Business Situation: Final Estimates for the Second Quarter of 2004

ACCORDING to the "final" estimates of the national income and product accounts (NIPAs), real gross domestic product (GDP) increased 3.3 percent in the second quarter of 2004 (table 1 and chart 1).1 The "preliminary" estimates released in August (which were described in detail in last month's SURVEY

* The second-quarter increase in real GDP was smaller than the increase in the first quarter, but it is above the 2.5-percent average annual rate of growth from 2001 to 2003.

* Prices of goods and services purchased by U.S. residents increased 3.5 percent, the same as in the preliminary estimate. In the first quarter, prices had increased 3.4 percent.

* Real disposable personal income (DPI) increased 2.4 percent, 0.1 percentage point less than in the preliminary estimate and the same as in the first quarter.

Most major components of GDP contributed to the 3.3-percent second-quarter increase.

* Nonresidential fixed investment increased 12.5 percent, about three times as much as in the first quarter, and contributed 1.21 percentage points to GDP growth. Investment in equipment and software accelerated, and investment in structures turned up.

* Consumer spending increased 1.6 percent, substantially less than in the first quarter, and contributed 1.10 percentage points to GDP growth. The slowdown from the first quarter to the second was mainly accounted for by a deceleration in purchases of nondurable goods.

* Residential investment increased 16.5 percent, about three times more than in the first quarter, and it contributed 0.86 percentage point to GDP growth. The step-up mainly reflected a step-up in brokers' commissions on house sales.

* Investment in private inventories increased (though not as much as in the first quarter) and contributed 0.78 percentage point to GDP growth.

* Exports increased 7.3 percent, the same as in the first quarter, and contributed 0.70 percentage point to GDP growth. A slowdown in exports of goods (especially nonautomotive capital goods and industrial supplies and materials) was offset by a step-up in exports of services.

* Government spending increased 2.2 percent, a little less than in the first quarter, and contributed 0.41 percentage point to GDP growth. A slowdown in spending by the Federal Government was largely offset by state and local spending, which increased in the second quarter after essentially no change in the first.

The contributions that these components made to GDP growth were partly offset by an increase in imports. (Imports are subtracted in the calculation of GDP.)

* Imports increased 12.6 percent after increasing 10.6 percent and subtracted 1.77 percentage points from second-quarter GDP growth. Step-ups and upturns in many components were partly offset by a downturn in petroleum imports.

The final estimates for the second quarter also show the following:

* Real final sales of domestic product (GDP less the change in private inventories) increased 2.5 percent after increasing 3.3 percent.

* Real gross domestic purchases increased 4.2 percent after increasing 5.0 percent.

* Real gross national product (GNP) increased 1.9 percent.3 The smaller second-quarter increase in GNP than in GDP reflected a much smaller increase in income receipts from the rest of the world than in income payments to the rest of the world.

* Motor vehicle output turned down. Excluding motor vehicles, real GDP increased 4.0 percent after increasing 4.3 percent.

Corporate Profits

Profits from current production increased $8.3 billion (0.7 percent at a quarterly rate) in the second quarter of 2004 after increasing $36.5 billion (3.2 percent) in the first quarter (table 3).4 The slowdown mainly reflected a downturn in profits of domestic financial corporations; in addition, profits from the rest of the world decreased more than in the first quarter. In contrast, profits of domestic nonfinancial corporations increased more than in the first quarter.5

Profits of domestic financial corporations decreased $7.9 billion (2.2 percent).

A $20.0 billion second-quarter decrease in rest-of-the-world profits reflected a larger increase in payments by domestic affiliates to foreign parents than in receipts from foreign affiliates of domestic parents.

Profits of domestic nonfinancial corporations increased $36.2 billion (6.0 percent). The increase was mainly accounted for by an increase in profits per unit, as unit prices increased more than unit costs.

Taxes on corporate income increased $14.7 billion in the second quarter. After-tax profits from current production decreased $6.4 billion (0.7 percent).

Net cash flow from current production, a profits-related measure of internally generated funds available for investment, decreased $5.7 billion.6 The ratio of cash flow to nonresidential fixed investment, an indicator of the extent to which the current level of investment could be financed by internally generated funds, decreased from 110.4 to 106.3; the ratio has been above 100 for seven consecutive quarters.

Revisions. The revised second-quarter estimate of profits from current production is $6.7 billion higher than the preliminary estimate released a month ago. Profits of domestic nonfinancial corporations were revised up $7.5 billion, and profits from the rest of the world were revised up $3.5 billion. These upward revisions were partly offset by a downward revision of $4.3 billion to the profits of domestic financial corporations.

Industry profits. The current-production measure of profits is not available at the detailed industry level, because estimates of the capital consumption adjustment (CCAdj) are not available at this level (CCAdj is only available for total financial industries and for total nonfinancial industries). Consequently, industry profits are best measured by profits with inventory valuation adjustment (IVA).

In the second quarter, domestic industry profits with IVA increased $35.2 billion. For domestic nonfinancial corporations, profits with IVA increased $42.4 billion. More than half of the increase was accounted for by the information industry (chart 2). Manufacturing profits also increased, partly reflecting smaller losses that were posted by manufacturers of electrical equipment and appliances. Among the major categories of nonfinancial corporations, retail trade registered the largest decline in profits.

For domestic financial industries, profits with IVA decreased $7.3 billion. The decrease was more than accounted for by corporations that provide security and commodity investment services.