.0 -8.1 16.1 5.7
 Of which:
 New autos -9.7 -4.4 16.6 -10.7
 New light trucks 25.9 -9.2 29.5 15.1
 Furniture and house-
 hold equipment 7.0 2.7 7.7 10.1
 Other(1) 6.8 2.4 5.0 4.6

 Nondurable goods 4.2 0.6 2.4 0.4
 Food 2.1 0.1 0.4 -0.2
 Clothing and shoes 7.9 0.2 3.3 1.7
 Gasoline, fuel oil,
 and other energy
 goods 3.4 -1.7 4.7 -7.3
 Other(2) 6.2 2.5 4.9 3.6

 Services 3.5 5.6 1.8 2.6
 Housing 1.8 2.2 2.2 1.7
 Household operation 4.4 15.1 -1.0 -4.8
 Electricity and gas -3.2 27.8 -11.2 -14.1
 Other household
 operation 9.2 8.1 6.0 1.5
 Transportation 1.7 3.4 1.0 -0.4
 Medical care 2.3 3.6 2.9 4.2
 Recreation 0.4 2.4 6.5 1.0
 Other(3) 7.3 8.6 0.6 6.0

(1.) Includes jewelry and watches, ophthalmic products and orthopedic
equipment, books and maps, bicycles and motorcycles, guns and
sporting equipment, photographic equipment, boats, and pleasure
aircraft.

(2.) Includes tobacco, toilet articles, drug preparations and sundries,
stationery and writing supplies, toys, film, flowers, cleaning
preparations and paper products, semidurable house furnishings, and
magazines and newspapers.

(3.) Includes personal care, personal business, education and research,
religious and welfare activities, and net foreign travel.

NOTE.--See note to table 1 for an explanation of chained (1996) dollar
series. Chained (1996) dollar levels and residuals are shown in NIPA
tables 2.3 and 8.9B (motor vehicles). Percent changes in major
aggregates are shown in NIPA table S.1.

Expenditures for nondurable goods increased 0.4 percent after increasing 2.4 percent. Most of the deceleration was accounted for by downturns in energy products and in food. Slowdowns in clothing and shoes and in "other" nondurable goods also contributed.

Expenditures for durable goods increased 7.1 percent after increasing 10.6 percent. Motor vehicles decelerated, primarily reflecting a downturn in new autos. In contrast, furniture and household equipment increased more than in the first quarter.

Expenditures for services increased 2.6 percent after increasing 1.8 percent. "Other" services accelerated, partly reflecting an upturn in brokerage and investment counseling. Spending for medical care services stepped up.

Some of the factors frequently considered in the analysis of consumer spending continued becoming less favorable (chart 3). The unemployment rate increased to 4.5 percent, the highest rate since 1998. The Index of Consumer Sentiment (prepared by the University of Michigan's Survey Center) decreased for the fifth consecutive quarter. Real disposable personal income increased slightly less than in the first quarter.

[GRAPH OMITTED]

Private Fixed Investment

In the second quarter, real private fixed investment decreased for the first time in 6 years (table 5 and chart 4). Nonresidential investment dropped after changing little; residential investment increased less than in the first quarter.

[GRAPH OMITTED]

Table 5.--Real Private Fixed Investment

[Seasonally adjusted at annual rates]

 Billions of chained (1996) dollars

 Level Change from preceding quarter

 2001 2000 2001

 II III IV I II

Private fixed investment 1,695.9 10.9 2.0 8.2 -44.4

 Nonresidential 1,320.6 23.4 3.4 -0.6 -53.3
 Structures 281.4 9.7 5.1 8.4 -10.3
 Nonresidential
 buildings, inclu-
 ding farm 190.4 3.5 1.6 2.9 -11.6
 Utilities 55.1 2.6 4.5 2.6 -1.0
 Mining exploration,
 shafts, and wells 30.6 2.8 -0.5 3.5 2.3
 Other structures 6.0 0.8 -0.1 -0.7 -0.3

 Equipment and software 1,044.1 12.7 -3.0 -11.6 -43.6
 Information processing
 equipment and
 software 588.0 19.5 20.8 -20.9 -32.9
 Computers and
 peripheral
 equipment(1) 287.5 20.7 12.4 -3.2 -26.9
 Software(2) 191.0 6.2 6.3 -3.1 -1.9
 Other 165.8 1.2 5.5 -12.4 -15.0
 Industrial equipment 161.0 4.6 0.5 5.1 -9.7
 Transportation
 equipment 175.4 -7.6 -17.0 1.2 -2.0
 Of which: Motor
 vehicles 141.0 -5.2 -16.7 2.0 -0.8
 Other 141.2 -0.6 -1.7 -1.1 -2.1

 Residential 378.1 -10.2 -1.0 7.6 5.2
 Structures 368.5 -10.2 -1.0 7.5 5.2
 Single-family 192.9 -8.8 -1.2 6.1 1.8
 Multifamily 23.8 -2.0 0.7 1.1 0.5
 Other structures(3) 151.8 0.8 -0.6 0.3 2.8
 Equipment 9.7 0 0 0.1 0

 Percent change from
 preceding quarter

 2000 2001

 III IV I II

Private fixed investment 2.5 0.5 1.9 -9.8

 Nonresidential 7.1 1.0 -0.2 -14.6
 Structures 15.2 7.6 12.3 -13.4
 Nonresidential
 buildings, inclu-
 ding farm 7.6 3.2 5.9 -21.1
 Utilities 24.3 42.7 20.6 -7.0
 Mining exploration,
 shafts, and wells 60.6 -7.5 68.1 37.5
 Other structures 61.2 -6.3 -33.1 -19.2

 Equipment and software 4.7 -1.1 -4.1 -15.1
 Information processing
 equipment and
 software 13.6 14.1 -12.4 -19.6
 Computers and
 peripheral
 equipment(1) 32.5 17.1 -3.9 -30.1
 Software(2) 14.1 14.0 -6.3 -3.8
 Other 2.5 12.2 -23.3 -29.3
 Industrial equipment 12.0 1.4 12.9 -21.0
 Transportation
 equipment -14.2 -30.8 2.8 -4.4
 Of which: Motor
 vehicles -12.3 -36.3 5.7 -2.2
 Other -1.6 -4.7 -3.0 -5.7

 Residential -10.4 -1.1 8.5 5.8
 Structures -10.6 -1.2 8.7 5.8
 Single-family -16.8 -2.6 13.9 3.7
 Multifamily -29.5 13.8 20.2 10.0
 Other structures(3) 2.1 -1.5 0.6 8.0
 Equipment 0.8 2.1 0.7 2.8

(1.) Includes new computers and peripheral equipment only.

(2.) Excludes software "embedded," or bundled, in computers and
other equipment.

(3.) Includes home improvements, new manufactured home sales,
brokers' commissions on home sales, net purchases of used structures,
and other residential structures (which consists primarily of
dormitories and of fraternity and sorority houses).

NOTE.--See note to table 1 for an explanation of chained (1996)
dollar series. Chained (1996) dollar levels and residuals are shown
in NIPA tables 5.5 and 8.9B (motor vehicles). Percent changes in
major aggregates are shown in NIPA table S.1.

Nonresidential fixed investment.--Real private nonresidential fixed investment decreased 14.6 percent after slipping 0.2 percent. Before the first-quarter decrease, nonresidential fixed investment had increased for 35 consecutive quarters.

Spending on equipment and software decreased much more than in the first quarter. Information processing equipment and software fell sharply; computers fell dramatically after a modest decrease, and communications equipment dropped sharply for the second straight quarter. Industrial equipment turned down, its first decrease in more than 2 years and its largest since 1975. Transportation equipment decreased after increasing; motor vehicles contributed to the downturn.

Spending on structures turned down. Commercial buildings, industrial buildings, and public utilities all decreased in the second quarter after increasing in the first.

The investment climate has generally been unfavorable in recent quarters. In the last four quarters, domestic corporate profits and capacity utilization has decreased steadily, and real final sales of domestic product has faltered.(6) Long-term interest rates have trended down, but only modestly; for example, the yield on high-grade corporate bonds decreased from 7.75 percent in June 2000 to 7.11 percent in June 2001 (chart 5).

[GRAPH OMITTED]

Residential investment.--Real private residential investment increased 5.8 percent after increasing 8.5 percent (table 5 and chart 4). Both single-family structures and multifamily structures slowed. In contrast, "other" structures increased more than in the first quarter, mainly reflecting brokers' commissions on home sales.

Inventory Investment

Real inventory investment (that is, change in private inventories) was -$38.4 billion in the second quarter and -$27.1 billion in the first (table 6 and chart 6). Back-to-back declines in the stock of inventories last occurred in 1991. Inventories were much less of a drag on GDP growth in the second quarter, however, because the $11.3 billion decrease in inventory investment followed a $69.9 billion first-quarter decrease as liquidation replaced accumulation.

[GRAPH OMITTED]

Table 6.--Real Change in Private Inventories

[Billions of chained (1996) dollars;
seasonally adjusted at annual rates]

 Level

 2000 2001

 II III IV I II

Change in private inventories 78.9 51.7 42.8 -27.1 -38.4

 Farm 3.7 -5.4 3.0 0.2 -2.3

 Construction, mining, and
 utilities -3.1 0.1 -6.8 1.9 4.4

 Manufacturing 22.0 12.0 12.9 -15.0 -35.5
 Durable goods industries 18.6 10.8 17.9 -10.5 -26.0
 Nondurable goods industries 3.5 1.3 -4.4 -4.5 -9.5
 Wholesale trade 27.9 18.2 12.5 -3.0 4.7
 Durable goods industries 21.8 10.2 5.5 -3.7 -10.0
 Nondurable goods industries 6.4 8.0 6.8 0.6 13.3
 Retail trade 22.9 18.7 19.3 -15.3 -13.1
 Of which: Motor vehicle

 dealers 11.0 10.4 8.4 -19.6 -5.5

 Other industries(1) 5.8 7.7 2.8 3.6 1.7

Addenda:
 Motor vehicles 14.2 4.1 6.4 -22.6 -8.6
 Autos 2.2 6.7 2.5 -9.5 -4.6
 Trucks 10.7 -1.9 3.6 -12.1 -3.8

 Change from preceding quarter

 2000 2001

 III IV I II

Change in private inventories -27.2 -8.9 -69.9 -11.3

 Farm -9.1 8.4 -2.8 -2.5

 Construction, mining, and
 utilities 3.2 -6.9 8.7 2.5

 Manufacturing -10.0 0.9 -27.9 -20.5
 Durable goods industries -7.8 7.1 -28.4 -15.5
 Nondurable goods industries -2.2 -5.7 -0.1 -5.0
 Wholesale trade -9.7 -5.7 -15.5 7.7
 Durable goods industries -11.6 -4.7 -9.2 -6.3
 Nondurable goods industries 1.6 -1.2 -6.2 12.7
 Retail trade -4.2 0.6 -34.6 2.2
 Of which: Motor vehicle
 dealers -0.6 -2.0 -28.0 14.1

 Other industries(1) 1.9 -4.9 0.8 -1.9

Addenda:
 Motor vehicles -10.1 2.3 -29.0 14.0
 Autos 4.5 -4.2 -12.0 4.9
 Trucks -12.6 5.5 -15.7 8.3

(1.) Includes inventories held by establishments in the following
industries: Transportation; communication; finance, insurance, and
real estate; and services.

NOTE.--See note to table 1 for an explanation of chained (1996)
dollar series. Chained (1996) dollar levels and residuals are shown
in NIPA tables 5.11B and 8.9B (motor vehicles).

The second-quarter decrease in inventory investment was dominated by manufacturing inventories, which decreased $35.5 billion after decreasing $15.0 billion. Inventories of durable-goods manufacturers decreased considerably more than in the first quarter; inventories of computers, machinery, and electronic products and of electrical equipment, appliances, and components turned down, and inventories of fabricated metal products decreased more than in the first quarter. In contrast, inventories of transportation equipment decreased much less than in the first quarter.

Inventories of nondurable-goods manufacturers decreased more than in the first quarter, mainly reflecting a downturn in inventories of chemicals and chemical products.

Wholesale trade inventories increased $4.7 billion after decreasing $3.0 billion. Inventories of nondurable goods increased considerably more than in the first quarter, mainly reflecting an up-turn in inventories of farm products and a step-up in inventories of drugs and sundries. Inventories of durable goods decreased more than in the first quarter, largely reflecting a downturn in electrical goods.

Retail trade inventories decreased $13.1 billion after decreasing $15.3 billion. Inventories of motor vehicle dealers decreased considerably less than in the first quarter; other retail inventories decreased after increasing.

Farm inventories decreased $2.3 billion after increasing $0.2 billion. Crop inventories decreased more than in the first quarter, and livestock inventories decreased after increasing.

The ratio of real private nonfarm inventories to final sales of goods and structures decreased to 3.67 from 3.68 (see NIPA table 5.13). A ratio that includes all final sales of domestic businesses decreased to 2.08 from 2.09.(7) For both ratios, these are the lowest levels in the current expansion.

Exports and Imports

Both exports and imports declined for the third consecutive quarter--exports after 6 consecutive increases, and imports after 38 increases.

Real exports of goods decreased much more than in the first quarter (table 7 and chart 7). Nonautomotive capital goods turned down, reflecting sharper declines in "other" nonautomotive capital goods and in computers and peripheral equipment as well as a downturn in civilian aircraft. Nonautomotive consumer goods and foods, feeds, and beverages also turned down. In contrast, automotive goods turned up.

[GRAPH OMITTED]

Table 7.--Real Exports and Imports of Goods and Services

[Seasonally adjusted at annual rates]

 Billions of chained (1996) dollars

 Change from
 Level preceding quarter

 2001 2000 2001

 II III IV I II

Exports of goods and services 1,107.4 28.7 -11.8 -3.4 -36.7
 Exports of goods(1) 805.0 35.6 -15.3 -5.1 -39.4
 Foods, feeds, and
 beverages 61.2 4.5 -3.2 2.3 -0.9
 Industrial supplies and
 materials 162.7 7.9 -0.5 -3.4 -6.0
 Capital goods, except
 automotive 367.4 17.6 -9.3 0.9 -37.8
 Automotive vehicles,
 engines, and parts 74.2 -0.1 -3.2 -5.4 4.2
 Consumer goods, except
 automotive 93.3 2.0 -1.5 3.4 -0.2
 Other 46.7 4.2 1.9 -1.9 -0.4
 Exports of services(1) 303.0 -5.1 2.7 1.3 1.2

Imports of goods and services 1,517.9 47.2 -2.1 -19.9 -30.7
 Imports of goods(1) 1,289.7 38.4 -2.1 -23.1 -33.1
 Foods, feeds, and
 beverages 50.6 1.6 -0.2 -0.7 0.9
 Industrial supplies and
 materials, except
 petroleum and products 166.7 1.6 -2.2 - 2.2 1.7
 Petroleum and products 92.5 -1.1 -1.8 5.4 1.2
 Capital goods, except
 automotive 400.1 19.7 2.4 -13.5 -56.5
 Automotive vehicles,
 engines, and parts 188.4 2.1 -5.2 -6.1 5.0
 Consumer goods, except
 automotive 300.9 6.6 7.5 -0.8 -4.5
 Other 84.3 11.1 -0.5 -9.0 6.7
 Imports of services(1) 229.2 8.7 0.1 2.7 1.8

 Percent change
 from preceding quarter

 2000 2001

 III IV I II

Exports of goods and services 10.6 -4.0 -1.2 -12.2
 Exports of goods(1) 18.3 -6.9 -2.4 -17.4
 Foods, feeds, and
 beverages 35.1 -18.8 15.9 -5.8
 Industrial supplies and
 materials 20.8 -1.1 -7.8 -13.5
 Capital goods, except
 automotive 19.0 -8.7 0.8 -32.4
 Automotive vehicles,
 engines, and parts -0.5 -15.7 -25.6 26.5
 Consumer goods, except
 automotive 9.3 -6.2 16.1 -1.0
 Other 45.7 17.0 -14.5 -3.0
 Exports of services(1) -6.7 3.7 1.8 1.6

Imports of goods and services 13.0 -0.5 -5.0 -7.7
 Imports of goods(1) 12.3 -0.6 -6.7 -9.7
 Foods, feeds, and
 beverages 13.4 -1.2 -5.4 6.8
 Industrial supplies and
 materials, except
 petroleum and products 3.9 -5.1 -5.1 4.1
 Petroleum and products -4.9 -7.7 27.1 5.3
 Capital goods, except
 automotive 18.9 2.1 -11.0 -41.1
 Automotive vehicles,
 engines, and parts 4.5 -10.4 -12.1 11.3
 Consumer goods, except
 automotive 9.4 10.5 -1.1 -5.8
 Other 72.9 -2.2 -35.5 38.9
 Imports of services(1) 17.1 0 4.9 3.3

(1.) Exports and imports of certain goods, primarily military equipment
purchased and sold by the Federal Government, are included in services.

NOTE.--See note to table 1 for an explanation of chained (1996) dollar
series. Chained (1996) dollar levels and residuals are shown in NIPA
table 4.4. Percent changes in major aggregates are shown in NIPA table
S.1.

Exports of services again increased a little. Modest increases in passenger fares, in transfers under U.S. military agency sales contracts, and in royalties and license fees were largely offset by declines in "other" services and in "other" transportation.

Real imports of goods decreased more than in the first quarter (chart 8). A steeper decline in nonautomotive capital goods (and also in nonautomotive consumer goods) more than offset up-turns in "other" goods and in automotive goods. Petroleum and products increased less than in the first quarter.

[GRAPH OMITTED]

Imports of services increased less than in the first quarter. "Other private services" slowed, and "other" transportation decreased more than in the first quarter. In contrast, passenger fares and travel turned up.

Government Spending

Government spending increased 5.4 percent in the second quarter, about the same as in the first. Federal Government spending increased less than in the first quarter, and State and local government spending increased more (table 8 and chart 9).

[GRAPH OMITTED]

Table 8.--Real Government Consumption Expenditures and Gross Investment

[Seasonally adjusted at annual rates]

 Billions of chained (1996) dollars

 Change from
 Level preceding quarter

 2001 2000 2001

 II III IV I II

Government consumption
 expenditures and gross
 investment(1) 1,624.5 -7.2 12.8 20.6 21.1

 Federal 554.2 -15.1 6.1 4.3 2.0
 National defense 362.3 -9.7 8.7 6.5 2.0
 Consumption expenditures 304.5 -7.6 3.0 8.4 0.1
 Gross investment 58.2 -2.1 6.2 -2.3 2.1
 Nondefense 191.9 -5.5 -2.5 -2.2 0.1
 Consumption expenditures 149.6 -3.5 -2.9 -2.3 0.1
 Gross investment 42.8 -2.0 0.4 0.3 -0.1

 State and local 1,069.3 7.5 6.7 16.2 18.8
 Consumption expenditures 847.0 6.3 5.9 8.6 7.9
 Gross investment 222.9 1.3 0.8 7.7 11.3

 Percent change from
 preceding quarter

 2000 2001

 III IV I II

Government consumption
 expenditures and gross
 investment(1) -1.8 3.3 5.3 5.4

 Federal -10.4 4.6 3.2 1.5
 National defense -10.4 10.5 7.5 2.2
 Consumption expenditures -9.8 4.2 11.8 0.2
 Gross investment -14.5 56.4 -14.6 15.7
 Nondefense -10.4 -5.1 -4.3 0.1
 Consumption expenditures -8.7 -7.3 -5.9 0.4
 Gross investment -16.9 4.6 2.1 -0.7

 State and local 3.0 2.7 6.4 7.4
 Consumption expenditures 3.1 2.9 4.2 3.8
 Gross investment 2.6 1.6 16.1 23.1

(1.) Gross government investment consists of general government and
government enterprise expenditures for fixed assets; inventory
investment is included in government consumption
expenditures.

NOTE.--See note to table 1 for an explanation of chained (1996) dollar
series. Chained (1996) dollar levels and residuals are shown in NIPA
table 3.8. Percent changes in major aggregates are shown in NIPA table
S.1.

Federal defense spending slowed, reflecting a slowdown in consumption spending, especially for services. Investment turned up, reflecting an u-pturn in equipment and software.

Federal nondefense spending changed little after decreasing. Consumption spending, especially for services other than compensation of employees, turned up. Investment, especially for structures, turned down.

The pickup in State and local government spending was due to investment in structures. Consumption spending increased less than in the first quarter, reflecting a slowdown in compensation of employees.

Prices

The price index for gross domestic purchases, which measures the prices paid for goods and services purchased by U.S. residents, increased 1.4 percent in the second quarter, about half as much as in the first quarter (table 9 chart 10). Prices of gross domestic purchases less food and energy posted a similar slowdown, from 2.3 percent to 1.0 percent. The slowdowns mainly reflected decelerations in the prices of PCE and government spending. In contrast, prices of nonresidential fixed investment decreased less than in the first quarter.

[GRAPH OMITTED]

Table 9.--Percent Changes in Prices

[Annual rates; based on seasonally adjusted index numbers (1996=100)]

 2000 2001

 III IV I II

Gross domestic product 1.9 1.8 3.3 2.2

Less: Exports of goods and services 1.3 0.5 -0.1 -0.8
Plus: Imports of goods and services 4.4 0.4 -3.0 -5.9

Equals: Gross domestic purchases 2.3 1.7 2.7 1.4

Less: Change in private inventories ... ... ... ...

Equals: Final sales to domestic purchasers 2.3 1.8 2.6 1.4

 Personal consumption expenditures 2.4 2.0 3.2 1.6
 Durable goods -2.2 -1.2 -0.7 -3.5
 Nondurable goods 2.7 2.0 1.9 2.7
 Services 3.2 2.6 4.7 2.1
 Private fixed investment 1.9 0.8 -0.4 0.1
 Nonresidential 1.3 0 -1.9 -0.5
 Structures 4.7 4.7 6.2 3.7
 Equipment and software 0.2 -1.5 -4.6 -1.9
 Residential 3.7 3.5 4.6 1.9
 Government consumption expenditures
 and gross investment 2.6 1.9 3.5 1.8
 Federal 1.7 0.4 4.4 1.4
 National defense 2.2 1.0 3.6 1.1
 Nondefense 0.6 -0.7 5.8 2.1
 State and local 3.1 2.7 3.0 2.0

Addenda:
 Gross domestic purchases:
 Food 3.6 1.6 4.1 2.6
 Energy 13.8 11.3 9.3 6.2
 Less food and energy 1.7 1.3 2.3 1.0
 Personal consumption expenditures:
 Food 3.7 1.6 4.0 2.6
 Energy goods and services(1) 11.7 10.5 11.7 9.3
 Less food and energy 1.6 1.5 2.6 0.9

(1.) Consists of gasoline, fuel oil, and other energy goods and of
electricity and gas.

NOTE.--Percent changes in major aggregates are shown in NIPA table
8.1. Index numbers are shown in tables 7.1, 7.2, and 7.4.

The deceleration in PCE prices was widespread; prices of energy, food, and medical care services slowed, and prices of motor vehicles turned down. Prices paid by the Federal Government slowed sharply after a first-quarter increase that reflected a pay raise for civilian and military personnel.(8)

The smaller second-quarter decrease in prices of private nonresidential fixed investment reflected smaller second-quarter declines in prices of computers and peripheral equipment and of transportation equipment.

Revisions

The preliminary estimate of a 0.2-percent increase in real GDP in the second quarter is 0.5 percentage point less than the advance estimate (table 10). This revision is equal to the average revision, without regard to sign, from the advance estimate to the preliminary estimate in the past 20 years.

Table 10.--Revisions to Change in Real Gross Domestic
Product and Prices, Second Quarter 2001

[Seasonally adjusted at annual rates]

 Percent
 change from Preliminary
 preceding estimate minus
 quarter advance estimate

 Billions
 Ad- of
 vance Preli- Percen- chained
 esti- minary tage (1996)
 mate estimate points dollars

Gross domestic product 0.7 0.2 -0.5 -13.2

 Less: Exports -9.9 -12.2 -2.3 -7.2
 Goods -13.7 -17.4 -3.7 -8.9
 Services -0.1 1.6 1.7 1.3

 Plus: Imports -6.7 -7.7 -1 -4.1
 Goods -8.2 -9.7 -1.5 -5.3
 Services 1.4 3.3 1.9 1

 Equals: Gross domestic
 purchases 0.8 0.4 -0.4 -10.4

 Less: Change in private
 inventories ... ... ... -11.5

 Equals: Final sales to
 domestic purchasers 0.9 0.8 -0.1 -0.5

 Personal consumption
 expenditures 2.1 2.5 0.4 5
 Durable goods 6 7.1 1.1 2.5
 Nondurable goods 0.4 0.4 0 -0.2
 Services 2.2 2.6 0.4 2.9

 Fixed investment -8.7 -9.8 -1.1 -5.4
 Non residential -13.6 -14.6 -1 -3.9
 Structures -11.2 -13.4 -2.2 -1.7
 Equipment and software -14.5 -15.1 -0.6 -1.9
 Residential 7.4 5.8 -1.6 -1.5

 Government consumption
 expenditures and
 gross investment 5.5 5.4 -0.1 -0.5
 Federal 1.6 1.5 -0.1 -0.2
 National defense 1.9 2.2 0.3 0.3
 Nondefense 0.9 0.1 -0.8 -0.4
 State and local 7.5 7.4 -0.1 -0.4

Addenda:
 Final sales of domestic
 product 0.7 0.6 -0.1 -3.3
 Gross domestic purchases
 price index 1.5 1.4 -0.1 ...
 GDP price index 2.3 2.2 -0.1 ...

NOTE.--The preliminary estimates for the second quarter of 2001
incorporate the following revised or additional major source
data that were not available when the advance estimates were
prepared.

Personal consumption expenditures: Retail sales for May and June
(revised), consumers' share of new-car purchases for June, average
unit value for domestic new autos for June (revised), and consumers'
share of new-truck purchases for June.

Nonresidential fixed investment: Construction put-in-place for April
and May (revised) and June, manufacturers' shipments of machinery and
equipment for May and June (revised), manufacturers' shipments of
complete civilian aircraft for April and May (revised) and June, and
exports and imports of machinery and equipment for May (revised) and
June.

Residential fixed investment: Construction put-in-place for April and
May (revised) and June.

Change in private inventories: Manufacturing and trade inventories for
May (revised) and June.

Exports and imports of goods and services: Exports and imports of goods
for May (revised) and June.

Government consumption expenditures and gross investment: Monthly
Treasury Statement detailed data for June, Department of Defense
detailed financial reports for the second quarter, and State and
local government construction put-in-place for April and May
(revised) and June.

Wages and salaries: Employment, average hourly earnings, and average
weekly hours for May and June (revised).

GDP prices: Detailed merchandise export and import price indexes for
April through June (revised), unit-value index for petroleum imports
for May (revised) and June, and housing prices for the second quarter.

The major contributors to the second-quarter revision were change in private inventories (-0.46 percentage point) and exports of goods (-0.33 percentage point). The negative contributions of these components were partly offset by the positive contributions of a downward revision to imports of goods (0.19 percentage point) and an upward revision to PCE for services (0.14 percentage point).

The downward revision to private inventory investment was mainly accounted for by manufacturing inventories and reflected the incorporation of newly available Census Bureau data on inventories for June and revised data for May.

The revisions to exports and imports of goods were largely to nonautomotive consumer goods and to "other" nonautomotive capital goods. The revisions mainly reflected the incorporation of newly available Census Bureau data on trade in goods for June.

The upward revision to PCE for services was mainly to medical care services, reflecting revisions to producer price indexes from the Bureau of Labor Statistics, and to foreign travel, reflecting newly available data from BEA's international transactions accounts.

Corporate Profits

Corporate profits decreased again in the second quarter. The current production measure decreased $28.5 billion (or 3.6 percent at a quarterly rate)--about half as much as in the first quarter and after a $47.4 billion drop in the fourth quarter of 2000 (table 11).(9)

Table 11.--Corporate Profits

[Seasonally adjusted]

 Billions of dollars (annual rate)

 Level Change from preceding quarter

 2001 2000 2001

 II III IV I II

Profits from current
 production 761.3 2.2 -47.4 -57.8 -28.5
 Domestic industries 624.1 -9.8 -63.2 -41.1 -25.6
 Financial 180.3 1.0 0.3 -2.6 -4.6
 Nonfinancial 443.7 -10.8 -63.4 -38.6 -21.1
 Rest of the world 137.2 12.1 15.8 -16.8 -2.8
 Receipts (inflows) 194.1 -3.0 5.4 -9.4 -6.9
 Payments (outflows) 56.8 -15.0 -10.4 7.4 -4.2

 IVA -9.7 11.2 -3.7 5.4 -7.8
 CCAdj 31.6 -5.1 -2.0 -2.4 -4.4
 Profits before tax 739.4 -3.7 -41.8 -60.8 -16.3
 Profits tax liability 231.0 -5.5 -21.4 -16.7 -5.8
 Profits after tax 508.4 1.8 -20.4 -44.1 -10.5


Cash flow from current
 production 900.9 12.1 -23.2 -35.1 -10.7

Domestic industry profits:
 Corporate profits of
 domestic industries
 with IVA 592.5 -4.7 -61.2 -38.6 -21.3
 Financial 198.2 2.8 1.3 -2.2 -4.0
 Nonfinancial 394.3 -7.4 -62.6 -36.4 -17.3

 Dollars

Unit price, costs, and
 profits of
 nonfinancial
 corporations:
 Unit price 1.044 0.002 0.002 0.004 0.006
 Unit labor cost 0.704 0.004 0.013 0.009 0.006
 Unit nonlabor cost 0.256 0 0.001 0.004 0.003
 Unit profits from
 current production 0.084 -0.003 -0.013 -0.007 -0.004

 Percent change
 (quarterly rate)

 2000 2001

 III IV I II

Profits from current
 production 0.3 -5.3 -6.8 -3.6
 Domestic industries -1.3 -8.4 -5.9 -4.0
 Financial 0.5 0.2 -1.3 -2.5
 Nonfinancial -1.9 -11.2 -7.7 -4.5
 Rest of the world 9.3 11.2 -10.7 -2.0
 Receipts (inflows) -1.4 2.6 -4.5 -3.4
 Payments (outflows) -19.1 -16.2 13.7 -6.8

 IVA ... ... ... ...
 CCAdj ... ... ... ...
 Profits before tax -0.4 -4.9 -7.4 -2.2
 Profits tax liability -2.0 -7.8 -6.6 -2.5
 Profits after tax 0.3 -3.5 -7.8 -2.0

Cash flow from current
 production 1.3 -2.4 -3.7 -1.2

Domestic industry profits:
 Corporate profits of
 domestic industries
 with IVA -0.6 -8.6 -5.9 -3.5
 Financial 1.4 0.7 -1.1 -2.0
 Nonfinancial -1.4 -12.3 -8.1 -4.2

Unit price, costs, and
 profits of
 nonfinancial
 corporations:
 Unit price ... ... ... ...
 Unit labor cost ... ... ... ...
 Unit nonlabor cost ... ... ... ...
 Unit profits from
 current production ... ... ... ...

NOTE.--Levels of these and other profits series are shown in NIPA
tables 1.14, 1.16, 6.16C, and 7.15.

IVA Inventory valuation adjustment

CCAdj Capital consumption adjustment

Domestic corporate profits were reduced about $14 billion by the effects of Tropical Storm Allison and other severe storms. Excluding the storm-related losses, profits from current production decreased 1.8 percent (quarterly rate).

Profits of domestic financial corporations decreased $4.6 billion (2.5 percent). These profits were reduced by about $13 billion by the payment of storm-related insurance benefits.

Profits of domestic nonfinancial corporations decreased $21.1 billion (4.5 percent). Unit profits of these corporations fell, as unit labor costs increased again after large increases in the first and fourth quarters; unit nonlabor costs also increased in these three quarters. The real output of domestic nonfinancial corporations changed little in the second quarter.(10) Profits of domestic nonfinancial corporations were reduced about $1 billion by uninsured losses associated with the storms.

A drop in rest-of-world profits reflected lower receipts from foreign affiliates of U.S. corporations. Payments of earnings by U.S. affiliates of foreign corporations decreased.(11)

Cash flow from current production, a profits-related measure of internally generated funds available for investment, decreased $10.7 billion after decreasing $35.1 billion in the first quarter and $23.2 billion in the fourth.(12) Despite the drop in cash flow, 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 from 69.5 percent to 71.6 percent. During 1991-99, the ratio fluctuated between 72 percent and 94 percent; it averaged 84 percent.

Domestic industry profits and related measures.--Domestic industry profits decreased $21.3 billion after dropping $38.6 billion in the first quarter and $61.2 billion in the fourth.(13) The largest second-quarter decreases were in durable-goods manufacturing, in the transportation and public utilities group, and in financial corporations, especially insurance.

Profits before tax decreased less than profits from current production. The difference between the two measures reflected decreases in both the inventory valuation adjustment and the capital consumption adjustment.(14)

Government Sector

The combined current surplus of the Federal Government and of State and local governments--the NIPA measure of net saving by government--decreased $16.9 billion, to $210.7 billion, in the second quarter after decreasing $23.6 billion in the first (table 12).(15) Both the Federal current surplus and the State and local government current surplus decreased less in the second quarter than in the first.

Table 12.--Government Sector Current Receipts and Expenditures

[Billions of dollars, seasonally adjusted at annual rates]

 Level Change from preceding quarter

 2001 2000 2001

 II III IV I II

Current receipts 3,105.7 33.9 26.2 22.9 8.9
Current expenditures 2,895.0 13.0 39.7 46.5 25.8

 Current surplus or
 deficit (-) 210.7 20.9 -13.5 -23.6 -16.9

Social insurance funds 113.7 7.0 5.1 -8.4 -2.0
Other 97.0 13.9 -18.7 -15.1 -14.9

 Federal Government

 Current receipts 2,092.7 21.8 13.2 9.9 5.3

Personal tax and nontax
 receipts 1,059.6 18.7 20.7 10.9 8.2
Corporate profits tax
 accruals 199.8 -4.7 -18.2 -14.4 -5.2
Indirect business tax and
 nontax accruals 111.1 .4 .8 -.5 -1.1
Contributions for social
 insurance 722.1 7.4 9.9 13.9 3.3

 Current expenditures 1,903.4 1.0 20.6 27.1 21.3

Consumption expenditures 509.8 -10.2 .5 13.4 2.3
 National defense 339.5 -6.4 4.3 13.0 1.2
 Nondefense 170.3 -3.9 -3.7 .4 1.1
Transfer payments (net) 822.5 5.4 22.4 8.8 10.8
 To persons 815.4 3.5 8.7 28.4 9.6
 To the rest of the world 7.1 1.9 13.7 -19.7 1.3
Grants-in-aid to State and
 local governments 281.2 6.7 -.8 13.9 17.2
Net interest paid 242.2 -1.5 -3.0 -6.4 -11.3
Subsidies less current
 surplus of government
 enterprises 47.7 .5 1.6 -2.7 2.3
 Subsidies 40.0 -1.0 -1.4 -2.1 .1
 Of which: Agricultural
 subsidies 18.1 -1.0 -1.6 -2.7 -.3
 Less: Current surplus of
 government enterprises -7.7 -1.6 -3.0 .5 -2.1
Less: Wage accrurals less
 disbursements 0 0 0 0 0

Current surplus or 189.3 20.8 -7.4 -17.2 -16.0
 deficit (-)
Social insurance funds 113.9 7.1 5.2 -8.6 -2.1
Other 75.4 13.7 -12.6 -8.6 -13.9

State and local governments

 Current receipts 1,294.2 18.8 12.1 27.0 20.8

Personal tax and nontax
 receipts 291.4 4.2 8.9 4.5 -2.4
Corporate profits tax
 accruals 31.1 -.9 -3.2 -2.3 -.7
Indirect business tax and
 nontax accruals 679.9 8.9 7.2 10.6 6.4
Contributions for social
 insurance 10.6 0 .1 .2 .3
Federal grants-in-aid 281.2 6.7 -.8 13.9 17.2

 Current expenditures 1,272.7 18.7 18.3 33.3 21.6

Consumption expenditures 981.2 14.3 13.4 16.7 14.5
Transfer payments to persons 288.3 4.4 5.1 5.1 5.4
Net interest paid -.9 .2 0 -.3 -.4
Less: Dividends received by
 government .4 0 0 0 0
Subsidies less current
 surplus of government
 enterprises 4.6 -.1 -.2 11.8 2.2
 Subsidies 15.1 0 0 12.2 2.5
 Less: Current surplus of
 government enterprises 10.5 .1 .3 .3 .3
Less: Wage accruals less
 disbursements 0 0 0 0 0

 Current surplus or
 deficit (-) 21.5 .1 -6.2 -6.3 -.8

Social insurance funds -.2 -.1 -.1 .2 .1
Other 21.6 .2 -6.0 -6.5 -1.0

 Addendum:

Net lending or net
 borrowing (-)(1) 114.3 22.9 -18.4 -23.3 -33.1
 Federal Government 177.3 23.6 -13.7 -10.3 -23.3
 State and local government -63.0 -.7 -4.7 -13.0 -9.8

(1.) "Net lending or borrowing" is conceptually similar to "net
financial investment" in the flow-of-funds accounts prepared by the
Board of Governors of the Federal Reserve System. The two measures
differ primarily because government net lending or borrowing is
estimated from data for transactions, whereas net financial investment
is estimated from data for financial assets. There are also small
conceptual differences, such as the classification of the Federal
Government's railroad retirement and veterans life insurance programs.

Federal

The Federal Government current surplus decreased $16.0 billion, to $189.3 billion, in the second quarter after decreasing $17.2 billion in the first. Both current receipts and current expenditures decelerated.

Current receipts.--Federal current receipts increased $5.3 billion in the second quarter after increasing $9.9 billion in the first. The deceleration was more than accounted for by decelerations in contributions for social insurance and in personal tax and nontax receipts. These decelerations were partly offset by a smaller decrease in corporate profits tax accruals in the second quarter than in the first.

Contributions for social insurance increased $3.3 billion after increasing $13.9 billion. The deceleration primarily reflected a deceleration in contributions for social security (old-age, survivors, disability, and health insurance), which increased $3.6 billion after increasing $13.2 billion. In the first quarter, contributions for social insurance were boosted $4.8 billion by an increase in the social security taxable wage base.

Personal tax and nontax receipts increased $8.2 billion after increasing $10.9 billion. The deceleration was more than accounted for by income taxes, which increased $8.3 billion after increasing $11.1 billion; first-quarter tax receipts were boosted $5.1 billion (net) by estimated annual levels of final settlements, refunds, and back taxes.

Corporate profits tax accruals decreased $5.2 billion after decreasing $14.4 billion, reflecting the smaller decrease in domestic corporate profits before tax.

Current expenditures.--Current expenditures increased $21.3 billion in the second quarter after increasing $27.1 billion in the first. Consumption expenditures increased less than in the first quarter, and net interest paid decreased more than in the first quarter. In contrast, "subsidies less current surplus of government enterprises" turned up, and grants-in-aid to State and local governments and "transfer payments (net)" accelerated.

Consumption expenditures increased $2.3 billion after increasing $13.4 billion. The deceleration was more than accounted for by a deceleration in defense consumption expenditures.

Defense consumption expenditures increased $1.2 billion after increasing $13.0 billion. The deceleration was more than accounted for by services, which decreased $1.3 billion after increasing $13.7 billion. Within services, "other services"--which includes spending for research and development, personnel support, and installation support--decreased $2.1 billion after increasing $10.9 billion. Also within services, compensation of employees increased $0.5 billion after increasing $3.0 billion; first-quarter compensation was boosted $3.6 billion by a pay raise in January 2001.

Net interest paid decreased $11.3 billion after decreasing $6.4 billion. Gross interest paid decreased $10.9 billion after decreasing $5.6 billion, reflecting larger decreases in interest paid to persons and business.

"Subsidies less current surplus of government enterprises" increased $2.3 billion after decreasing $2.7 billion. The upturn was accounted for by a downturn in the Postal Service current surplus and by a smaller decrease in agricultural subsidies. The Postal Service current surplus decreased $2.0 billion after increasing $1.0 billion; the first-quarter surplus had been boosted $2.1 billion by a postal rate increase that was effective on January 7, 2001. Agricultural subsidies decreased $0.3 billion after decreasing $2.7 billion; the smaller decrease reflected the pattern of the newly authorized emergency agricultural subsidies.

Grants-in-aid to State and local governments increased $17.2 billion after increasing $13.9 billion. The acceleration was accounted for by grants for health and hospitals, which includes payments to States for the children's health insurance program.

"Transfer payments (net)" increased $10.8 billion after increasing $8.8 billion. The acceleration was more than accounted for by transfer payments to the rest of the world, which increased $1.3 billion after decreasing $19.7 billion; the first-quarter decrease followed a large fourth-quarter increase that included the annual payment of $3.2 billion ($13.0 billion at an annual rate) to Israel for economic support. In contrast, transfer payments to persons increased $9.6 billion after increasing $28.4 billion. The deceleration was mostly accounted for by decelerations in benefit payments for social security (old-age, survivors and disability insurance) and for supplemental security income and by a downturn in benefit payments for veterans pensions; first-quarter payments for these and other programs were boosted $15.6 billion by a 3.5-percent cost-of-living adjustment.

State and local

The State and local government current surplus decreased $0.8 billion, to $21.5 billion, in the second quarter after decreasing $6.3 billion in the first. Both current receipts and current expenditures decelerated.

Current receipts.--State and local government current receipts increased $20.8 billion in the second quarter after increasing $27.0 billion in the first. The deceleration was more than accounted for by a downturn in personal tax and nontax receipts and by a deceleration in indirect business tax and nontax accruals. In contrast, Federal grants-in-aid accelerated, and corporate profits tax accruals declined less than in the first quarter.

Personal tax and nontax receipts decreased $2.4 billion after increasing $4.5 billion. The downturn was accounted for by a downturn in personal income taxes, which decreased $3.2 billion after increasing $3.7 billion as some States returned excess revenues to taxpayers in the form of one-time refunds.

Indirect business tax and nontax accruals increased $6.4 billion after increasing $10.6 billion. The deceleration was mostly accounted for by decelerations in nontaxes and in sales taxes. Within nontaxes, the deceleration followed a step-up in the first quarter in out-of-court settlement payments to the States by tobacco companies.

Corporate profits tax accruals decreased $0.7 billion after decreasing $2.3 billion, reflecting the smaller decrease in domestic corporate profits before tax.

Current expenditures.--Current expenditures increased $21.6 billion in the second quarter after increasing $33.3 billion in the first. The deceleration was accounted for by decelerations in "subsidies less current surplus of government enterprises" and in consumption expenditures.

"Subsidies less current surplus of government enterprises" increased $2.2 billion after increasing $11.8 billion. Subsidies increased $2.5 billion after increasing $12.2 billion; first-quarter subsidies had been boosted $3.0 billion ($12.0 billion at an annual rate) as the result of electricity purchases by the State of California.

Consumption expenditures increased $14.5 billion after increasing $16.7 billion. The deceleration was more than accounted for by "other services," which increased $0.5 billion after increasing $4.8 billion, reflecting a deceleration in spending for natural gas. In contrast, nondurable goods increased $2.2 billion after increasing $0.7 billion, reflecting an acceleration in spending for petroleum products.

Net lending or net borrowing

"Net lending or net borrowing(-)," an alternative measure of the government fiscal position, is the financing requirement of the government sector. It is derived as the current surplus plus the consumption of fixed capital and "capital transfers received (net)" less gross investment and net purchases of nonproduced assets.

Net lending decreased $33.1 billion after decreasing $23.3 billion. The larger decrease was more than accounted for by Federal Government net lending, which decreased $23.3 billion after decreasing $10.3 billion. The larger decrease was attributable to an upturn in "net purchases of nonproduced assets" that resulted from a downturn in receipts for radio spectrum sales, to a downturn in "capital transfers received (net)" that resulted from a downturn in estate and gift tax receipts, and to an upturn in gross investment.

Government gross investment increased $15.2 billion after increasing $8.1 billion. Federal Government gross investment increased $2.1 billion after decreasing $2.3 billion; the turnaround reflected an upturn in equipment and software investment. State and local government gross investment increased $13.1 billion after increasing $10.4 billion; the acceleration was attributable to investment in structures.

(1.) Quarterly estimates in the NIPA's are expressed at seasonally adjusted annual rates. Quarter-to-quarter dollar changes are the differences between the published estimates. Quarter-to-quarter percent changes are annualized and are calculated from unrounded data unless otherwise specified.

Real estimates are calculated using a chain-type Fisher formula with annual weights for all years and quarterly weights for all quarters; real estimates are expressed both as index numbers (1996=100) and as chained (1996) dollars. Price indexes (1996=100) are also calculated using a chain-type Fisher formula.

(2.) Gross domestic purchases is calculated as the sum of personal consumption expenditures, gross private domestic investment, and government consumption expenditures and gross investment; thus, gross domestic purchases includes imports of goods and services, which are subtracted in the calculation of GDP, and does not include exports of goods and services, which are added in the calculation of GDP.

(3.) In the NIPA's, consumer spending is shown as personal consumption expenditures, government spending is shown as government consumption expenditures and gross investment, and inventory investment is shown as change in private inventories.

(4.) The personal saving rate is measured as personal saving as a percentage of current-dollar disposable personal income. The national saving rate, which is measured as gross saving as a percentage of gross national product and which was not available at the time of the advance estimate, decreased to 17.2 percent from 17.3 percent; it was the fourth consecutive decrease.

(5.) The average annual rate of growth for real PCE over the current expansion is 3.6 percent.

(6.) The growth of real final sales averaged 2.3 percent over the last four quarters, compared with 3.5 percent over the earlier part of the current expansion.

(7.) Using the ratio that includes all final sales of domestic businesses in the denominator implies that the production of services results in a demand for inventories that is similar to that generated in the production of goods and structures. In contrast, using the "goods and structures" ratio implies that the production of services does not generate demand for inventories. Both implications are extreme. Production of some services may require substantial inventories, while production of other services may not.

(8.) In the NIPA's, an increase in the rate of Federal employee compensation is treated as an increase in the price of employee services purchased by the Federal Government.

(9.) Profits from current production is estimated as the sum of profits before tax, the inventory valuation adjustment, and the capital consumption adjustment; it is shown in NIPA tables 1.9, 1.14, 1.16, and 6.16C (see "Selected NIPA Tables," which begins on page D--2 of this issue) as corporate profits with inventory valuation and capital consumption adjustments.

Percent changes in profits are shown at quarterly, not annual, rates.

(10.) Output is defined here as real gross product of nonfinancial corporate business. It is a measure of the contribution, or value added, of nonfinancial corporations to the Nation's output and is measured as the sum of incomes generated by these businesses.

(11.) Profits from the rest of the world is calculated as (1) receipts by U.S. residents of earnings from their foreign affiliates plus dividends received by U.S. residents from unaffiliated foreign corporations minus (2) payments by U.S. affiliates of earnings to their foreign parents plus dividends paid by U.S. corporations to unaffiliated foreign residents. These estimates include capital consumption adjustments (but not inventory valuation adjustments) and are derived from BEA's international transactions accounts.

(12.) Cash flow from current production is undistributed profits with inventory valuation and capital consumption adjustments plus the consumption of fixed capital.

(13.) Domestic industry profits are estimated as the sum of corporate profits before tax and the inventory valuation adjustment; they are shown in NIPA table 6.16C (on page D-16 of this issue). Estimates of the capital consumption adjustment do not exist at a detailed industry level; they are available only for total financial and total nonfinancial industries.

(14.) As prices change, companies that value inventory withdrawals at original acquisition (historical) costs may realize inventory profits or losses. Inventory profits--a capital-gains-like element in profits--result from an increase in inventory prices, and inventory losses--a capital-loss-like element in profits--result from a decrease in inventory prices. In the NIPA's, inventory profits or losses are removed from business incomes by the inventory valuation adjustment (IVA); a negative IVA removes inventory profits, and a positive IVA removes inventory losses.

The capital consumption adjustment converts depreciation valued at historical cost and based on service lives and depreciation patterns specified in the tax code to depreciation valued at current cost and based on empirical evidence on the prices of used equipment and structures in resale markets. For information on depreciation in the NIPA's, see Arnold J. Katz and Shelby W. Herman, "Improved Estimates of Fixed Reproducible Tangible Wealth, 1929-95," SURVEY OF CURRENT BUSINESS 77 (May 1997): 69-92.

(15.) Net saving equals gross saving less consumption of fixed capital (CFC); the estimates of gross saving, CFC, and net saving are shown in NIPA table 5.1. For NIPA estimates of government current receipts, current expenditures, and the current surplus or deficit for 1999 and 2000, see NIPA tables 3.1, 3.2, and 3.3 in this issue.