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From the March 2000 SURVEY OF CURRENT BUSINESS



Business Situation

This article was prepared by Larry R. Moran, Daniel Larkins, Ralph W. Morris, and Deborah Y. Sieff.

Real gross domestic product (GDP) increased 6.9 percent in the fourth quarter of 1999, according to the "preliminary" estimates of the national income and product accounts (NIPA's), after increasing 5.7 percent in the third quarter (table 1 and chart 1); the "advance" fourth-quarter estimate of real GDP, reported in the February "Business Situation," had shown a 5.8-percent increase./1/ The upward revision to real GDP reflected upward revisions to consumer spending, to State and local government spending, to exports of goods, and to private nonfarm inventory investment; these revisions were partly offset by a downward revision to Federal Government spending. Real final sales of domestic product and real gross domestic purchases were each revised up less than GDP. (The sources of the revisions are discussed in the section "Revisions.")

The 6.9-percent increase in the fourth quarter was the largest increase in 3 1/2 years and was well above the 3.6-percent average annual growth rate for real GDP over the current expansion, which began in the second quarter of 1991.

The picture of the economy in the fourth quarter presented by the preliminary estimates differs somewhat from that presented by the advance estimates. The preliminary estimates showed the following:

The price index for gross domestic purchases increased 2.3 percent in the fourth quarter after increasing 1.7 percent in the third (table 3). The step-up was accounted for by an acceleration in prices of personal consumption expenditures (PCE) other than food and energy and by a smaller decrease in prices of private nonresidential investment in equipment and software; in contrast, prices of PCE energy goods and services and of private residential investment decelerated. The price index for gross domestic purchases excluding food and energy—food and energy prices are usually more volatile than many other prices—increased 1.9 percent after increasing 1.2 percent.

GDP prices increased 2.0 percent in the fourth quarter after increasing 1.1 percent in the third.

Real disposable personal income (DPI) increased 4.5 percent in the fourth quarter after increasing 2.9 percent in the third. The personal saving rate—personal saving as a percentage of current-dollar DPI—continued its downtrend, decreasing to 1.8 percent from 2.1 percent in the third quarter; the fourth-quarter rate is the lowest since 1959, the first year for which quarterly estimates are currently available.

Personal consumption expenditures

Real personal consumption expenditures (PCE) increased 5.9 percent in the fourth quarter after increasing 4.9 percent in the third (table 4 and chart 2). For eight consecutive quarters, the increases have exceeded the 3.8-percent average annual growth rate for PCE over the current expansion. The fourth-quarter step-up was accounted for by accelerations in expenditures for both nondurable and durable goods. Expenditures for services increased less than in the third quarter.

The step-up in PCE was consistent with movements in some of the factors considered in analyses of PCE (chart 3). As previously mentioned, real DPI increased more in the fourth quarter than in the third; the Index for Consumer Sentiment (prepared by the University of Michigan's Survey Research Center as a measure of consumer attitudes and expectations) remained high; and the unemployment rate decreased to 4.1 percent, the lowest quarterly rate in 30 years.

Expenditures for nondurable goods increased 7.2 percent after increasing 3.6 percent. The step-up was more than accounted for by an acceleration in food, but "other" nondurable goods also contributed./4/ Gasoline and oil increased about the same in each quarter, fuel oil and coal decreased slightly more in the fourth quarter than in the third, and clothing and shoes decreased after increasing.

Expenditures for durable goods increased 13.0 percent after increasing 7.7 percent. The acceleration was widespread. An acceleration in motor vehicles and parts was more than accounted for by an upturn in new autos. An acceleration in "other" durable goods was largely accounted for by wheel goods and sporting equipment, which increased after no change./5/ An acceleration in furniture and household equipment was accounted for by furniture and equipment other than computers and software; computers and software increased less than in the third quarter.

Expenditures for services increased 3.8 percent after increasing 5.0 percent. The slowdown was primarily accounted for by a downturn in household operation, which was mostly accounted for by electricity and gas. Recreation decelerated, reflecting a downturn in motion picture admissions and a slowdown in casino gambling. Transportation also decelerated, reflecting a downturn in motor-vehicle leasing. Medical care and housing services both increased about the same in each quarter. "Other" services increased more than in the third quarter, primarily reflecting an upturn in brokerage and investment counseling./6/

Private fixed investment

Real private fixed investment increased 2.1 percent in the fourth quarter after increasing 6.8 percent in the third (chart 4). A deceleration in nonresidential fixed investment more than offset an upturn in residential investment.

Nonresidential fixed investment.—Real private nonresidential fixed investment increased 2.5 percent in the fourth quarter after jumping 10.9 percent in the third (table 5). Equipment and software decelerated sharply, and structures decreased more than in the third quarter.

Over the past four quarters, nonresidential fixed investment increased 7.0 percent, somewhat less than the 8.3-percent average increase over the current expansion. Some of the factors that affect investment spending showed strength over the past four quarters (chart 5). Over that period, real final sales of domestic product increased 4.5 percent, and over the first three quarters of 1999, domestic corporate profits increased at an average annual rate of 6.4 percent (estimates of profits for the fourth quarter are not yet available). In contrast, the capacity utilization rate was 81.0 percent in the fourth quarter of 1999, unchanged from a year ago, and long-term interest rates increased; for example, the yield on high-grade corporate bonds increased to 7.47 percent from 6.25 percent.

Investment in equipment and software increased 4.7 percent after jumping 15.7 percent. The slowdown was accounted for by a downturn in transportation equipment—reflecting downturns in trucks, buses, and trailers and in autos—and by a deceleration in information processing equipment and software. Industrial equipment increased more than in the third quarter, and "other" equipment decreased less./7/ The deceleration in information processing equipment was largely accounted for by a slowdown in computers and peripheral equipment, but communication equipment and software also slowed.

Investment in nonresidential structures decreased 4.3 percent after decreasing 3.8 percent. The larger fourth-quarter decrease was accounted for by downturns in mining exploration, shafts, and wells and in utilities. Nonresidential buildings and "other structures" decreased less than in the third quarter./8/

Residential investment.—Real private residential investment increased 1.0 percent in the fourth quarter after decreasing 3.8 percent in the third (table 5). The upturn was more than accounted for by single-family structures, which increased after decreasing. Multifamily structures changed little in each quarter, and "other" residential investment turned down./9/

Investment in single-family structures increased 9.1 percent after decreasing 8.0 percent. Multifamily structures decreased 0.8 percent in each quarter. "Other" residential investment decreased 7.9 percent after increasing 1.2 percent; a downturn in brokers' commissions—which largely reflected a larger decrease in sales of existing homes in the fourth quarter than in the third—more than offset an acceleration in home improvements.

Inventory investment

Real inventory investment—that is, the change in private inventories—increased $30.7 billion in the fourth quarter, as inventory accumulation stepped up to $68.7 billion from $38.0 billion; inventory investment had increased $24.0 billion in the third quarter (table 6 and chart 6). The fourth-quarter increase in inventory investment was largely accounted for by retail trade.

Retail inventories increased $42.1 billion after increasing $14.1 billion. Inventories of durable-goods retailers increased $28.1 billion after increasing $11.8 billion; the step-up reflected both inventories of nonmotor-vehicle-durable-goods retailers, which increased $13.6 billion after increasing $2.5 billion, and inventories of motor vehicle dealers, which increased $14.4 billion after increasing $9.3 billion. Inventories of nondurable-goods retailers increased $14.3 billion after increasing $2.5 billion; about half of the step-up reflected an upturn in the inventories of apparel stores.

Manufacturing inventories increased $10.2 billion after increasing $1.7 billion. The step-up was largely accounted for by inventories of nondurable-goods manufacturers, which increased $6.3 billion after no change. Chemical inventories increased after decreasing, and food inventories increased after little change. Inventories of durable-goods manufacturers increased $3.8 billion after increasing $1.8 billion. Inventories of electronic machinery increased substantially more than in the third quarter, and a number of other durable-goods industries recorded smaller step-ups or upturns; in contrast, inventories of transportation equipment other than motor vehicles decreased more than in the third quarter, reflecting a step-up in the liquidation of aircraft inventories.

"Other" nonfarm inventories increased $3.9 billion after little change./10/ Inventories of durable goods turned up, and inventories of nondurable goods accelerated.

Wholesale trade inventories increased $16.7 billion after increasing $25.1 billion. Inventories of nondurable goods turned down, more than offsetting an acceleration in inventories of durable goods.

Farm inventories decreased $6.4 billion after decreasing $3.8 billion. Crop inventories decreased more than in the third quarter, and livestock inventories decreased about the same as in the third quarter.

In the fourth quarter, the ratio of real nonfarm inventories to real final sales of domestic businesses was 2.09, the same as in the third quarter; over the current expansion, the ratio has fluctuated in the range of 2.07 to 2.17. The inventory-sales ratio that includes only final sales of goods and structures decreased from 3.71 to 3.70, its lowest level in more than 30 years./11/

Exports and imports

Real exports of goods and services increased 8.7 percent in the fourth quarter after jumping 11.5 percent in the third; exports of goods decelerated, and exports of services accelerated (table 7). Real imports of goods and services increased 10.0 percent after jumping 14.9 percent; imports of goods decelerated, and imports of services accelerated.

Real exports of goods increased 10.5 percent after jumping 16.9 percent (chart 7). Most of the slowdown was attributable to a sharp deceleration in nonautomotive capital goods, primarily reflecting downturns in computers, peripherals, and parts and in telecommunication equipment and reflecting decelerations in semiconductors and in civilian aircraft, engines, and parts; however, a downturn in food, feeds, and beverages also contributed to the slowdown. Exports of industrial supplies and materials and of nonautomotive consumer goods accelerated.

Exports of services increased 4.5 percent after no change. Exports of travel turned up, and exports of "other private services" accelerated./12/

Real imports of goods increased 9.3 percent after jumping 17.3 percent (chart 8). The slowdown reflected slowdowns in imports of automotive vehicles, engines, and parts and in computers, peripherals, and parts; a downturn in imports of civilian aircraft, engine, and parts; and a larger decrease in the imports of petroleum and products.

Imports of services jumped 13.9 percent after increasing 3.6 percent. Imports of travel and of royalties and license fees turned up, and imports of passenger fares and of "other private services" accelerated./13/

Government spending

Real government consumption expenditures and gross investment increased 9.2 percent in the fourth quarter after increasing 4.5 percent in the third (table 8 and chart 9). Spending by both the Federal Government and State and local governments increased more in the fourth quarter than in the third.

Federal defense spending jumped 16.7 percent after increasing 11.2 percent. Investment spending increased after little change; equipment and software stepped up, and structures changed little after decreasing slightly. Consumption spending increased more in the fourth quarter than in the third; the acceleration was more than accounted for by a step-up in services other than compensation of employees.

Federal nondefense spending increased 9.9 percent after decreasing 7.1 percent. Consumption expenditures increased after decreasing, largely reflecting an upturn in services. Investment spending also increased after decreasing, reflecting an upturn in equipment and software.

State and local government spending increased 6.6 percent after increasing 4.8 percent. The step-up was more than accounted for by an acceleration in investment spending, which reflected an acceleration in spending for structures, largely for highways. Consumption expenditures increased slightly less than in the third quarter.

Revisions

The preliminary estimate of a 6.9-percent increase in real GDP in the fourth quarter is 1.1 percentage points higher than the advance estimate (table 9); for 1978–99, the average revision, without regard to sign, from the advance estimate to the preliminary estimate was 0.5 percentage point.

The upward revision to real GDP primarily reflected upward revisions to PCE, to State and local government spending, to exports of goods, and to private nonfarm inventory investment; these revisions were partly offset by a downward revision to Federal Government spending.

The upward revision to PCE was largely to nondurable goods and services. The upward revision to nondurable goods was primarily to food, which mainly reflected the incorporation of revised Census Bureau estimates of retail sales for November and December. The upward revision to services was primarily to recreational services, which mainly reflected the incorporation of newly available data on State government gambling revenues for November and December, and to brokerage and investment counseling, which mainly reflected the incorporation of newly available trade source data on mutual funds sales for December.

The upward revision to State and local government spending was primarily to investment in highways and reflected the incorporation of newly available Census Bureau estimates of construction-put-in-place for December.

The upward revision to exports of goods was mainly to "other capital goods, except automotive" and primarily reflected the incorporation of newly available Census Bureau estimates for December.

The upward revision to private nonfarm inventory investment was mainly to retail motor vehicles and primarily reflected the incorporation of newly available trade source data on auto inventories for December.

The downward revision to Federal Government spending was mainly to defense spending and primarily reflected the incorporation of newly available detailed data from the Monthly Treasury Statement for December and Department of Defense financial reports for the fourth quarter.

The preliminary estimates of the increases in the price indexes for gross domestic purchases (2.3 percent) and for GDP (2.0 percent) were the same as the advance estimates.

The preliminary estimate of the increase in real DPI was 4.5 percent and that of the increase in current-dollar DPI was 7.1 percent, both of which were 0.1 percentage point lower than the advance estimates.

Footnotes:

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. Final sales of domestic product is calculated as GDP less change in private inventories.

3. Gross domestic purchases—a measure of purchases by U.S. residents regardless of where the purchased goods and services were produced—is calculated as the sum of personal consumption expenditures, gross private domestic investment, and government consumption expenditures and gross investment.

4. "Other" nondurable goods 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.

5. "Other" durable goods 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.

6. "Other" services includes personal care, personal business, net foreign travel, education and research, and religious and welfare activities.

7. "Other" equipment includes construction and agricultural machinery, mining and oilfield machinery, electrical equipment not included in other categories, furniture and fixtures, and service-industry machinery.

8. "Other" structures includes streets, dams and reservoirs, sewer and water facilities, parks, airfields, brokerage commissions on the sale of structures, and net purchases of used structures.

9. "Other" residential investment includes home improvements, new manufactured home sales, brokers' commissions on home sales, net purchases of used structures, residential equipment, and other residential structures (which consists primarily of dormitories and of fraternity and sorority houses).

10. "Other" nonfarm inventories includes inventories held by the following industries: Mining; construction; public utilities; transportation; communication; finance, insurance, and real estate; and services.

11. Use of the ratio that includes all final sales of domestic businesses in the denominator implies that the use of inventories in the production of services is similar to the use of inventories in the production of goods and structures. In contrast, use of the "goods and structures" ratio implies that the production of services does not use inventories. Because business final sales of services are large relative to final sales of goods and structures, the levels of the two ratios differ substantially. However, quarter-to-quarter changes is the two ratios tend to be similar.

12. Exports of other private services includes education, financial, telecommunications, insurance, and business, professional, and technical.

13. Imports of other private services includes education, financial, telecommunications, insurance, and business, professional, and technical.



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