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The business situation.

U.S. economic activity picked up in the first quarter of 1989; the pickup was attributable to the return of farm output to a level not affected by the 1988 drought. Inflation also picked up somewhat in the first quarter (chart 1).

* Real GNP, a measure of U.S. production, increased at an annual rate of 5 1/2 percent, following an increase of 2 1/2 percent in the fourth quarter.

* Real gross domestic purchases, a measure of U.S. demand, increased at an annual rate of 4 1/2 percent, following a 3 1/2-percent increase.

* The GNP price index increased at an annual rate of 5 percent, following a 4-percent increase; the price index for gross, domestic purchases increased at an annual rate of 5 1/2 percent, following a 4 1/2percent increase.'

Impact of the drought on real GNP.-In the last three quarters of 1988, the level of real GNP was reduced by a severe drought that substantially lowered farm--predominately crop-output. The drought losses (in 1982 dollars) reduced real farm output by $9 billion in the second quarter, an additional $5 billion in the third, and an additional $10 1/2 billion in the fourth (table 1)..sup.2 Thus, the cumulative losses lowered the fourth-quarter level of real farm output-and real GNP-by $25 biUion. Consequently, the return of farm output to a level not affected by the drought raised real GNP by $25 billion in the first quarter of 1989. (This estimate assumes that the drought did not continue into 1989; if later information indicates otherwise, BEA will make an estimate of its impact in 1989.)

Over the period affected by the drought, the increase in real GNP subsides from 3 1/2 percent in the first quarter of 1988 to 3 percent in the second quarter and to 2 1/2 percent in the third and fourth quarters; the increase then jumps to 5 1/2 percent in the first quarter of 1989. The impact of the drought lowers the increase in real GNP by 0.9 percentage point in the second quarter, by 0.5 percentage point in the third, and by 1.1 percentage points in the fourth; it then raises the increase in real GNP by 2.5 percentage points in the first quarter. If this impact is excluded, a different pattern of economic activity emerges: Real GNP would increase 3 to 4 percent in each of the past five quarters.

Motor vehicles.-Real motor vehicle output declined $4 1/2 billion in the first quarter, following a $5 billion increase in the fourth. Both auto and truck output contributed to the first-quarter decline; the fourth-quarter increase was entirely accounted for by truck output.

In units, domestic car production declined 0.8 minion to 7.0 million (seasonally adjusted annual rate) in the first quarter, following a 0.6-million increase in the fourth. Manufacturers reduced production in the first quarter in an attempt to cut inventories, which had swelled to the highest level in a year. Sales of domestic cars declined to 6.9 million units in the first quarter from 7.5 million in the fourth. Because production again exceeded sales in the first quarter, inventories edged up further to 1.69 million. The inventory-sales ratio rose to 2.9well above the ratio considered desirable by the industry-from 2.6 in the fourth quarter.

Sales of imported cars declined to 2.8 million units-the lowest level since the second quarter of 1985-from 3.0 million in the fourth quarter. At the end of the first quarter, inventories of imported cars were at a record high.

Domestic truck production declined in the first quarter after a sharp increase in the fourth; however, production remained higher than sales, so inventories continued to build. Sales of new trucks declined again in the first quarter, as sales of both domestic and imported trucks edged down. At 4.9 million units, truck sales were the lowest since the fourth quarter of 1987.

Components of Real GNP

Even aside from the impact of the drought, which led to a sharp upswing in farm inventory investment, changes in the major components of real GNP in the first quarter differed considerably from those in the fourth. On the upside, nonresidential fixed investment, nonfarm inventory investment, and net exports all increased after decreasing in the fourth quarter. On the downside, personal consumption expenditures and government purchases increased much less than in the fourth quarter, and residential investment decreased after an increase. Personal consumption expenditures

Real personal consumption expenditures (PCE) increased 1 1/2 percent in the first quarter, following a 3 1/2percent increase in the fourth (table 2). The first-quarter increase was the smallest since the fourth quarter of 1987, when PCE declined. The deceleration, which occurred despite continued strong growth in disposable personal income and continued high consumer confidence (as measured by the Index of Consumer Sentiment prepared by the University of Michigan's SURVEY Research Center), was in durable goods and in services. Nondurable goods increased somewhat more in the first quarter than in the fourth.

Expenditures for durable goods declined 3 percent after increasing 6 percent in the fourth quarter. The decline was accounted for by motor vehicles and parts and by "other" durables. New car purchases, after changing little in the last three quarters of 1988, fell in the first quarter; used car purchases and new truck purchases also declined after changing little in the fourth quarter. "Other" durables-which includes wheel goods, durable toys, sporting goods, recreational boats, jewelry, and watches-declined in the first quarter after increasing in the fourth.

Expenditures for services increased 2 1/2 percent after increasing 4 percent in the fourth quarter; the first-quarter increase was the smallest since the fourth quarter of 1987. The slowdown was largely accounted for by energy services (reflecting reduced expenditures for electricity and natural gas due to unusually mild weather) and transportation services (mainly air transportation), both of which declined after increasing in the fourth quarter.

Expenditures for nondurable goods increased 2 percent after increasing 1 1/2 percent in the fourth quarter. The first-quarter increase was accounted for by food and "other" nondurables. In contrast, energy declined, partly reflecting reduced expenditures for fuel oil and coal due to the mild weather. tion contracts for commercial properties also declined (no doubt reflecting the fact that although vacancy rates are falling, they still remain high). New orders for nondefense capital goods have been erratic since early 1988.

Residential investment

Real residential investment declined 3 1/2 percent in the first quarter, following an 11 -percent increase in the fourth. Single-family construction and the "other" component of residential investment (which includes additions and alterations, major replacements, mobile home sales, and brokers' commissions on house sales) both contributed to the turnaround. Multifamily construction increased after a decline.

In the first quarter, the downswing in single-family construction mirrored movements in the number of singlefamily starts. Starts declined 62,000 (or 20 percent) to 1,076,000 (seasonally adjusted annual rates) in the first quarter, following a 77,000 increase in the fourth (chart 2). Starts were high in January, reflecting the unusually mild weather, but they declined in February and March.

The upswing in multifamily construction, which took place in conjunction with a declining vacancy rate for apartments, raises the possibility that the protracted downtrend in multifamily construction may be ending. The downtrend, which had reflected overbuilding and the curtailment of tax incentives, took multifamily construction from a peak of $30 1/2 billion in the second quarter of 1986 to $17 billion in the second quarter of 1988, a decline of 43 percent.

The downswing in th "other" component was moatly attributable to a decline in brokers' commissions on house sales. Sales of new and existing residences declined 399,000 in the first quarter, partly reflecting higher home prices and higher mortgage interest rates (chart 3).

Inventory investment

Real inventory investment-that is, the change in business inventories-increased $24 1/2 billion in the first quarter, as inventory accumulation jumped to $54 billion from $29 billion in the fourth quarter (table 4). In contrast, inventory investment had decreased $10 1/2 billion in the fourth quarter. The upswing in inventory investment was largely traceable to farm inventories.

Farm inventories increased $12 1/2 billion in the first quarter, following decreases of $8 1/2 billion in the fourth quarter and $1 billion in the third. The pattern largely reflected BEA's allocation of the impact of the drought. Despite sharp drops in farm-predominately crop-output, a relatively steady pace of market sales was maintained, as crops were withdrawn from inventories held by the Commodity Credit Corporation (CCC), and, in the fourth quarter, from farmers' own inventories. In the first quarter, the retum of farm output to a level not affected by the drought led to the substantial accumulation in farm inventories.

Nonfarm inventories increased $41 bilhon in the first quarter, roughly in line with increases in the two preceding quarters. Accumulations in manufacturing inventories slowed in the first quarter. The slowdown was traceable to a larger decumulation in inventories. of nondurable goods; inventories of durable goods-particularly machinery and transportation equipment--continued to accumulate steadily. Wholesale trade inventories accumulated more strongly than in the fourth quarter; the step-up was mainly in inventories of merchant wholesalers of durable goods. Retail trade inventories again accumulated substantially, as auto dealers' inventories continued to build.

Reflecting the pickup in inventory investment and a slight slowdown in final sales, the constant-dollar ratio of total inventories to total final sales edged up to 3.22 in the first quarter from 3.21 in the fourth. At 3.22, the ratio is at the high end of the 3.12-to3.22 range of the past 3 1/2 years.

Net exports

Real net exports increased $10 bilhon in the first quarter, following a decline of $11 1/2 billion in the fourth (table 5). The upswing largely reflected changes in net exports of merchandise; net exports of services, which declined less than in the fourth quarter, also contributed.

Merchandise exports -increased $8 billion (or 9 percent) after increasing $6 bilhon (or 7 percent) in the fourth quarter. Agricultural exports, which swung to a $3 billion increase from a $2 1/2 billion decline, more than accounted for the step-up. Nonagricultural exports slowed to an increase of $5 billion from an increase of $8 1/2 billion. The slowdown was evident in all end-use categories except consumer goods and industrial supplies and materials.

Merchandise imports dechned $3 bilhon (or 2 1/2 percent) after increasing $15 billion (or 13 1/2 percent) in the fourth quarter. Petroleum imports, which dropped $4 1/2 billion after rising $3 1/2 billion, accounted for almost onehalf of the downswing. Nonpetroleum imports slowed sharply to an increase of $1 1/2 bilhon from an increase of $11 1/2 billion. The slowdown was accounted for by autos and consumer goods, both of which dechned after strong increases in the fourth quarter.

Exports of services increased $5 1/2 billion after an increase of $2 billion; the step-up largely reflected an upswing in services other than investment income. Imports of services increased $6 1/2 billion after an increase of $4 1/2 billion; investment income more than accounted for the step-up. Government purchases

Real government purchases increased $2 bilhon (or 1 percent) in the first quarter, following an increase of $22 billion (or 12 percent) in the fourth (table 6). The slowdown largely reflected a sharp downswing in Federal defense purchases; Federal nondefense purchases and State and local purchases, both of which were up less than in the fourth quarter, also contributed.

Federal defense purchases decreased $6 1/2 billion, following a $6 billion increase in the fourth quarter. The decrease, which was in military hardware and in services other than employee compensation, resumed a downtrend that began in late 1987.

Federal nondefense purchases increased $4 1/2 billion, about one-half as much as in the fourth quarter; the slowdown was largely traceable to net changes in CCC inventories. Although CCC inventories have decumulated for five consecutive quarters, fluctuations in the rate of decumulation have had considerable impact on the quarterly pattern of changes in Federal nondefense purchases. The inventory decumulations in the fourth and first quarters mainly reflected net withdrawals of crops under the CCC commodity loan program. Federal nondefense purchases excluding CCC inventory transactions increased $1 billion in the first quarter, following a $2 billion increase in the fourth.

State and local government purchases increased $4 1/2 billion in the first quarter, after a $6 1/2 billion increase in the fourth. The slowdown was traceable to structures, particularly highways.

Prices

GNP prices and gross domestic purchases prices both picked up in the first quarter: GNP prices were up 5 percent after a 4-percent increase, and gross domestic purchases prices were up 5 1/2 percent after a 4 1/2-percent increase (table 7). The first-quarter illcreases in each of these price measures were boosted 0.4 percentage point by the combined effect of a 4.1 -percent pay raise for Federal civilian and mihtary personnel and of an increase in the Federal Government's contributions-as an employer-for social insurance programs. (Such increases in employee compensation are treated in the national income and product accounts as an increase in the price of employee services purchased by the Federal Government.)

Prices of exports increased somewhat more than in the fourth quarter, and prices of imports increased considerably more. The upsurge in import prices was more than accounted for b petroleum prices, which jumped 117 1/2 percent after five consecutive quarters of decline. Prices of other merchandise imports were up less than in the fourth quarter, primalily reflecting prices of autos and of capital goods (except autos).

PCE prices were up 5 percent for the third consecutive quarter. Food prices increased 5 percent in the first quarter, somewhat more than in the fourth; the acceleration was largely accounted for by meat and egg prices. Energy prices increased 3 percent after decreasing in the fourth quarter. The turnaround was in prices of gasoline and oil and of fuel oil and coal; prices of electricity and gas increased in both quarters, but at a slower pace in the first, "Other" PCE prices increased 5 percent, slightly less than in the fourth quarter; the slowdown was attributable to prices of clothing and shoes, which often fluctuate sharply from quarter to quarter, and to prices of durable goods other than autos.

Among other components of final sales, the increase in prices of fixed investment moved up to 4 1/2 percent, and the increase in prices of government purchases more than doubled to 7 1/2 percent. One-half of the step-up in prices of government purchases was attributable to the Federal pay raise and increased Federal Government contributions for social insurance.

Personal Income

Personal income surged $132 billion in the first quarter, following an $86 1/2 billion increase in the fourth (chart 4 and table 8). The acceleration was largely due to a sharp turnaround in farm proprietors' income and to stronger increases in personal interest income and transfer payments.

Movements in personal income in recent quarters have been greatly affected by the impact of the drought on farm proprietors' income. In addition, the special factors shown in the addenda to table 8 have had considerable impact. If farm proprietors' income and the special factors affecting the other components of personal income are excluded, personal income would have registered strong increases of $84-91 billion in each of the past three quarters.

Wage and salary disbursements were up $57 billion in the first quarter, following a $55 billion increase in the fourth. The step-up was in government wages and salaries, which were boosted $4 1/2 bilhon by the pay raise for Federal Government and Postal Service employees. Private wages and salaries increased somewhat less than in the fourth quarter, reflecting a slowdown in average hourly earnings and a swing in average weekly hours from a small increase to a small decline.

Farm proprietors' income increased $31 billion in the first quarter, following a $5 billion decline in the fourth. Farm income excluding subsidies jumped $32 billion after a $19 1/2 billion drop; the swing reflected a sharp increase in crop prices after a sharp decrease, as well as the return of farm output to a level not affected by the drought. Federal agricultural subsidy payments, which had jumped $14 1/2 billion to a level of $16 billion in the fourth quarter, remained high-$15 billion-in the first. Substantial deficiency and drought assistance payments were made in both quarters.

Personal interest income was up $29 billion, the fifth quarter of progressively larger increases. These increases reflected uptrends in both short-term interest rates and personal asset holdings.

Transfer payments increased $20 1/2 billion in the first quarter, following an $8 billion increase in the fourth. The jump was largely due to cost-of-living adjustments (COLA's) to benefits under the social security and several other Federal retirement and income support programs. The COLA's, which became effective in January, added $12 billion to transfer payments in the first quarter. In addition, retroactive social security payments to recent retirees, which result largely from the recalculation of the earnings base underlying benefits, added $1 1/2 billion.

Among the other incomes, nonfarm proprietors' income was up less in the first quarter than in the fourth. Firstquarter increases in other labor income and personal dividend income were similar to those in the fourth quarter. Rental income declined more in the first quarter than in the fourth; the declines in both quarters reflected smaller increases in average rents combined with increased expenses because of higher mortgage rates.

Personal contributions for social insurance, which are subtracted in deriving the personal income total, increased $10 billion in the first quarter, following a $3 1/2 bilhon increase in the fourth. First-quarter contributions were boosted by several program changes: An increase in the social security taxable wage base from $45,000 to $48,000, the initial premium under the Medicare Catastrophic Coverage Act of 1988, an increase in the monthly premium for supplementary medical insurance from $24.80 to $27.80, and rate and base changes in social security contributions paid by the selfemployed.

Personal tax and nontax payments increased $18 billion in the first quarter, following an $11 1/2 billion increase in the fourth. The increases largely reflected growth in the taxable earnings base.

Reflecting the surge in personal income, disposable personal income (DPI) increased $114 billion (or 13 1/2 percent) in the first quarter, following an increase of $75 billion (or 9 percent) in the fourth. The acceleration largely carried through to real DPI, which increased 7 1/2 percent after increasing 4 percent.

Personal outlays-largely consisting of PCE-increased $11 billion less in the first quarter than in the fourth. This slowdown, coupled with the sizable pickup in DPI, led to a substantial increase in personal saving. The personal saving rate climbed 1.4 percentage points to 5.7 percent in the first quarter, the highest level in nearly 4 years.

Corporate Profits and Profitability in 1988

Profits from current production increased $18 bilhon in 1988, to $328 1/2 bilhon, after increasing $11 1/2 billion in 1987. Profits of domestic nonfinancial corporations accounted for $15 billion of the 1988 increase; in 1987, profits of these corporations accounted for $7 bilhon of the increase, while profits from the rest of the world accounted for the other $4 1/2 billion.

Corporate property income-income accruing to investors in corporations-includes net interest payments as well as profits. For domestic nonfinancial corporations, net interest payments increased $15 billion in 1988 after increasing $14 1/2 bilhon in 1987.

Chart 5 provides perspective on the recent increases in both types of property income of domestic nonfinancial corporations, In 1970-88, both types registered strong increases, but the increases in net interest were substantially larger-with an average annual rate of increase of 11.1 percent, compared with an average annual rate of increase of 8.8 percent for profits; as a result, the ratio of net interest to profits increased from 31 percent in 1970 to 45 percent in 1988. It may also be noted that profits showed more sensitivity to the business cycle than did net interest: Profits declined markedly in the recession years of 1974, 1980, and 1982 (and 1970, although this decline is not apparent from the chart); net interest, in contrast, increased in each of these years, with the only substantial decline occurring in the recovery year of 1983.

The increase in profits in 1987 was similar in size to the increases in 1985 and 1986; the increase in 1988 was substantially larger. The large increases in net interest in 1987 and 1988 followed several years of relative flatness; these increases are somewhat surprising, given the relatively low level of interest rates in these years. Although the relationship is far from exact, such large increases in net interest tend to occur when interest rates are higher than they were in 1987-88. The strength of net interest in these years may well reflect increased leveraged buy-out and merger activity and changes in the tax law. (Net interest, like other components of the NIPA's, is subject to revision in July.)

Perspective on property income can also be gained by examining property income in relation to the net reproducible assets and the domestic income of domestic nonfinancial corporations. The ratio of property income (P) to the value of net reproducible assets (K) is the rate of return on these assets-that is, the rate of retum, or yield, on "capital." (Rates of retum can be calculated in many ways, as explained in the accompanying box.) The ratio of property income to domestic income (Y) is property income's "share"-that is, the percent of domestic income that is not used to compensate labor. These two ratios are related to each other by a third-the ratio of domestic income to the value of net reproducible assets, which is a measure of the average annual product per dollar of capital. Algebraically, the relationship between the ratios can be expressed:

P over K = (P over Y)(Y over K)

This relationship should not be interpreted as suggesting a particular direction of causation; the three ratios may well be determined simultaneously, in which case any one of the ratios could be put on the left side of the equation. Rather, the equation is written with the rate of return on the left side because this ratio is of particular interest.

With its denominator valued at replacement cost, the rate of retum is directly comparable to other current market yields, such as yields on bonds. Mix-effects aside, this rate of retum is an estimate of the average profitability of capital investment and is, therefore, one of the determinants of new investment. Thus, a regression of constant-dollar nonresidential investment against the Federal Reserve Board's Index of Capacity Utilization in Manufacturing and the rate of retum yields a coefficient of the rate of retum that is both positive and statistically significant. (Alternatively, this relationship may be interpreted as suggesting, that the rate of retum is measured correctly; if it entered the equation with the wrong sign or insignificantly, skepticism about its accuracy would be justified.)

All three ratios are plotted for 197088 in chart 6, and are reported, along with related ratios, for 1948-88 in table 9. From the table, it seems clear that shifts in property income's share (column 1) and in the rate of return (column 4) occurred around 1970. (The share fell from an average of 21.4 percent in 1948-69 to an average of 16.5 percent in 1970-88; for the rate of return, the two averages are 12.6 percent and 8.6 percent, respectively.)' These shifts are traceable to profits; net interest's share (column 3) and rate of return (column 5) increased. The occurrence of the shifts at about the time that the ratios would be expected to fall for cydical reasons (see below) complicates both the dating and the explanation of the shifts. Whatever the reason(s) for the shifts, however, the fact that they occurred seems dear. The remainder of this discussion will ignore the period before 1970.

The cyclical nature of all three ratios is apparent in both the chart and the table. Cyclical factors, represented by the percentage gap between actual GNP and middle-expansion trend GNP, explain about one-half of the variation in each of the first two ratios and about one-third of the variation in the third. None of the ratios exhibits a significant trend since 1970, but in 1988 all three were above their 1970-88 averages.

The average product of capital increased in each of the last 3 years. In 1986, however, the increase did not boost the rate of retum because property income's share dechned. In 1987 and 1988, in contrast, the increases in the average product of capital were augmented by small increases in property income's share and the rate of return increased.

In the past few years, the difference between the rate of return on capital and the rate of interest on longterm corporate bonds has reverted to the range that prevailed in most of the 1970's (chart 7). In the first half of the 1980's, the interest rate was much higher than the rate of retum, reflecting the very large inflation premium that was incorporated in the interest rate.

Looking Ahead...

* Computers. An article reviewing the concepts and statistical procedures used by BEA in measuring the output of computers will appear in an upcoming issue of the SURVEY.

* U.S. Business Enterprises Acquired or Established by Foreign Direct Investors in 1988. Data on the cost to foreign direct investors of the ownership interests acquired or established in U.S. business enterprises in 1988, by industry, and by country of foreign owner, will be presented in the May SURVEY. Selected operating data of the U.S. business enterprises will also be presented.

* Pollution Abatement and Control Expenditures. Estimates of U.S. expenditures for pollution abatement and control for 1985-87 will be presented in the June issue of the SURVEY.

* U.S. International Transactions and Investment Position. Revised estimates of U.S. international transactions will be presented in the June SURVEY, along with preliminary estimates for the first quarter of 1989. The revisions cover 1985-88. The same issue will present preliminary estimates for yearend 1988 of U.S. assets abroad and foreign assets in the United States and the sources of change in the investment position.

* Annual Revisions of the National Income and Product Accounts. Revised estimates will be presented in the July SURVEY. The revisions cover the 3year period beginning with the first quarter of 1986.

NOTE.-Quarterly estimates in the national income and product accounts are expressed at seasonally adjusted annual rates, and quarterly changes in them are differences between these rates. Quarter-to-quarter percent changes are annualized. Real, or constant-dollar, estimates are expressed in 1982 dollars.

The advance GNP estimates for the first quarter are based on the following major source data: For personal consumption expenditures (PCE), sales of retail stores through March, and unit auto and truck sales through March; for nonresidential fixed investment, the same inform for autos and trucks as for PCE, construction put iii place for January and February, and manufacturers' shipments of machinery and equipment for January and February; for residential investment, construction put in place for January and February, and housing starts through March; for change in business inventories, manufacturing and trade inventories for Januar-y and February, and unit auto inventories through March; for net exports of goods and services, merchandise exports and merchandise imports for January and February; for government purchases of goods and services, Federal outlays through March, and State and local construction put in place for January and February; and for GNP prices, the Consumer Price Index through March, the Producer Price Index through March, and the unit-value index for petroleum imports for January and February. Some of the source data are subject to revision.

Rates of Return

The rate of return in domestic nonfinancial corporations discussed in the text is measured as the ratio of property income to the value of net reproducible assets. (Ideally, nonreproducible assets, such as land, would also be included in the denominator, but the lack of data prevents this.) Property income is the sum of profits from current production-corporate profits with inventory valuation adjustment and capital consumption adjustment-and net interest payments. Net reproducible assets consist of capital stock and inventories; both are measured at replacement cost.

As explained in the text, a rate of retum calculated with the denominator valued at replacement cost is an estimate of the profitability of new investment (assuming no change in the mix). The use of property income, rather than profits alone, as the numerator of this ratio reflects the assumption that a corporation's decision to invest in plant, equipment, and inventories depends on estimates of the total income stream that will flow from that investment. Given that estimate, the decision on whetlier to finance the investment out of equity or debt-that is, whether the income stream will take the form of profits or of interest-is a separate question, one presumably determined by financial considerations.

Rates of return can be calculated in many other ways, however; the following paragraphs describe several.

The income measure in the numerator of the ratio can be defined exclusive of net interest or in terms of some measure other than the current-production variant for profits. A few of these variants are given in columns 6-10 of table 9. The last few entries in columns 7 and 8, for example, reflect the impact of the Tax Reform Act of 1986.

The stock of reproducible assets valued at historical cost with consistent (i.e., straight-line) depreciation can be used as the denominator; however, for companies that use the LIFO method of inventory accoimting, historical-cost valuation of inventories is not feasible, and this part of inventories can only be valued at replacement cost. If the historical cost and replacement cost of LIFO inventories were equal, the historical-cost rate of return would have been about 14.7 percent in both 1987 and 1988, compared with the replacement-cost rates of retum of 9 percent and 9.2 percent, respectively.

The denominator need not be reproducible assets. For example, rates of retum on stockholders' equity and on sales for mining, manufacturing, retail trade, and wholesale trade corporations are published by the Census Bureau in the Quarterly Financial Report (QFR). (QFR measures of book profits, not profits from current production, are used in the numerators.) These rates of retum differ substantially from the rates of return discussed previously. In 1988, for example, the QFR estimate of the rate of return on stockholders' equity for all manufacturing corporations was 22.8 percent, compared with the 14.7 percent (for domestic nonfinancial corporations) reported previously.

Part of the large difference between the QFR rate of retum on stockholders' equity and the rate of return based on reproducible assets valued at historical cost simply reflects the fact that stockholders' equity is smaller than the value of reproducible assets. If the QFR estimate of profits in manufacturing is divided by the historical-cost value of manufacturers' reproducible assets, the QFR rate of retum would fall from 22.8 percent to 19.4 percent. The remaining difference (between 19.4 percent and 14.7 percent) presumably reflects coverage differences and differences between financial accounting and tax accounting. (For an explanation of the latter, see Appendix A of BEA's Corporate Profits: Profits Before Tax, Profits Tax Liability, and Dividends, Methodology Paper Series MP-2 (Washington, DC: GPO, May 1985, with update.)
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Title Annotation:first quarter of 1989
Publication:Survey of Current Business
Date:Apr 1, 1989
Words:5305
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