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Note on Profitability of Domestic Nonfinancial Corporations, 1960-2000.

THE profitability of domestic nonfinancial corporations decreased slightly in 2000, as the rate of return on capital slipped to 8.6 percent from 8.8 percent in 1999 (chart 1 and table 1). This rate was the lowest since 1995, but it was still higher than its average for the 1990s, and it was substantially higher than its average for the 1980s. In contrast, it was far below the levels posted in the high-productivity-growth years of the 1960s.

[GRAPHS OMITTED]
Table 1.--Rate of Return and Income Share, Domestic Nonfinancial
Corporations, 1960-2000

[Percent]

 Rate of return Share of domestic income

 Domestic property income Domestic property income

 Profits Profits
 from Net from Net
 Year Total current interest Total current interest
 production produc-
 tion

 (1) (2) (3) (4) (5) (6)

1960 9.0 8.3 0.7 19.8 18.2 1.5
1961 9.1 8.3 0.8 19.9 18.2 1.7
1962 10.4 9.5 0.9 21.3 19.5 1.8
1963 11.2 10.3 0.9 22.2 20.5 1.8
1964 12.0 11.0 0.9 22.9 21.1 1.8
1965 13.1 12.1 1.0 24.1 22.2 1.9
1966 13.0 11.9 1.1 23.6 21.5 2.1
1967 11.7 10.4 1.2 22.1 19.7 2.3
1968 11.5 10.2 1.3 21.5 19.0 2.5
1969 10.3 8.7 1.6 19.5 16.5 3.0

1970 8.3 6.4 1.8 16.8 13.1 3.8
1971 8.7 6.9 1.8 18.0 14.3 3.7
1972 9.2 7.4 1.8 18.4 14.9 3.5
1973 9.1 7.3 1.9 18.0 14.3 3.7
1974 7.3 5.3 2.0 15.9 11.6 4.3
1975 7.6 5.9 1.7 18.0 14.0 4.1
1976 8.0 6.5 1.5 18.4 14.9 3.4
1977 8.5 7.0 1.5 18.9 15.5 3.4
1978 8.5 6.9 1.6 18.5 15.0 3.5
1979 7.5 5.7 1.7 16.8 12.9 3.9

1980 6.3 4.4 1.9 15.3 10.6 4.7
1981 6.9 4.8 2.1 16.8 11.7 5.1
1982 6.2 4.0 2.2 15.8 10.1 5.7
1983 6.9 4.9 2.0 17.0 12.1 5.0
1984 8.3 6.1 2.2 18.9 13.9 5.0
1985 7.9 5.8 2.1 18.0 13.1 4.9
1986 7.1 4.8 2.3 16.2 11.0 5.1
1987 7.8 5.5 2.3 17.1 12.0 5.1
1988 8.6 6.0 2.6 18.3 12.8 5.5
1989 8.2 5.2 3.0 17.6 11.2 6.4

1990 7.8 4.9 2.9 16.8 10.5 6.3
1991 7.2 4.6 2.6 15.9 10.2 5.8
1992 7.0 5.0 2.0 15.2 10.8 4.4
1993 7.4 5.6 1.8 15.8 12.0 3.9
1994 8.3 6.6 1.8 17.4 13.7 3.7
1995 8.6 6.8 1.8 17.9 14.2 3.7
1996 9.1 7.5 1.6 18.8 15.5 3.3
1997 9.5 7.8 1.7 19.2 15.8 3.4
1998 8.9 7.1 1.8 17.9 14.2 3.7
1999 8.8 6.7 2.1 17.5 13.4 4.1

2000 8.6 6.6 2.1 17.0 12.9 4.0

Average:
 1960-69 11.1 10.1 1.0 21.7 19.6 2.0
 1970-79 8.3 6.5 1.7 17.8 14.1 3.7
 1980-89 7.4 5.2 2.3 17.1 11.9 5.3
 1990-99 8.3 6.3 2.0 17.2 13.0 4.2

Source: Table 2.

NOTE.--Columns 1-2 are percentages of the net stock of produced assets
(averages of end-of-year values for adjacent years) valued at current
costs. Columns 4-6 are percentages of domestic income.


Capital's share of total income dropped to 17.0 percent from 17.5 percent; although this was its lowest level since 1993, it was only a little lower than its average over the last three decades. The share in 2000 was close to the midpoint of the relatively narrow range within which capital's share has fluctuated in during this period.

The rate of return may be calculated in many ways (see the box "Alternative Measures of Rates of Return"). In this note, it is calculated as the ratio of "property income" to "produced assets." Property income is profits of domestic nonfinancial corporations with inventory valuation and capital consumption adjustments plus net interest (table 2).(1) (In the United Nations' System of National Accounts, the sum of profits and net interest is termed "net operating surplus.") "Produced assets" is the current-cost value for domestic nonfinancial corporations of the net stock of equipment and software and of structures and the replacement-cost value of inventories.(2)
Table 2--Property Income of Domestic Nonfinancial
Corporations and Related Series 1960-2000

[Billions of dollars]

 Domestic property income

 Profits
 from Net Domestic Produced
Year Total current interest income assets(1)
 produc-
 tion

1960 44.6 41.1 3.5 225.6 499.3
1961 46.1 42.1 4.0 231.3 611.2
1962 54.1 49.6 4.5 254.1 528.6
1963 60.3 55.5 4.8 271.2 546.5
1964 67.2 61.9 5.3 293.7 575.5
1965 78.3 72.2 6.1 324.6 615.6
1966 84.4 77.0 7.4 358.2 681.8
1967 82.7 73.9 8.8 374.9 736.5
1968 88.4 78.3 10.1 411.5 803.1
1969 86.7 73.5 13.2 445.2 885.0

1970 76.5 59.4 17.1 454.6 963.9
1971 87.9 69.8 18.1 489.1 1,047.7
1972 100.3 81.1 19.2 546.2 1,135.6
1973 110.7 88.2 22.5 615.2 1,289.4
1974 105.0 76.7 28.3 660.1 1,591.8
1975 127.2 98.5 28.7 705.8 1,743.2
1976 147.4 119.9 27.5 802.4 1,921.0
1977 172.0 141.3 30.7 912.0 2,133.9
1978 192.8 156.5 36.3 1,043.8 2,425.6
1979 195.1 150.1 45.0 1,161.3 2,807.1

1980 190.8 132.7 58.1 1,247.8 3,212.9
1981 236.2 164.4 71.8 1,406.1 3,600.2
1982 228.8 146.3 82.5 1,444.9 3,788.9
1983 263.0 186.4 76.6 1,542.9 3,884.3
1984 330.6 242.9 87.7 1,752.1 4,124.0
1985 334.2 243.7 90.4 1,856.4 4,301.2
1986 309.1 210.7 98.4 1,912.9 4,429.5
1987 353.3 248.3 105.1 2,069.7 4,645.5
1988 412.2 288.6 123.6 2,256.2 4,931.4
1989 416.1 264.2 151.8 2,362.7 5,190.7

1990 414.6 258.5 156.0 2,467.3 5,440.1
1991 395.7 252.8 143.0 2,482.6 5,515.5
1992 392.2 278.9 113.3 2,586.5 5,687.4
1993 431.2 325.3 105.9 2,721.9 5,961.7
1994 510.4 402.5 107.9 2,940.6 6,308.3
1995 558.3 442.5 115.8 3,111.0 6,652.2
1996 617.8 509.1 108.7 3,284.9 6,956.5
1997 675.6 555.6 120.0 3,510.7 7,325.8
1998 668.5 530.7 137.7 3,726.5 7,636.2
1999 693.9 530.3 163.6 3,966.1 8,095.7

2000 722.2 550.1 172.1 4,257.4 8,664.4

(1.) Produced assets consist of structures, equipment and software,
and inventories; they are valued at current cost at end of year.
Through 1997, the estimates for structures and equipment and software
are available on the BEA Web site; go to <www.bea.doc.gov/bea/dn2/
facd.htm> and choose table 6A. Revised estimates for 1998 and 1999
and new estimates for 2000 are from "Fixed Assets and Consumer Durable
Goods for 1925-2000" in this issue. Inventories are from legal-form
and industry detail underlying NIPA table 5.12.

NOTE.--Property income is profits from current production plus net
interest. Profits from current production is corporate profits with
inventory valuation adjustment and capital consumption adjustment.
Profits after tax is also shown with inventory valuation adjustment
and capital consumption adjustment.


Capital's share is calculated as the ratio of domestic property income to domestic income; it is the portion of domestic income that is not labor income.

Q-type ratios

"Tobin's-Q," or simply "Q," is the ratio of the valuation of assets in financial markets to the current-cost value of produced assets. A value of Q above 1 indicates that newly produced physical assets may be purchased more cheaply than (the ownership claims to) existing assets. Such a situation may induce businesses to purchase newly produced physical assets instead of acquiring existing assets; alternatively, it may induce financial investors to reduce the prices they will offer for financial assets. Likewise, a value of Q below 1 indicates that claims to existing physical assets may be acquired more cheaply than newly produced assets.

Three Q-type ratios for domestic nonfinancial corporations are shown in chart 2.

* Q1 is calculated as the market value of outstanding equity divided by the net stock of produced assets.

* Q2 differs from Q1 by adding the book value of outstanding corporate bonds to the numerator.(3) The inclusion of bonds makes Q2 a more complete measure of invested capital.

* Q3 differs from Q1 by adding an estimate of the market value of outstanding corporate bonds and net liquid assets to the numerator. In addition, an estimate of the value of land is subtracted from the numerator because land is not included in the denominator.(4)

[GRAPHS OMITTED]

All three ratios trace similar patterns over time. All three dropped sharply in 2000 after reaching record levels in 1999, but all three still remained considerably above 1 and were higher than in all but 2 years since 1960. (The ratios had moved above 1 in the mid-1990s.) The decreases in 2000 mainly reflected an 18.8-percent drop in the market value of equities as shown in the bottom panel of chart 2.

(1.) Corporate profits and net interest are based on tabulations of "company" data rather than of "establishment" data. As a result, property income for domestic nonfinancial corporations includes income earned by financial establishments of those corporations; similarly, it excludes income earned by nonfinancial units of financial corporations. For a discuss/on of the industrial distribution of NIPA series, see "A Guide to the NIPA's," (June 2001): M-21 - M-22, available on BEA's Web site at <www.bea.doc.gov/bea/an/ nipaguid.htm>. For a discussion of produced assets, see Shelby W. Herman, "Fixed Assets and Consumer Durable Goods," SURVEY OF CURRENT BUSINESS 80 (April 2000): 17-30.

(2.) In other contexts, different definitions of these terms may be appropriate. For example, for the economy as a whole, some part of proprietors' income might be included in property income.

(3.) "Outstanding bonds" is a gross estimate; that is, it is not net of financial assets/debt held by nonfinancial corporations.

(4.) The Bureau of Economic Analysis is grateful to lames Tobin for providing an unpublished paper describing a procedure for approximating the market value of bonds outstanding (lames Tobin and Dan Sommers, "Explanation of Revised Estimates of Tobin's `q' Ratio, 1950-1997," (April 20, 1999)). In brief, the book value of bonds issued in year t is estimated as the change in the book value of bonds outstanding in year t plus the book value of bonds issued 10 years earlier (which are assumed to have matured in year t). In year t, the market value of bonds issued in earlier years is estimated from the book value of bonds issued in those years by calculating the present value of principal and (semiannual) coupons not yet paid on those bonds (discounted by the interest rate on 10-year Baa bonds in year t). Finally, the market value of bonds outstanding in year t is the sum of the market values of bonds issued in years t-9 through t.

The value of land is estimated as the difference between the value of real estate and the value of structures and of equipment and software.

Net liquid assets is estimated as financial assets less liabilities other than municipal securities, corporate bonds, and mortgages.

The data are from the Federal Reserve Board, Flow of Funds Accounts of the United States, Statistical Release Z.1 and "Selected Interest Rates," Statistical Release H.15 (Washington, DC: Board of Governors of the Federal Reserve System).

RELATED ARTICLE: Alternative Measures of Rates of Return

This box describes several rates of return that differ from the one featured in the note.

The income measure in the numerator of the rate of return ratio could be defined exclusive of net interest or in terms of some measure of profits other than the current production variant. For example, the numerator could be profits after tax (with or without the inventory valuation and capital consumption adjustments), or it could be profits as calculated on the basis of financial-accounting standards.

The denominator could include the stocks of assets valued at historical cost, that is, at the prices at which the assets were purchased. However, comparing current-income streams with historical-cost assets is problematic at best. Moreover, the mix of inventory-accounting methods (such as last-in-first-out and first-in-first-out) would make historical-cost valuation of inventories difficult. (The Census Bureau's Quarterly, Financial Report (QFR) contains estimates of fixed assets based on historical costs and total inventories based on a mixture of accounting methods; these estimates are available for all manufacturing corporations with assets over $250,000 and for corporations included in the mining and trade areas with assets over $50 million.)

The denominator of the rate of return ratio need not be limited to produced assets. For example, land (including subsoil resources), goodwill, and intellectual property might also be included. Alternatively, stockholders' equity or sales could be used as the denominator, as is done for mining, manufacturing, retail trade, and wholesale trade corporations by the Census Bureau in the QFR. (QFR measures of profits based on financial-accounting standards, not profits from current production, are used in the numerators.)
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Author:Larkins, Daniel; Morris, Ralph W.
Publication:Survey of Current Business
Article Type:Statistical Data Included
Geographic Code:1USA
Date:Sep 1, 2001
Words:2561
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