The business situation.

Larkins, Daniel ; Dobbs, David T.

FINAL ESTIMATES for the fourth quarter of 1991 show that real GDP increased at an annual rate of 0.4 percent; the preliminary estimates issued a month ago had shown a 0.8-percent increase (table 1). (1) The fourth-quarter change in real gross domestic purchases was revised from a 0.3-percent to a 0.4-percent decrease. The downward revision in GDP was larger than that in gross domestic purchases because of a downward revision in net exports. Revisions in net exports--that is, exports minus imports--lead to revisions in GDP but not in gross domestic purchases. (2)

The downward revision in net exports mainly reflected revised data on exports of services in the quarter. The change in business inventories was also revised down, mainly reflecting revised data on December inventories of retailers and merchant wholesalers. Personal consumption expenditures and fixed investment were revised up. Increases in the fixed-weighted price indexes for gross domestic purchases and for GDP were revised down 0.1 percentage point, to 2.2 percent and 2.1 percent, respectively.

Gross national products.--The final national income and product account estimates for the fourths-quarter include the initial estimate of gross national product (GNP) for the quarter. This measure of U.S. production, which is now released at the same time as the preliminary estimate of corporate profits, shows a 0.4 percent increase, the same as GDP. GNP equals GDP plus

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net receipts of factor income from the rest of the world. Net receipts of factor income was unchanged, as receipts from the rest of the world and payments to the rest of the world both decreased.

In estimating real GNP, the current-dollar value of exports of goods and services is deflated by export prices, the current-dollar value of imports of goodsand services is deflated by import prices, and the current-dollar value of most factor income is deflated by the deflator for net domestic product. Another measure of U.S. production, command-basis GNP, is calculated by deflating exports of goods and services and receipts of factor income by the implicit price deflator for imports of goods and services and payments of factor income. Thus, command-basis GNP measure U.S. production in terms of its purchasing power. (Command-basis GNP is shown in table 1.11 of the "Selected NIPA Tables.") In the last two quarters, command-basis GNP has presented much the same picture of the U.S. economy that GNP has: In the fourth quarter, command-basis GNP increased 0.1 percent, compared

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with the 0.4-percent increase in GNP; in the third, command-basis GNP increased 2.1 percent, compared with a 2.0-percent increase in GNP.

Corporate Profits

Profits from current production--profits before tax plus inventory valuation adjustment (IVA) and capital consumption adjustment (CCADj)--increased $10.5 billion in the fourth quarter of 1991 after increasing $2.6 billion in the third quarter (table 2). Most of the fourth-quarter increase was accounted for by profits of domestic nonfinancial corporations and reflected a larger decrease in unit costs than in unit prices.

Cash flow from current production, a profits-related measure of internally generated funds available to corporations for investment, increased $13.9 billion after decreasing $2.6 billion. The increase, together with a decrease in nonresidential fixed investment, lifted cash flow as a percentage of nonresidential investment to 81.2 percent in the fourth quarter from 77.5 percent in the third.

Profits by industry.--Profits before tax with IVA is the best available measure of industry profits because estimates of the CCAdj by industry do not exist. For domestic industries, this measure of profits increased $2.5 billion after decreasing $4.0 billion. The increase was more than accounted for by a $4.4 billion increase in the profits of nonfinancial corporations; all major nonfinancial industry groups increased except the transportation and public utilities group. Profits of financial corporations decreased $1.9 billion after increasing $1.4 billion; the decrease was more than accounted for by insurance carriers.

Profits from the rest of the world increased $2.0 billion after increasing $1.3 billion. 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 decreased $1.0 billion, mainly reflecting lower profits of petroleum affiliates of U.S. corporations; payments decreased $3.0 billion, mainly reflecting lower profits of affiliates of European corporations.

Government Sector

The fiscal position of the government sector deteriorated in the fourth quarter of 1991, as the combined deficit of the Federal Government and of State and local governments increased $24.0 billion, to $202.4 billion (table 3). The Federal Government deficit increased $32.6 billion, and the State and local surplus increased $8.6 billion.

Federal

The Federal Government deficit increased to $242.8 billion, as expenditures increased considerably more than receipts.

Receipts increased $1.9 billion in the fourth quarter after increasing $10.4 billion in the third. Personal tax and nontax receipts, corporate profits tax accruals, and contributions for social insurance all contributed to the deceleration. Personal tax and nontax payments declined $0.9 billion after increasing $1.1 billion; the decline was accounted for by a $1.1 billion drop in estate and gift taxes. Corporate profits tax accruals declined $1.4 billion after increasing $4.1 billion, reflecting the pattern of corporate profits. Contributions for social insurance increased $1.7 billion after increasing $3.6 billion; the third-quarter increase had included $1.8 billion for an expansion of the medicare program to cover additional State and local government employees. Indirect business tax and nontax accruals increased $2.5 billion after increasing $1.6 billion; the acceleration was largely attributable to customs duties, which increased $1.8 billion after increasing $1.0 billion.

Expenditures increased $34.5 billion after increasing $13.9 billion; purchases declined, but other expenditure categories increased sharply.

Transfer payments to persons increased $13.5 billion after increasing $4.4 billion. The fourth-quarter increase included $3.1 billion for benefits paid under the emergency unemployment compensation program enacted in November, $1.8 billion for payments to Japanese-Americans interned during World War II, $1.4 billion for a cost-of-living adjustment in food stamps, and $0.8 billion for retroactive social security benefits. Transfer payments to foreigners increased $8.2 billion after increasing $25.4 billion. The fourth-quarter deceleration was attributable to the pattern of payments to the Federal Government by U.S. coalition partners for Operation Desert Storm expenses; these contributions peaked in the first quarter of 1991 and have declined steadily since then. In the NIPA'S, they are treated as negative transfer payments to foreigners.

Subsidies less the current surplus of government enterprises increased $12.2 billion after decreasing $8.9 billion. Both changes were attributable to agricultural subsidies, which were unusually low in the third quarter.

Grants-in-aid to State and local governments increased $10.1 billion after increasing $2.2 billion; medicaid grants accounted for $6.8 billion of the latest increase. Net interest paid increased $3.5 billion after declining $1.8 billion.

Purchases declined $12.9 billion after declining $7.2 billion. Defense purchases declined $11.3 billion after declining $6.1 billion; the declines in both quarters reflected decreases in purchases of most types of military services and goods. Nondefense purchases decreased $1.7 billion after decreasing $1.1 billion; both decreases were attributable

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to the Commodity Credit Corporation inventory change.

Cyclically adjusted surplus or deficit.--BEA has suspended publication of estimates of the cyclically adjusted Federal Government surplus or deficit. The detailed models supporting these estimates are being reviewed and updated to reflect the recent comprehensive revision of the NIPA'S and changes in the Federal sector's cyclical responsiveness following recent tax and unemployment legislation. Information on the availability of these estimates will appear in a subsequent issue of the SURVEY.

State and local

The State and local government surplus increased to $40.4 billion, as receipts increased more than expenditures.

Receipts increased $18.5 billion in the fourth quarter after increasing $13.4 billion in the third. Grant-in-aid increased $10.1 billion after increasing $2.2 billion. Personal tax and nontax receipts increased $4.2 billion after increasing $0.4 billion; the fourth-quarter increase included a new income tax in Connecticut and an increase in the New York City income tax. Indirect business tax and nontax accruals increased $4.1 billion after increasing $9.6 billion; the third-quarter increase had included a sales-tax increase in California. Contributions for social insurance increased $0.3 billion after increasing $0.2 billion. Corporate profits tax accruals declined $0.3 billion after increasing $1.0 billion, reflecting the pattern of corporate profits.

State and local government expenditures increased $10.0 billion after increasing $9.1 billion; a deceleration in purchases was more than offset by accelerations in other expenditure categories. Purchases increased $3.3 billion after increasing $3.8 billion; an acceleration in compensation was more than offset by decelerations in purchases of other services, nondurable goods, and structures. All other expenditure categories combined increased $6.7 billion after increasing $5.3 billion.

(1) Quarterly estimates in the national income and product accounts are expressed at seasonally adjusted annual rates, and quarterly changes are differences between these rates. Quarter-to-quarter percent changes are annualized. Real, or constant-dollar, estimates are expressed in 1987 dollars and are based on 1987 weights.

(2) Gross domestic purchases is the sum of personal consumption expenditures, gross private domestic investment, and government purchases. GDP is the sum of these three components plus exports minus imports, thereby including U.S. production of goods and services sold outside the United States and excluding those goods and services in gross domestic purchases that are not produced in the United States.