Technical Notes

These technical notes provide background information about the data sources and estimating methods used to produce the estimates presented in the GDP news release of June 25, and also provide some perspective on the estimates. Additional material will become available in the days and weeks ahead; much of it will be posted on BEA's web site. In mid-July, the estimates will be published in BEA's journal, the Survey of Current Business, along with a more detailed analysis of the estimates ("The Business Situation").

GDP and Corporate Profits

Real GDP: Real GDP is now estimated to have increased 5.4 percent in the first quarter of 1998, 0.6 percentage point more than the preliminary estimate of 4.8 percent. Real GDP increased 3.7 percent in the fourth quarter of 1997.

As in the preliminary and advance estimates, the final estimate of the first-quarter increase reflects large increases in consumer spending and in business expenditures for equipment. The larger growth in the final estimate than in the preliminary mainly reflects an upward revision to exports and to nonfarm inventory investment (see "Source of revisions" below).

The final estimate of the price index for gross domestic purchases is estimated to have increased 0.1 percent, 0.1 percentage point higher than the preliminary estimate of no change in the first quarter.

Corporate Profits: The final estimate of corporate profits from current production shows an increase of $9.6 billion in the first quarter. This current-production measure differs from profits as they are usually reported in corporate financial statements. First, the current-production measure excludes non-operating items, such as special charges and capital gains and losses. Second, the current-production measure is based on replacement-cost estimates of inventory withdrawals and depreciation rather than on historical-cost values.

The final estimate of profits from current production is $5.2 billion higher than that reported in last month's preliminary estimate. The revision was primarily accounted for by an upward revision to U.S. companies' profits on operations abroad and a downward revision in foreign-owned companies profits in the United States.

Growth in real gross national product (GNP) in the first quarter is revised to 5.6 percent from 4.8 percent; in the fourth quarter, real GNP had grown 3.6 percent. GNP equals GDP plus incomes, mainly profits and other investment income, earned abroad by U.S. residents less similar incomes earned in the U.S. by foreign residents.

Sources of Revision in Real GDP

The 0.6-percentage point revision to real GDP growth is larger than the average revision--0.3-percentage point without regard to sign--between preliminary and final estimates for the period 1976-97. Today's revision to real GDP is mainly the result of upward revisions to net exports and to nonfarm inventory investment.

The upward revision to net exports reflects an upward revision to exports of goods and services and a downward revision to imports of goods and services. These revisions reflect the incorporation (on a "best-change" basis from the fourth quarter to the first) of source data form the annual revision of the balance of payments accounts released last week. Revisions to the levels of exports and imports for the affected quarters will be incorporated as part of this year's annual revision of the national income and product accounts (NIPA's), scheduled for release on July 31.

The upward revision to nonfarm inventory investment reflects upward revisions to motor vehicle inventory investment, resulting from the incorporation of newly available trade source data on used car stocks, and to wholesale trade and retail trade inventory investment, resulting from the incorporation of revised census data for March on the book value of inventories.

Annual Revision Scheduled for July 31

The GDP news release on July 31 will present the regular annual revision of the NIPA's covering the estimates from the first quarter of 1995 through the first quarter of 1998, as well as the advance estimates of the second quarter of 1998. Annual revisions incorporate source data that are more complete, more detailed, and otherwise more appropriate than previously available. The newly incorporated source data include the following: Census Bureau annual surveys of manufactures, merchant wholesale and retail trade, services, and State and local government, and monthly survey of construction; BEA balance of payments accounts; Federal Government budget data; Internal Revenue Service tabulations of tax returns for corporations and for sole proprietorships and partnerships; Bureau of Labor Statistics (BLS) tabulations of wages and salaries of employees covered by State unemployment insurance; and Department of Agriculture farm statistics.

Data from new sources will be introduced for several difficult-to-measure consumer services, including computer on-line services, cellular telephone services, motor vehicle leasing, brokerage and investment counseling, and casino gambling. A new method will be introduced for measuring the average price of light trucks (including minivans and sports utility vehicles) for the most recent year. Several new price deflators will also be introduced in this annual revision. Many personal consumption expenditures categories will be deflated using newly available geometric-mean-type consumer price indexes that allow for consumer substitution within categories, and several services categories will be deflated using newly available producer price indexes.

This year's annual revision will also incorporate a number of changes designed to better separate income from current production from that attributable to capital gains on existing assets. Among the more important of these changes is a redefinition of dividend payments. Dividend payments will be defined to exclude those that reflect identifiable capital gains distributions. At present, the national accounts include capital gains distributions of regulated investment companies (i.e., mutual funds) as dividends. The redefinition will result in a reduction in dividends and an offsetting increase in undistributed corporate profits; gross domestic product and national income will not be affected. The reduction in dividends will also result in reductions in personal income and in personal saving (which is calculated as disposable personal income less personal outlays). The reduction in personal saving will be offset by an increase in business saving (undistributed corporate profits); private saving will not be affected. All series affected by the redefinition will be revised back to 1982.

J. Steven Landefeld
Director
Bureau of Economic Analysis
202-606-9600
June 25, 1998