Business Situation: Advance Estimates for the Third Quarter of 2004

ECONOMIC growth stepped up somewhat in the third quarter of 2004, and inflation moderated, according to the "advance" estimates of the national income and product accounts (NIPAs).

* Real gross domestic product (GDP) increased 3.7 percent after increasing 3.3 percent in the second quarter (table

* The price index for gross domestic purchases increased 1.8 percent after increasing 3.5 percent.

The insurance transactions associated with the hurricanes that struck portions of the southern and eastern United States in August and September did not directly affect third-quarter GDP, reflecting the new treatment of insurance services that BEA introduced as part of its 2003 comprehensive revision of the NIPAs.2 Estimates of other, indirect effects of the hurricanes are not available because the effects may occur with a lag, and they generally cannot be disentangled from the regular source data that BEA uses to prepare its GDP estimates. However, as described later in this article (in the section on personal income), some income flows were affected by the hurricanes, and estimates of those effects have been prepared.3

The step-up in GDP growth mainly reflected an acceleration in consumer spending and a slowdown in imports.4

* Consumer spending increased 4.6 percent and contributed 3.23 percentage points to GDP growth in the third quarter after contributing 1.10 percentage points to growth in the second quarter. Purchases of durable goods increased after a small decrease, and purchases of nondurable goods increased after little change.

* Imports, which are subtracted in the calculation of GDP, increased 7.7 percent and subtracted 1.13 percentage points from third-quarter GDP growth after a 12.6-percent increase had subtracted 1.77 percentage points from second-quarter growth. The slowdown in imports mainly reflected downturns in imports of nonautomotive consumer and capital goods that were partly offset by an upturn in petroleum imports. (Exports increased 5.1 percent and contributed 0.51 percentage point to GDP growth in the third quarter after contributing 0.70 percentage point in the second.)

The contributions of consumer spending and imports were partly offset by a downturn in inventory investment and by a slowdown in residential investment.

* Inventory investment subtracted 0.48 percentage point from GDP growth as inventory stocks increased less in the third quarter ($48.1 billion) than in the second quarter ($61.1 billion); in the second quarter, inventory investment had contributed 0.78 percentage point to GDP growth.

* Residential investment increased 3.1 percent and contributed 0.18 percentage point to GDP growth after contributing 0.86 percentage point; the smaller contribution in the third quarter mainly reflected a downturn in brokers' commissions on house sales.

The advance estimates for the third quarter also show the following:

* Real final sales of domestic product (GDP less change in private inventories) increased 4.2 percent after increasing 2.5 percent (table 2).

* Nonresidential fixed investment increased 11.7 percent and contributed 1.15 percentage points to GDP growth after contributing 1.21 percentage points. A slowdown in structures was partly offset by a modest step-up in equipment and software.

* Government spending increased 1.4 percent and contributed 0.26 percentage point to GDP growth after contributing 0.41 percentage point. Downturns in state and local spending and in Federal nondefense spending were partly offset by a step-up in spending on national defense.

* Gross domestic purchases increased 4.1 percent after increasing 4.2 percent.

* The production of goods stepped up in the third quarter. In contrast, services increased the same as in the second quarter, and structures increased much less than in the second quarter.

* Motor vehicle output turned up sharply. Excluding motor vehicles, real GDP increased 3.5 percent after increasing 4.0 percent.

* Final sales of computers increased modestly after two quarters of little change.

* The personal saving rate decreased from 1.2 percent to 0.4 percent.5

Prices

The price index for gross domestic purchases increased 1.8 percent in the third quarter after increasing 3.5 percent in the second (table 3). The deceleration partly reflected a sharp deceleration in energy prices and a moderate deceleration in food prices. Excluding the prices of energy and food, the price index increased 1.5 percent after increasing 2.5 percent (chart 2).

Prices of goods and services purchased by consumers increased 1.1 percent after increasing 3.1 percent. Excluding food and energy, prices paid by consumers increased 0.7 percent after increasing 1.7 percent. In addition to these comprehensive price indexes for consumer purchases, BEA produces supplemental indexes for "market-based" personal consumption expenditures (PCE) that exclude most imputed expenditures (such as services furnished without payment by financial intermediaries).6 The market-based PCE price index increased 1.4 percent in the third quarter after increasing 3.7 percent in the second. Excluding food and energy, the market-based index increased 1.0 percent after increasing 2.1 percent.

Prices of private nonresidential fixed investment increased 1.0 percent after increasing 1.7 percent. Prices of equipment and software decreased after little change, and prices of structures increased somewhat more than in the second quarter.

Prices paid by government increased 3.3 percent after increasing 4.3 percent. Prices paid by both the Federal Government and state and local governments contributed to the slowdown.

The GDP price index, which measures the prices paid for goods and services produced in the United States, increased 1.3 percent in the third quarter, 0.5 percentage point less than the price index for gross domestic purchases. The smaller increase in the GDP price index reflected a smaller increase in export prices (which are included in the GDP price index) than in import prices (which are included in the price index for gross domestic purchases).

Personal Income

Real disposable personal income (DPI) increased 1.4 percent in the third quarter after increasing 2.4 percent in the second (table 4 and chart 3). The slowdown was more than accounted for by a slowdown in currentdollar DPI (which is defined as personal income less personal current taxes); the implicit price deflator for PCE (which is used to deflate DPI) increased less than in the second quarter.

Personal income, which is measured only in current dollars, increased $71.4 billion (or 3.0 percent) after increasing $138.4 billion (or 6.0 percent). The slow-down was mainly traceable to proprietors' income and rental income, but current transfer receipts and wage and salary disbursements also contributed.

Rental income and proprietors' income were reduced by the property damage caused by the hurricanes that struck portions of the southern and eastern United States in the third quarter, and current transfer receipts were increased by insurance settlements related to the hurricanes.7

Proprietors' income slowed sharply. A large secondquarter increase in the income of nonfarm proprietors had mainly reflected a jump in commissions earned by real estate brokers; commissions turned down in the third quarter, and the income of nonfarm proprietors was reduced $1.7 billion (annual rate) by the loss of uninsured business property in the hurricanes. The income of farm proprietors fell sharply in the third quarter after a modest increase in the second; the decrease mainly reflected a drop in prices received by farmers.

Rental income of persons decreased $21.8 billion in the third quarter after little change in the second. Most of the decrease reflected the loss of uninsured residential property as a result of the hurricanes.

Current transfer receipts increased $13.5 billion after increasing $21.4 billion. A decrease in government social benefits reflected lower Medicaid payments by states. An increase in "other current transfer receipts" reflected $15.5 billion (annual rate) in net insurance settlements for hurricane-related damages to motor vehicles and other consumer durable goods.

Wage and salary disbursements increased $57.8 billion after increasing $63.7 billion. Disbursements by private services-producing industries and by government slowed.