Survey of Current Business October 1963 - FRASER...SURVEY OF CURRENT BUSINESS OCTOBER 1963 VOL. 43,...

OCTOBER 1963

survey of

CURRENTBUSINESS

U.S. DEPARTMENT OF COMMERCE

OFFICE OF BUSINESS ECONOMICS

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

SURVEY OF CURRENT BUSINESS

OCTOBER 1963 VOL. 43, NO. 10

ContentsTHE BUSINESS SITUATION PAGE

Summary 1

Recent Developments in Manufacturing Output. 2

ARTICLES

Depreciation and Corporate Profits 5

Foreign Operations of U.S. Industry Capital Expenditures,Sales, and Financing 13

Plant Expansion Abroad 13

Sources and Uses of Funds in 1962 16

Sales From Foreign Manufacturing Plants 18

NEW STATISTICAL SERIES

Manufacturers' Export Sales S-5

Home Mortgage Rates (conventional 1st mortgages) S-17

CURRENT BUSINESS STATISTICS

General S1-S24Industry S24-S40

Subject Index Inside Back Cover

U.S. Department of Commerc

Luther H. HodgesSecretary

Office of Business Economics

George JasziDirector

Louis J. ParadisoAssociate Director

Murray F. FossEditor

K. Celeste Stokea Billy Jo HuStatistics Editor Graphics

STAFF CONTRIBUTORSTO THIS ISSUE

Business Review and Features:

Francis L. Hirt.

Articles:

Murray Brown

Fred CutlerSamuel Pizer

Julius N. FreidlinJohn Reid

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U.S. DEPARTMENT OF COMMERCE FIELD OFFICESAlbuquerque, N. Mex., 87101, U.S. Courthouse. Phone

247-0311.Anchorage, Alaska, 99501, U.S. Post Office and Court-

house. BR 2-9611.Atlanta, Ga., 30303, 75 Forsyth St. NW. JA 2-4121.Birmingham, Ala., 35203, 2028 Third Ave. N. Phone

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2-3300.


By the Office of Business Economics

uauon

_lHE pace of business activity as re-flected in the most comprehensiveeconomic measures—personal incomeand nonfarm employment—was steppedup a little in September followingsmall changes in August. Both ofthese measures reached new highsduring the month after seasonal ad-justment and for the third quarter as awhole they were somewhat abovesecond quarter rates. Now that pro-duction of the new models is in fullswing total output is being stimulated bythe automobile industry. The initial re-sponse of consumers to the new cars isapparently good, although it is too earlyto judge the ultimate strength of this de-mand. Business fixed investment isalso moving up, as anticipated in thesurveys reported earlier this year.

However, September, like August,was characterized by cross-currents ina number of other activities which havedampened the upward overall move-ment of business. Retail sales wereoff in September following a levelingoff in August, in part due to specialfactors described below. Both hous-ing activity and industrial productionwere little changed for the month. Asa result, while the third quarter rateof business activity has averaged higherthan the second quarter, as the GNPfigures cited below indicate, the ratetoward the end of the latest quarterwas not much higher than the quarterlyaverage.

Rise in GNPThe gross national product advanced

in the third quarter for the tenthsuccessive quarter since the present ex-pansion started in early 1961. Prelimi-nary estimates put the total at aseasonally adjusted annual rate of $588Kbillion, a rise of $9 billion over thesecond quarter and $32 billion over the

year-ago rate. The full set of figuresbased on more complete data will appearas usual in next month's SURVEY.

The overall rise reflected almostwholly an advance in final purchases.Consumer expenditures were up, as apickup in spending on nondurable goodsand the continued growth in outlays for

EmpSu

Mil l ie60

55

50

Hour

45

40

35

Perc

10

5

0

U.S. D

oyment Gains Slowed Down in themmer Months

jns of Persons

EMPLOYEES IN NONFARMESTABLISHMENTS

i 1 1 i i I 1 1 i i i 1 1 1 i i i ! i i i i i 1 i i i i i 1 i i i i i

Hours of Work Have Fluctuated Withina Narrow Range

s

AVERAGE WEEKLY HOURS INMANUFACTURING

i i i i i ! i i i i i 1 i i i i i 1 i i i i i 1 i i i i i 1 i i i i i

Unemployment Rate Continues at 5 Yi %or Slightly Above

snt

UNEMPLOYMENT AS A PERCENT OFCIVILIAN LABOR FORCE

i i 1 1 1 1 i i i i f 1 i \ 1 1 i 1 1 i i i 1 1 1 i i i 1 1 1 1 i i i1961 1962 1963

Monthly, Seasonally Adjusted

Data: BLS

apartment of Commerce, Office of Business Economics 63-10-1

services more than offset a small dipin purchases of durable goods. Therise in fixed investment was marked,extending to producers' durable equip-ment, nonresidential construction, andresidential building. The rise in govern-ment outlays was confined to a higherrate of spending by State and localgovernments.

Personal income up a little

September personal income was ata seasonally adjusted annual rate of$466^ billion, up about $1J£ billion overAugust and $21 billion over September1962. About $1 billion of the monthlyrise reflected higher payrolls, which inturn came from increased nonfarm em-ployment (+100,000), a slightly longeraverage workweek, and higher hourlyearnings. The payroll advances wereabout equally divided among manufac-turing, distribution, government andother private industries.

The recent income data indicate thatmost of the second to third quarter risein overall activity took place by theearly part of the third quarter. Thirdquarter personal income was $5 billionhigher than the second, but the Julyrate was already $4 billion higher.

From June to September, it may benoted, personal income increased bysome $4 billion at a seasonally adjustedannual rate. This rise was only halfthe increase that took place from Marchto June. The slowdown in the advanceoccurred chiefly in payrolls, which roseonly $2% billion over the third quarterafter having risen $7 billion from Marchto June.

Retail sales offRetail sales in late summer did not

follow through on the lift that came inJune and July; in fact, seasonallyadjusted sales were off noticeably inSeptember. It is questionable, how-


SURVEY OF CUEEENT BUSINESS October 1963

ever, whether the most recent month-to-month seasonally adjusted changereveals the underlying trend; a longerperspective is required to judge theproper movement. The early LaborDay probably resulted in some Augustpurchasing of apparel and general mer-chandise that in most years occurs inSeptember. August sales for both typesof stores were 3 percent above July,after seasonal adjustment. At thistime a sounder view of retail buyingcan be made from quarterly compari-sons; sales for the quarter as a wholewere up some 4 percent over the year-ago total and 1 percent over the secondquarter; in both comparisons thechanges are about in line with incomechanges.

Early reports on auto sales—for thelast 10 days of September and first 10days of October—suggest that con-sumers have been buying the new 1964models at a very good pace. Underthese circumstances, the distinct slow-down in new car sales in August andSeptember from the high rates thatprevailed through most of the 1963model year appears to be due torelatively low stocks in dealers' hands.

The latest figures on consumer creditthrough August do not suggest thatconsumers have been overextendingthemselves. While credit continues torise, the increase has been approxi-mately in line with income. Moreover,the ratio of new extensions to purchasesdoes not indicate excessive creditutilization when viewed against theexperience of the postwar period.Overall prices little changed but

some items are raised

In recent weeks producers havefurther raised quotations on severalprimary metals products, includingaluminum, lead, zinc, and steel. In-dustrial prices as a group continue toshow little change, however, becauseprice decreases have also occurred in anumber of industries and those whichhave been increased have not beennumerous enough to affect the overallindex. The BLS weekly wholesaleprice index of commodity prices forproducts other than farm and food inearly October stood at 100.7 percent ofthe 1957-59 average, as against 100.6 inearly July and 100.8 in September of

1962. For industry generally the per-sistence of excess capacity in domesticmarkets despite the rise in output thathas taken place since the last cyclicaltrough, continued competition fromabroad, and the comparative stabilityof unit labor costs are among the chiefeconomic factors that have kept overallindustrial prices fluctuating in an ex-tremely narrow range in the currentexpansion, and indeed over the past5 years.

The steel price rise in early Octoberextended to roughly 60-75 percent of the

proportion of steel mill shapes andforms that have been marked up on aselective basis since last spring. Sincethen steel prices in aggregate haveadvanced approximately 2 percent.Prices had dipped slightly from late1959 to early 1963 and are now about1 percent higher than the 1959 level.

So far this year farm prices haveaveraged K percent lower than thecorresponding 1962 price. This is thechief reason that processed food pricesin wholesale markets have also edgeddown fractionally from 1962.

Recent Developments in Manufacturing Output

INDUSTRIAL production, followinga period of relative stability in the lasthalf of 1962, advanced steadily throughJuly of this year to a record high buthas since leveled off. In September,the Federal Reserve Board's seasonallyadjusted index of manufacturing pro-duction stood 5% percent above theJanuary level and 5 percent above Sep-tember 1962.

The slowdown in output in recentmonths has been mainly the result ofspecial influences affecting steel, whereoutput was cut back sharply as a result

of a letdown in orders following thedisappearance of a strike possibility,and automobiles, where the changeoverto the 1964 model runs was somewhatearlier than last year. By the end ofSeptember, however, output of steelwas showing a little recovery and autoproducers had returned to full produc-tion of the 1964 models. In most othermajor industries output held steady orcontinued to increase, though at asomewhat slower pace than in theearlier months of the 1963 advance.

New orders placed with manufac-

Table 1.—Industrial Production

[1957-59=100; seasonally adjusted]

1962I ._IIIII - _ .IV

1963:IIIJulvAugustSeptember

Percent change:1962 average — Sept. 19631963 1st quarter— Sept. 1963..

Total

118.3116.1118.2119.5119.3

120 2124 2126. 5125 6125.7

6.34.6

Industry group

Manu-factur-

ing,total

118.7116.3118.7120. 0119.8

1^0 8124.9126.8125.9126.1

6.27.4

Dura-bles

117.9115.5118.0118.9119.0

120 2125.2127.2125. 2125. 2

6.24.2

Non-dura-bles

119.8117.4119.5121. 3120.9

121.5124.5126.3126.7127.2

6.24.7

Min-ing

105.0104.3105.2105.9104.7

104 4108.4111.3111 0110.4

5.15.7

Utili-ties

131.3128. 9130.2133.2133.2

136. 8138.7145.0143.5143.5

9.34.9

Market group

Con-sumergoods

119.7117.3119.6121.2120.8

122 6124. 1126.4125 6126.8

5.93.4

Busi-ness

equip-mentincl.

defense

119.6114.8118.3122.4122.9

121 4122 1124.8126 0127.0

6 24.6

Mate-rials

117.0115.3117.3117.6117.3

118 3125 0126.7124 6124.2

6 25.0

Source: Board of Governors of the Federal Reserve System.


October 1963

turers foreshadowed the recent pause inindustrial activity. New orders fordurable goods companies began to de-cline in May and have fallen by $1billion since then. Much of the reduc-tion in durable goods new orders inrecent months reflected the sharp cut-back in order placements by steel users.For most other durables, new orderinghas been slightly up on balance. Sea-sonally adjusted unfilled orders fordurable goods have also fallen about

STEEL PRODUCTION, CONSUMPTION,

AND STOCKS

Output Has Leveled Off FollowingDrop in Summer Months

Index, 1957-59=100

160

140

120

100

80

IRON AND STEEL OUTPUT

Seasonally Adjusted

Consumption Through August Is 5 PercentAhead of Year Ago

Million Short Tons

CONSUMPTION BY MANUFACTURERS

Moderate Stock Liquidation FollowingEarlier Buildup

Million Short Tons

24

22

20

18

STOCKS, CONSUMERS, WAREHOUSESAND PRODUCING MILLS

Ratio

STOCK-CONSUMPTION RATIO

i I

1962 1963Monthly, not Seasonally Adjusted

Data: FRB & Census

U.S. Department of Commerce, Office of Business Economics 63-10-4

SUEVEY OF CUKEENT BUSINESS

$1 billion from May, though the Augusttotal was $1.6 billion above August ayear ago.

Most of the rise in output in the earlypart of the year was centered inindustries producing basic materials,particularly iron and steel, thoughsignificant advances also occurred forindustrial chemicals, rubber and plasticsand bituminous coal. The materialsindex, which accounts for more thanone-half of the weight in the totalindustrial production index, contrib-uted over four-fifths of the total advancein output from January through May.By midspring, the output expansionhad broadened to industries turningout consumer goods and capital equip-ment; by late May steel productionbegan to turn downward. Total mate-rials output was little changed betweenMay and July but since then has fallenby 2 percent. Consumer goods pro-duction has changed little in the last 3months but business equipment pro-duction has continued to move higher.

Steel decline levels off

Iron and steel production has beenat a reduced rate since May, and stillcontinues to be influenced by the in-ventory readjustment of steel users.The cutback since the May peak, afterseasonal adjustment, has now amountedto more than one-fifth. However, out-put declined very little in Septemberafter falling sharply in July and August.

Weekly ingot production (beforeseasonal adjustment) began to pickup in late August and this movementcontinued through early October. ForSeptember as a whole, output increasedto 7.9 million tons of steel ingotsand castings from 7.8 million tons inAugust; the rise was only a little lessthan seasonal. By the second week ofOctober production had risen to a pointsome 5 percent above the Septemberweekly average, a slightly better thanseasonal rise.

In contrast with the sharp cutbackin steel production, consumption offinished steel by manufacturing con-sumers during the summer monthshas been fairly well maintained; con-sumption in the June-August periodwas 4 percent above the year-ago level.In August (unadjusted), consumptionexceeded receipts for the first time

since the beginning of the year andsteel stocks of manufacturing con-summers fell by 300,000 tons. Pro-ducing mills, which had started theirinventory liquidation earlier than con-sumers, also cut their inventories by300,000 during August, although ware-houses maintained their holdings at theJuly level. The reduction of 600,000tons of finished steel during Augustbrought total holdings by manufac-turing consumers, warehouses, and pro-ducing mills down to 21.9 million tons;further inventory reductions have beenmade since then. In August 1962,when the inventory readjustment wasalready well underway, the carryoveramounted to 20.4 million tons.

Domestic producers continue to feelthe effects of competition from abroad.July imports of steel mill products roseto a record 600,000 tons and broughtthe January-July total to 3 million tons,and increase of more than one-fifthover 1962. The share of the U.S.market now accounted for by importedsteel is 6 percent.

Consumer Goods

Under the influence of expandingconsumer expenditures, output of con-sumer goods has been in a rising phaseso far this year though the increasesince July has been very small. Therecent production rate, a new top, was4 percent above January and wellabove the average for all of 1962.Since the start of the year, all consumerproduct groups participated in theadvance, and all but automotive pro-ducts and household appliances were atrecord production rates in September.

Brisk retail sales, coupled with asteady and favorable level of new carstocks in dealers7 hands throughoutthe important part of the selling season,kept the auto industry operating at avery high rate in the first half of 1963.Assemblies of passenger cars fromJanuary through July were above 1962in every week except two; the averagefor the period was 156,00 units perweek, one-tenth higher than in 1962,and just short of matching the outputperformance in the banner year of 1955.

The reduction in the automotive andparts output index coincided with themodel changeover period. Seasonal


SURVEY OF CURRENT BUSINESS October 1963

adjustments are particularly difficult atthis time and some of the change prob-ably reflects the inadequacies of theseasonal adjustment.

Following the changeover period,which was completed in a shorter timethan in 1962, producers stepped upassemblies of the 1964 model cars at afast pace. Production reached 153,000units by the end of September and roseto 175,000 in the second week ofOctober; the latter rate matched thehigh June volume and was well abovethe comparable week a year ago. Forthe full month of September, comple-tions totaled 502,000 units. A recordturnout of 800,000 passenger cars isscheduled for October, 10 percent aboveOctober of last year, which was the

OUTPUT OF SELECTED PRODUCT GROUPS

Recent Movements Are Mixed

1957-59=100

140

120

100•£• Appliances, TV & Home Radios

8 0 1 1 1 1 1 1 1 1 1 1 1 1 M i 1 1 i 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

1957-59=100160

140

120

100

80

Drugs, Soaps & Toiletries ,

\ .„••••...••**..••**

.••...••*" Apparel & Shoes- f I ^

\Foods, Beverages & Tobacco

I M I I I I I I I i i I I I I I i I I I I I I I I I I i i I I I i I

1957-59=100

140

120

100

80

BUSINESS EQUIPMENT

M I I I 1 I I I 1 1 i t I t t l I 1 t 1 I I 11 I 1 I I 1 I I I I I

1961 1962 1963Seasonally Adjusted

Data: FRB


highest monthly production rate in1962.

Household durables

Strong consumer demand, partlyassociated with a high level of housingstarts, has supported a rising volumeof output of home goods. The Augustindex of these goods, at a new peak,was 5 percent above January and 8percent above the average for 1962 as awhole. Within the group, output offurniture and rugs has advanced fairlysteadily to a record rate in July andAugust while production of appliances,TV and home radios as a group hasdeclined a little after peaking duringthe spring months.

It should be pointed out that theindex of appliances, TV, and homeradios does not include color TV sets.Production data are not available buttrade reports indicate that color TV isbeing produced in large volume andthat there has been a substantial in-crease in the number of sets producedthis year as compared with 1962. Ifmeasured in terms of constant dollarvalue, the gain in production of colorrelative to all black and white TVsets would be particularly impressivesince the factory value of a color TVreceiver is over three times the averagevalue of all noncolor sets.

Output of most individual applianceshas been running well above last year.Factory shipments (in units) for the 8months of 1963 were 20 percent or moreabove the corresponding 1962 period inthe case of dishwashers and room airconditioners and 10-17 percent higherin the case of refrigerators, vacuumcleaners, and food waste disposers. Forsome other important items—washingmachines, freezers, ranges, and TV—thegains were much smaller w^hile waterheaters and radios showed decreasesfrom last year's total.

Inventories of household durables atretail stores have shown little changesince the end of 1962; radios and phono-graphs are an important exception.The stock-sales ratio at retail has moveda little lower since the end of 1962. Atthe end of August the ratio stood at2.07, as compared with 2.12 at the endof last December and 2.12 in August ayear ago.

Expansion in BusinessEquipment

Rising business demand for capitalgoods this year has stimulated increasedoutput of business equipment. Afterdeclining slightly from early in thefourth quarter of 1962 to the end of thefirst quarter of 1963, output of businessequipment excluding defense began torecover this spring and has since ad-vanced at an average rate of about 1percent per month. The Septemberindex was 6 percent above April and 5percent above a year earlier. Accord-ing to the latest quarterly OBE-SECsurvey capital expenditures show arising trend throughout 1963.

Within the total, however, productionmovements have been quite mixed.Output of industrial machinery and offreight and passenger equipment hasadvanced to new highs while commer-cial equipment has fallen below itsearlier peak.

Industrial equipment, which accountsfor half of the weight of the businessequipment index, recorded a rise of 5percent from April through August.One aspect of the increased activity inthe industrial equipment field has beenthe expanded flow of new orders and,in turn, backlogs for machine tools.

(Continued on p. 12)

PASSENGER CARS

Assemblies Rebound to Above Year-ago RatesFollowing Shift to 1964 Models

Thousand Units200

150

100 -

J F M A M J J A S O N D

Weekly , not Seasonal ly ad jus ted


By MURRAY BROWN

Depreciation and Corporate Profits

LN" connection with an interde-partmental study of economic growth,the Office of Business Economics isassessing trends in the division ofcorporate income between wages andprofits. As a background to otherparts of this project, the presentarticle examines for the period 1929-62the effects on corporate profits ofalternative methods of calculating de-preciation charges.

The present article is entirely descrip-tive. Its sole objective is to examineto what extent alternative methods ofdepreciation accounting modify theobserved movement of corporate profitsas measured for national income pur-poses over the postwar period and ascompared with 1929. The article doesnot attempt to establish whether thatmovement can be called a long-termtrend or whether it reflects moretransitory factors. No examination ismade of the basic determinants ofprofits such as the supply of labor andcapital, the degree of competition,technological change, the extent ofcapacity utilization, or money andcredit.

Nor does the article deal with thepossible effects of the historical profitspatterns on other aspects of theeconomy—-e.g., on the course of prices,on investment incentives, corporatecash flows, or the further effects ofthese on the functioning of the economyor its various parts.

It will be noted also that in thisstudy corporate profits are related tothe value of corporate output as astandard. An alternative approach,which would relate them to investedcapital, was not pursued. This alterna-tive approach is of equal significanceand necessary to a comprehensiveevaluation of profit trends, but thedata necessary to pursue it from thevantage point of this article are not

available. However, judging from par-tial studies that have been made in thepast, it is quite possible that the resultswould differ substantially if the focusof this study were the relation ofprofits to invested capital rather thanto output.

Depreciation charges are intended tomeasure the decline in the value ofproductive facilities as a result of theiruse in production, their age, and theirobsolescence. The last, in turn, resultsfrom the introduction of new methodsof production or products, or fromchanges in demand. These charges arededucted from gross receipts along withother expenses to arrive at the profitsfor the accounting period.

The depreciation charges calculatedfor tax purposes, which underlie thepresent national income accounts, arebased upon Federal tax laws and regula-tions and influenced by changes inthem. While measures of this typeare appropriate for some types ofeconomic analysis, for many otherpurposes it is desirable to have de-preciation and profit series that arenot affected by such changes.

Even after we adjust for changes inthe tax laws and their administration,the calculation of depreciation, andconsequently of profits, remains subjectto a number of unresolved questions.First, there is no general agreementabout the way in which depreciationcharges should be spread over theservice life of a capital asset; second,there are several ways of measuring thevalue of the total capital that is to bedepreciated; and, third, in a dynamiceconomy such as ours it is very difficultto assess the length of the service life-over which the depreciation of thecapital goods occurs.

Given these uncertainties, it is notpossible to calculate depreciation andprofit series to which there would begeneral consent. But it is possible to

calculate several series, each based uponreasonable alternative assumptions asto depreciation formula, valuation, andservice life. Then, from a comparisonof the results so obtained, certain con-clusions can be drawn as to the effectthe different depreciation assumptionswould have had on the level and move-ment of corporate profits. This is theapproach adopted in the present article.The techniques of calculating the sev-eral corporate profit variants are ex-plained in the appendix. The severalprofits series calculated are those thatresult when depreciation series basedon alternative accounting methods aresubstituted for those used for tax pur-poses. These profits series need notbe identical with those that would havematerialized if these depreciation meth-ods had actually been used by corporatemanagement, because use of suchmethods might have led to differentprice, production, etc. policies, andtherefore also of profits.

It should be noted that the alterna-tive profits series are not part of theregularly published national income andproduct accounts. The reason for notincorporating them in these accountsis twofold. First, there is the lack ofagreement on a single appropriate seriesjust referred to. Second, the presentestimates of alternative profit variantsare preliminary and aggregative, andwould have to be refined further beforeany of them can be considered forinclusion.

The discussion is arranged as follows:The pattern of the corporate profitscomponent of the national incomeaccounts, which is based on accountingpractices used for tax purposes, is firstreviewed. Corporate profits, before de-preciation charges have been nettedout, are then examined. Next, a ver-sion of corporate profits is introducedwhich adjusts for variations in tax lawsand regulations. As will be explained,


6 SURVEY OF CURRENT BUSINESS October 1963

this is based on depreciation chargescalculated on a straight line historicalcost basis. Subsequently, further profitvariants are introduced, involving, inturn, departures from the straight lineformula, from the historical cost methodof valuation, and, finally, from theservice lives that underlie the tax cal-culations of depreciation.

A major conclusion of the compari-sons of these profit series is that all ofthem display a pattern similar to thatof the national income variant: Theydecline relative to corporate gross prod-uct from the earlier part of the postwarperiod to 1962, and also for the longerspan, 1929-62. However, the nationalincome variant shows the largest rela-tive decline. The study also showsthat the recent level of corporate profitsbased upon national income concepts isin the lower range of the levels thatwould be registered if alternative rea-

sonable methods of depreciation wereused. These conclusions can be ob-served in table 1, and in the charts.

It would have been most desirableto extend the long-term comparison toyears earlier than 1929, but the datanecessary to do so are not available.From the partial information that is athand,1 it seems likely that if an averageof prosperous years in the second halfof the 1920's were substituted for 1929,the conclusion just summarized re-lating to the pattern of the profit sharewould continue to hold. It would not,however, seem to hold in a comparisonmade with the earlier part of that decade.

Corporate profits, national incomeversion

Business earnings before taxes origi-nating in the corporate system, as

1. Harlow D. Osborne and Joseph B. Epstein, "CorporateProfits Since World War II," SURVEY OF CURRENT BUSI-NESS, January 1956.

CORPORATE GROSS PRODUCT AND PROFITSNATIONAL INCOME ACCOUNTS

Corporate Profits Before Taxes* Have Declined in Relation to Corporate Output

(ratio scale) Billion $Billion $

80

70

60

50

40

30

20

10

8 Li

Corporate Gross Product(right scale)

Corporate Profits(left scale)

400

300

200

100

50

1929 1947 50 60

* Including corporate inventory valuation adjustment .and excluding

corporate profits originating in rest of the world

measured in the national income ac-counts, rose from $9.9 billion in 1929 to$44.4 billion in 1962, an average annualrate of increase of 4.7 percent. Theannual growth rate in earnings slowedto 2.9 percent from 1948 to 1962.The pattern of the postwar decline inthe rate of growth of earnings wouldhave been substantially unaltered hadperiods of high activity in 1959 or 1960,been used as the terminal point of thecomparison.

The corporate earnings measure dis-cussed here is the same as the corporateprofits component of the national in-come accounts, except that dividendsand branch profits received by U.S.residents from abroad are omitted,while those remitted from the UnitedStates to foreign stock holders areincluded. The series excludes inven-tory gains and losses, capital gains andlosses, and intercorporate dividendsfrom profits of domestic corporations.The discussion is conducted in terms ofa before-tax definition of profits, but forthose who wish to examine the after-tax profits patterns, the data are pro-vided in tables 3 and 4. It may bementioned here that the conclusionsnoted above as to the broad patternsdisplayed by the various before-taxprofits series hold also on an after-taxbasis.

Corporate earnings may be comparedwith total corporate gross product, thecorporate component of GNP. Corpo-rate gross product is the market valueof the output of goods and servicesoriginating in the corporate sector ofthe economy, net of intermediate prod-ucts used up in production. Anothermeaningful comparison of corporateearnings would be with total incomeoriginating in corporate business. Thisis the sum of corporate earnings, employeecompensation, and net interest. Itdiffers from corporate gross product,which in addition includes depreciationcharges, indirect business taxes, and afew minor items. Comparisons withcorporate gross product are presentedin tables 1 to 3 in this report; compari-sons with corporate income originatingare shown in table 4. The conclusionsas to major trends are substantially thesame whether income originating orcorporate gross product is used as a


October 1963 SURVEY OF CURRENT BUSINESS

frame of reference. However, since arecent SURVEY article2 on corporateprofits used the corporate gross productframework, the discussion here will bein the same terms.

The first chart clearly indicates thatin the postwar period the rate of in-crease of corporate earnings, depictedby the solid line, has fallen relative tothat of corporate gross product, thedotted line. This relative decline issummarized in the downward move-ment of the ratio of corporate earningsto corporate gross product depicted bythe dashed line in the second chart.For instance, in 1948, corporate earn-ings were 21.3 percent of corporate grossproduct; this percentage increased 0.9points to a high in 1950 (during theKorean War) and then declined to alow of 14.4 in 1962. A similar patternwould emerge if 1947 or 1949 were usedfor the initial year of the comparisonrather than 1948, and if 1959, 1960 or1961 rather than 1962 were the terminalyears.

In the longer run also—from 1929to 1962—the growth of corporate grossproduct exceeded that of corporateearnings. Over 19 percent of corporategross product was accounted for byprofits in 1929, whereas this was reducedby 5 points in 1962. The qualificationsrelating to the 1929 comparisons willnot be repeated.

Profits before depreciationThe relative fall in corporate earn-

ings, especially in the postwar period,has been associated with a rapidincrease in depreciation charges. Capi-tal consumption allowances, whose ma-jor component is depreciation, increasedat an average annual rate of 6.1 percentin the period 1929-62; from 1948 to1962, this rate was 10.5 percent—con-siderably larger than the 5.7 percentannual increase in corporate grossproduct in the same period.

As is pointed out in the SURVEYarticle by Graham and Bauman towhich reference has been made, thelarge increase in capital consumptionallowances in the postwar period can beexplained by several factors: Capitalstocks grew more rapidly than output

2. Robert E. Graham, Jr. and Jacquelin Bauman, "Corpo-arte Profits and National Output," SURVEY OF CURRENTBUSINESS, November 1962. Some of the conclusions of thisarticle are repeated as background in the present study.

CORPORATE PROFIT SHARE UNDER ALTERNATIVE

DEPRECIATION METHODSAll Variants of Corporate Profits Before Taxes* as a Percent of

Corporate Gross Product Decline

Percent of Corporate Gross Product

30

25

20

15

10

Corporate Profits

•— — • — _^ >»— v Plus Depreciation

/"-/X \

~~ National Income v/ ^^

Proofs

I 1 1 1 I ! 1 | 1 1 I 1 1 1 1 1 1 1 1 I

25

20

15

10

25

20

15

10

25

20

15

10

25

20

15

10

25

20

15

10

25

20

15

10

25

20

15

10

Straight Line, Historical Cost

Tax Service Lives

National Income^

Profits

I I I I I I I l I

Double-Declining Balance,

Historical Cost, Tax Service Lives

National Income

Profits ^

I I L I I I I I I I I I I

National Income

Profits

Sfraighf Line, Current Cosf,Tax Service Lives

[ i i I I I I I I I I

National Income

Profits

Double-Declining Balance,Current Cost, Tax Service Lives

l i i l l l l i i i l I l l

Straight Line, Historical Cost, Lives

25% Shorter Than Tax Lives

National Income

Profits *^

l I l I I l l I I

National Income

Double-Declining Balance, Historical CostLives 25% Shorter Than Tax Lives

Straight Line, Historical Cost, Lives

25% Longer Than Tax Lives.

National Income

ProfitsI I I I I I I I I I I I I I I I t

29 1947 1950 1955 1960 1965

Including corporate inventory valuation adjustment and excluding corporate profits originating in rest of the world

U.S. Department of Commerce, Office of Business Economics. 63-10-6


8 SUEVEY OF CUKEENT BUSINESS October 1963

during the postwar period, and com-paratively shortlived equipment, whichcarries a high annual depreciationquota, increased relative to structures,which have longer service lives andconsequently lower annual depreciation.

Also, the large postwar additions tothe capital stock were at prices con-siderably higher than those embodiedin the stock that was subject to depre-ciation at the beginning of the period.As the older stock was replaced by newitems, depreciation charges rose, re-flecting the higher postwar price levels.

Finally, changes in the tax laws andregulations further contributed to therapid growth in depreciation allowancesin the postwar period. These changesconsisted in the provision of certificatesof necessity which permitted the ac-celerated amortization of defense facili-ties during World War II and theKorean War; the authorization for taxpurposes of accelerated methods ofdepreciation for new investment by theEevenue Act of 1954; and the promul-gation of the DEPRECIATION GUIDE-LINES of 1962 which effected a broadreduction of service lives for tax pur-poses.

It is apparent that an economicinterpretation of a profit series based ondepreciation charges so measured isdifficult. However, one may abstractfrom these charges by examining cor-porate profits before deduction of depre-ciation.

Corporate profits plus total depreci-ation allowances rose from $13.8 billionin 1929 to $72.7 billion in 1962. Forthe overall period, the percentage ofcorporate gross product accounted for

by corporate profits and depreciationfell by 3.6 points. In the postwarperiod, 1948 to 1962, this percentagedeclined from 25.8 to 23.6, which isone-half of the decline in the share ofnational income profits in the corporategross product.

Thus, even with depreciation allow-ances added back, profits were reducedrelative to corporate gross product.This implies that the depreciationaccounting underlying the nationalincome calculations is not responsiblefor all of the observed reduction of theprofits share.

However, this is not a completeanalysis. Depreciation charges shouldbe deducted to arrive at a meaningfulmeasure of profits. We shall accord-ingly examine the levels and trends ofcorporate profits under alternativemethods of depreciation accounting.

Corporate profits adjusted for legalchanges

The first alternative measure ofprofits that will be examined is basedupon depreciation charges that havebeen adjusted to eliminate the effectsof the major changes in the tax lawsand regulations that have just beenenumerated.

Elimination of the effect of thesechanges from the depreciation estimatesused for tax purposes converts theseinto straight line historical cost depre-ciation series with service lives asactually used. These service lives arehereafter referred to as tax lives. Thismethod, which is the simplest and moststraightforward one, writes off theoriginal cost (to the last buyer) of the

Table 1.—Corporate Profits 1 Under Alternative Depreciation Formulas and CorporateGross Product, 1929, 1948, and 1962

Corporate profits, national income version. _ _ -

Corporate profits plus depreciation, national income version _

Corporate profits based on alternative methods of depreciation:Straight-line, historical cost, tax livesDouble-declining, historical cost, tax livesStraight line, current cost, tax lives.Double-declining, current cost, tax lives

Straight line, historical cost, 25 percent shorter than tax lives-Double-declining historical cost 25 percent shorter than tax livesStraight line, historical cost, 25 percent longer than tax lives _ -_

Percent of corporate grossproduct

1929

19.5

27.2

19.518.818.618.1

19.018.320.1

1948

21.3

25.8

21.120.118.818.1

20.819.621.6

1962

14.4

23.6

16.115.314.614.1

15.414.716.7

Absolutevalue,

1962(billions

of$)

44.4

72.7

49.647.245.043.4

47.345.251.4

1. Including corporate in.Source: U.S. Department of Commerce, Office of Business Economics.

capital asset in equal installments overits estimated service life.

The adjustments that we have beenable to make do not eliminate all effectsof changes in the tax law and itsadministration. Less important changesin legislation have not been taken intoaccount. Nor have changes in enforce-ment procedures that have occurredduring the period. In particular, en-forcement was tightened in the early1930's and probably resulted in somedecrease in recorded depreciationcharges.

From 1952 to 1962, the profit seriesadjusted as indicated above is higher inlevel than the profit component of thenational income accounts. Corporateprofits would have been slightly higherin 1948 in the absence of the legalchanges that have liberalized deprecia-tion procedures for tax purposes. In1962, they would have been $5.2 billionhigher than the profits calculated in thenational income accounts. But thesalient longterm and postwar move-ments persist. Specifically, adjustedprofits as a percentage of corporategross product fell 3.4 points over theoverall period and declined by 5 pointsfrom 1948 to 1962. However, therelative decline was not quite so largeas in the national income version of theprofits share.

Corporate profits with double-declining balance depreciation

There is a significant body of opinionwhich holds that the value of a capitalasset declines at approximately a con-stant rate throughout its service liferather than by a constant amount asunder the straight line method. Ac-cording to this view the dominantcomponent of depreciation is obsoles-cence. This is assumed to progress ata constant percentage rate so that theabsolute decline in the value of theexisting capital is greater in the earlierthan in the later part of its service life.

There are several depreciation for-mulas that produce an accelerated write-off of fixed assets. Two of these arethe sum-of-the-years-digits method andthe double-declining balance method,both of which were authorized for taxpurposes in 1954. The declining bal-ance formula is the more frequentlyused of the two methods. In the


October 1963

present section, the effect on corpor-ate profits of employing the decliningbalance method is examined. Thedouble-declining balance method com-putes the annual depreciation chargeby applying a constant percentage tothe undepreciated part of the invest-ment in the year in which the computa-tion is made. Specifically, a percent-age which is twice the straight line rateis used.

A profit series based on the double-declining balance formula, historicalcost valuation, and service lives used fortax purposes has been computed, andis presented in table 2. The movementin this profit variant corresponds closelyto that of the national income profit

SURVEY OF CURRENT BUSINESS

series; the difference between the twodoes not exceed $2 billion except in1962, the year that Guidelines was in-troduced. In the terminal year, doubledeclining profits were $2.8 billion higherthan the national income variant.Both series rise rapidly after WorldWar II, but after the early 1950's theirrates of growth begin to taper.

In 1955, the corporate profits basedsolely on the double-declining balancemethod began to exceed the nationalincome version. The double-decliningprofit series had begun to catch up priorto 1955 with the national income profitseries. In addition, there were largeincreases in depreciation based on theuse of certificates of necessity in 1955;

9

MEASURES OF CORPORATE PROFITS UNDER ALTERNATIVEDEPRECIATION METHODS, 1962*

National Income Measure of Profits Before Taxes OccupiedLower End of Range of Alternative Estimates

Billion $

60

40

30

20

10 h

&*^

* Including corporate inventory valuat ion adjustment and excluding corporate

profits originating in rest of the world

U.S. Department of Commerce, Office of Business Economics

706-248—63 2

these tended to raise depreciation al-lowances above the normal straightline rates. Coupled with the authori-zation to use double-declining balanceand sum-of-the-years-digits methods in1954, the reported depreciation allow-ances used for national income purposesfor the first time exceeded those com-puted on the basis of the double-declining balance formula alone.

Just as with all profit variants dis-cussed so far, the share in corporategross product of profits based on dou-ble-declining balance depreciation hasfallen since 1929 and especially in thepostwar period. However, the de-cline—from 18.8 percent in 1929 to 15.3percent in 1962—is slightly smaller thanthe 5.1 point fall for the same period inthe national income profits share ofcorporate gross product.

A profit series based on the triple-declining balance formula was also com-puted but is not shown. The level islower than either the double-decliningbalance or the national income profitseries. This was to be expected, sinceas long as investment is growing, triple-declining depreciation allowances tendto exceed double-declining deprecia-tion, which in turn tend to be greaterthan straight line depreciation.

The problem of the valuation ofassets3

Aside from the difficulty of choosinga depreciation formula, there is theproblem of valuing fixed assets fordepreciation purposes.

All of the profit series presented sofar are based on depreciation chargesthat, calculated over the service lifeof an asset, equal its original cost.Such depreciation charges fall short of(exceed) the replacement cost of used-

$3-10-7

3. It is no easy task to apply the current cost criterioneither at the firm level or in the national income accounts,and it is important to understand the nature of the measuresthat in practice can be constructed. Briefly, the conven-tional procedures for calculating current-cost depreciationoverstate the amounts needed to replace the used-up machin-ery and equipment by items of equal productive capacity.This is sj because these procedures set aside resources suffi-cient t ) replace the items used up by identical items. Butin fact these resources will be used to produce new and im-proved items that have a higher productive capacity. Inthe case of structures there is also overstatement for anotherreason if the procedures for revaluing depreciation rely uponthe generally available construction cost indexes. Theseindexes measure the change in the cost of raw material andlabor, and their use in converting depreciation to a current-cost basis sets aside the funds necessary to purchase the samequantity of labor and materials that was employed in theconstruction of the buildings or factories that have been usedup. To the extent that the efficiency of labor and materialshas increased over the period, the funds set aside will be morethan sufficient to maintain productive capacity. Thesepoints are discussed with reference to the measurement ofgross capital stocks by George Jaszi, Robert C. Wasson, andLawrence Grose in "Expansion of Fixed Business Capitalin the United States", SURVEY OF CURRENT BUSINESS,November 1962.


10 SUEVEY OF CURRENT BUSINESS October 196?

up items if capital goods prices rise(decline) during the period in which theasset is being written off. An alter-native is to calculate depreciation interms of current costs. This methodis advocated on the ground that itsets aside funds equaling the currentreplacement cost of the used-up items.

The profits that would have resultedfor 1929 and the postwar period hadfirms used straight line depreciation,tax service lives, and valued the depreci-ation of their assets in terms of currentcost are shown in table 2. They traceout the by now familiar pattern—asharp rise in the immediate postwarperiod and then a reduction in theirrate of growth. However, this seriesis lower than the national income ver-sion of corporate profits except for 1962.

In other words, even though thenational income profit estimates in-cluded the effect of the extra depreci-ation due to accelerated amortizationof defense facilities, and the 1954 taxlaw and administrative changes, de-preciation charges would have beenstill larger, and profits correspondinglysmaller, had current-cost depreciationbased on the application of the straightline formula to normal lives before theintroduction of Guidelines been used.When prices are rising, revaluation in-creases depreciation charges as com-pared with historical cost depreci-ation—just as the extra depreciationdue to the tax and administrativemeasures taken, augmented chargesover the standard straight line writeoff.In the period under review, the effectof using current cost depreciation

would have been larger than was theeffect of the various liberalization meas-ures that were introduced. It was notuntil 1962, when Guidelines was intro-duced, that these relationships werereversed.

Relative to corporate gross product,the straight line revalued profits fallless from 1948 to 1962 than does thenational income version. The samepattern is observed if revalued profitsare compared with original cost profitsfor any given depreciation formula.

Corporate profits under differentservice lives

The versions of corporate earningsdiscussed so far have been based onservice lives which are thought toapproximate those used for tax pur-

Table 2.—Corporate Profits Before Taxes* Under Alternative Depreciation Formulas and Corporate Gross Product, 1929 and 1947-62[Billions of Dollars]

Corporate profits, national income versionPercent of corporate gross product _ _

Corporate profits plus depreciation, national income versionPercent of corporate gross product

Corporate profits based on alternative methods of depreciation:Straight line, historical cost, tax livesPercent of corporate gross product

Double-declining historical cost, tax livesPercent of corporate gross product

Straight line, current cost, tax lives ._ _Percent of corporate gross product

Double-declining, current cost, tax livesPercent of corporate gross product ._. _ _

Straight line, historical cost, 25% shorter than tax livesPercent of corporate gross product

Double-declining, historical cost, 25% shorter than taxi ivesPercent of corporate gross product _ . _ _

Straight line historical cost 25% longer than tax livesPercent of corporate gross product - _ . -

Corporate gross product

1929

9.919.5

13.827.2

9.919.5

9 518.8

9.518.6

9.218.1

9.719.0

9.318.3

10. 220.1

50.8

1947

22.918.6

28.222.9

22.618.4

21.817.8

20.216.4

19.716.0

22.318.1

21.317.3

23.218.9

123.0

1948

30.021.3

36.325.8

29.721.1

28.320.1

26.518.8

25.518.1

29.220.8

27.619.6

30.421.6

140.7

1949

27.42(1.0

34.625.2

27.119.7

25.518.6

23.917.4

22 716.5

26.619.4

24.818.0

28.120.4

137.3

1950

34.722 2

42.627.2

34.422.0

32.720.9

31.219.9

30.119.2

33.821.6

32.020.4

35.522.7

156.5

1951

39.722.0

48.827.1

39.622.0

37.821.0

35.619.8

34.419.1

38.721.5

36.920.5

40.822.6

180.2

1952

36.619.4

47.024.9

36.919.6

35.118.6

33.017.5

31.916.9

35.718.9

33.918.0

38.220.2

188.6

1953

36.217.9

48.223.8

37.018.3

35.217.4

33.116.4

32.015.8

35.617.6

33.916.7

38.519.0

202.4

1954

32.316.3

46.023.3

33.717.0

32.016.2

30.015.2

29.114.7

32,216.3

30.715.5

35.517.9

197.8

1955

41.618.6

57.525.8

44.019.7

42 419.0

40.218.0

39.317.6

42.719.1

41.118.4

46.020.6

223.2

1956

40.216.9

57.724 3

43.018.1

41 117.3

38.516.2

37.415.7

41.817.6

39.916.8

45.019.0

237.3

1957

39.716.0

59.023.7

43.017.3

40 716.4

37.815.2

36.314.6

41.616.7

39.315.8

44.818.0

248.7

1958

35.414.5

56.023.0

38.515.8

36 214.9

33.313.7

31.813.1

36.915.1

34.714.2

40. 116.5

243.6

1959

45.416.7

67.324 7

48.417.8

46 217.0

43.115.8

41.815.4

46.617.1

44.616.4

49.918.3

272. 1

1960

42.615. 1

65.823 3

45 416.1

43 115.3

40.714.5

39.314.0

43.415.4

41.514.8

47 016.7

281.2

1961

41.414.5

65 823 0

44 215.5

41 914.7

39.914 0

38 413.4

42.014 7

40.114.0

45 816.0

285.6

1962

44.414.4

72.723 6

49 616.1

47 215.3

45.014 6

43 414.1

47.315 4

45.214.7

51 416.7

307.9

Table 3.—Corporate Profits After Taxes* Under Alternative Depreciation Formulas and Corporate Gross Product, 1929 and 1947-62[Billions of Dollars]

Corporate profits, National income version _._Percent of corporate gross product

Corporate profits plus depreciation income versionPercent of corporate gross product

Corporate profits based on alternative methods of depreciation:Straight line, historical cost, tax lives

Percent of corporate gross productDouble-declining, historical cost, tax lives

Percent of corporate gross productStraight line, current cost, tax lives. ._ .

Percent of corporate gross productDouble-declining, current cost, tax lives _ _ _

Percent of corporate gross productStraight line, historical cost, 25% shorter than tax lives

Percent of corporate gross productDouble-declining historical cost, 25% shorter than tax lives

Percent of corporate gross product _ _Straight line historical cost 25% longer than tax lives

Percent of corporate gross productCorporate gross product - -

1929

8.516.712.424.4

8.516.78.1

15.98.1

15.97.8

15.48.3

16.37.9

15.68.8

17.350.8

1947

11.79.5

16.913.7

11.39.2

10.58.58.97.28.46.8

11.08.9

10.08.1

11.99.8

123. 0

1948

17.512.423 816.9

17.212.215.811.214.010.013.09.2

16.711.915.110.717.912.7

140.7

1949

17.012.424 217.6

16.712.215.111.013.59.8

12.39.0

16.211.814.410.517.712.9

137.3

1950

16.810.724.715.8

16.510.514.89.5

13.38.5

12.27.8

15.910.214.19.0

17.611.2

156.5

1951

17.39.6

26.414.7

17.29.5

15.48.5

13.27.3

12.06.7

16.39.0

14.58.1

18.410.2

180.2

1952

17.19.1

27.514.6

17.49.2

15.68.3

13.57.2

12.46.6

16.28.6

14.47.6

18.79.9

188.6

1953

16.07.9

28.013.8

16.88.3

15.07.4

12.96.4

11.85.8

15.47.6

13.76.8

18.39.0

202.4

1954

15.17.6

28 814.6

16.58 3

14.87.5

12.86.5

11.96.0

15.07.6

13.56.8

18.39.3

197.8

1955

19.78.8

35.716.0

22.29.9

20.69.2

18.48.2

17.57.8

20.99.4

19.38.6

24.210.8

223.2

1956

19.08.0

36 515 4

21.89.2

19.98.4

17.37.3

16.26.8

20.68.7

18.77.9

23.810.0

237.3

1957

18.87.6

38. 115.3

22.18.9

19.88.0

16.96.8

15.46.2

20.78.3

18.47.4

23.99.6

248.7

1958

16.76.9

37 415 4

19.98.2

17.67.2

14.76.0

13.25.4

18.37.5

16.16.6

21.58.8

243.6

1959

22.28 2

44 116 2

25.29 3

23.08.5

19.97.3

18.66 8

23.48.6

21 47.9

26 79 8

272. 1

1960

20.37 2

43 515 5

23.18 2

20.87.4

18.46 5

17.06 0

21 17 5

19 26 8

24 78 8

281 2

1961

19 46 8

43 815 3

22 27 8

19 97 0

17.96 3

16 45 7

20 07 0

18 16 3

23 88 3

285 6

1962

22 37 2

50 516 4

27 48 9

25 08 1

22.87 4

21 26 9

25 18 2

23 07 5

99 29 5

307 9

* Including corporate inventory valuation adjustment and excluding corporate profit originating in the rest of the world.Source: U.S. Department of Commerce, Office of Business Economics.


October 1963 SUEVEY OF CUKEENT BUSINESS 11

poses prior to the introduction ofGuidelines Alternative assumptionsconcerning service lives can now beexamined.

Table 2 presents a corporate profitsseries based on straight line deprecia-tion, historical cost valuation andservice lives 25 percent shorter thantax lives. From 1929 to 1954, theabsolute level of this profit varianttends to be lower than the nationalincome version, but after 1954 it ex-ceeds it. In 1962, the difference be-tween the two variants is $2.9 billion.

The standard pattern of decline inrelation to corporate gross product isobservable in this series also. It issomewhat more pronounced than inthe straight line historical cost seriesbased upon tax lives.

Profit series for lives 25 percent

shorter than tax lives have been calcu-lated also for corporate profits basedupon all the versions of depreciationformula and valuation procedure hither-to discussed—straight line and double-declining formula and historical andcurrent cost valuation. These variantsof corporate profits, which are notshown in the table, all exhibit thetypical pattern of decline in relationto corporate gross product that wehave observed hitherto. In general theretardation is somewhat larger underthe shorter service life assumptionthan under the tax life assumption.

Although recent legal and adminis-trative changes affecting depreciationcharges for tax purposes have been inthe direction of shortening service lives,it is interesting to see what the level andtrend of corporate profits would have

been had longer service lives been used.In table 2 corporate earnings have beencomputed using straight line deprecia-tion historical cost valuation and serv-ice lives 25 percent longer than thoseunderlying tax lives prior to the intro-duction of Guidelines. As would beexpected, this results in higher levels ofprofit than are obtained under thedepreciation methods underlying thenational income version—and indeedany other version of depreciation ac-counting that has been discussed inthis article. However, the pattern ofretardation in relation to corporategross product persists in this variant ofcorporate profits also, but it is some-what less pronounced than the straightline historical cost variant based uponpast practice with respect to servicelives for tax purposes.

Table 4.—Corporate Profits (Before and After Taxes)* Under Alternative Depreciation Formulas and Corporate Income Originating,1929 and 1947-62

[Billions of dollars]

National Income Version:Corporate profits before taxes

Percent of corporate income originating _ _Corporate profits after taxes

Percent of corporate income originating.Corporate income originating

Corporate profits and income originating based on alternative methods ofdepreciation:

Straight line, historical cost, tax lives:Profits before taxes

Percent of income originating ._ ___Profits after taxes-

Percent of income originating . _ .Income originating _

Double-declining, historical cost , tax lives:Profits before taxes _ _ _

Percent of income originatingProfits after taxes

Percent of income originating _ __Income originating

Straight line, current cost, tax lives:Profits before taxes

Percent of income originating . _ . _ _ _Profits after taxes

Percent of income originatingIncome originating

Double-declining, current cost, tax lives:Profits before taxes

Percent of income originating _ _Profits after taxes-

Percent of income originatingIncome originating ._

Straight line, historical cost, 25% shorter than tax lives:Profits before taxes


Percent of income originating ...Income originating

Double-declining, historical cost, 25% shorter than tax lives:Profits before taxes -- -

Percent of income originating _ _ . _Profits after taxes -

Percent of income originating _Income originating

Straight line, historical cost, 25% longer than tax lives:Profits before taxes


Percent of income originating -Income originating

1929

9 921 98 5

18.845.2

9 921.98 5

18.845.2

9.521 28 1

18.144.8

9.521.28 1

18 144.8

9.220.77.8

17 544.5

9 721.68.3

18.445.0

9.320.97.9

17.744 6

10.222.48 8

19.345 5

1947

22 921 911 711.2

104.7

22 621.611 310.8

104.4

21.821 010 510.1

103.6

20.219.88 98 7

102 0

19 719.48.48 3

101.5

22 321.411 010.6

104.1

21.320.710.09.7

103 1

23 222.111 911 3

105 0

1948

30 024.917 514.5

120.4

29 724.717 214.3

120.1

28.323 815 813.3

118.7

26 522.714 012 0

116 9

25 522.013 011 2

115.9

29 224.416 714.0

119.6

27.623.415 112.8

118 0

30.425.217 914.8

120 8

1949

27 423 717 014.7

115. 5

27 123 516 714 5

115.2

25.522 415 113.3

113.6

23 921.313 512 1

112 0

22 720 512 311 1

110.8

26 623.216 214.1

114 7

24.822.014 412.8

112 9

28 124.217 715 2

116 2

1950

34 726 216 812.7

132 3

34 426.116 512. 5

132.0

32.725 114 811.4

130.3

31.224.213 310 3

128 8

30 123.612.29 6

127.7

33 825.715 912.1

131.4

32.024.714. 110.9

129 6

35 526.717 613.2

133 1

1951

39 725.917 311.3

153.3

39.625.817.211.2

153.2

37.825.015 410.2

151.2

35.623.913.28.8

149 2

34.423.212.08 1

148.0

38 725.416 310.7

152.3

36.924.514.59.6

150 5

40 826.418 411 9

154 4

1952

36.623.117 110.8

158.5

36 923.217 411.0

158.8

35.122 415 69.9

157.0

33 021.313 58 7

154 9

31 920 712 48 1

153.8

35 722 716 210.3

157 6

33.921.814 49.2

155 8

38 223.918 711 7

160 1

1953

36 221.416 09.5

169.0

37 021.816.810.0

169.8

35.221 015 08.9

168.0

33 120.012 97 8

165 9

32 019.411.87 2

164.8

35 621.115.49.1

168.4

33.920.313.78.2

166 7

38 522.518 310.7

171 3

1954

32.319.815 19.2

163.3

33.720.516 510.0

164.7

32.019.614 89. 1

163.0

30.018.612.88 0

161 0

29 118.211.97 4

160.1

32 219.715 09.2

163.2

30.719.013.58.3

161 7

35.521.318 311.0

166 5

1955

41.622.519 710.7

184.2

44 023.622.211.9

186.6

42.422.920 611.1

185.0

40.222.018 410 1

182 8

39 321.617.59.6

181.9

42 723.020. 911.3

185.3

41.122.419.310.5

183 7

46 024.424.212.8

188 6

1956

40.220.619 09.7

195.2

43 021.721.811.0

198.0

41. 121.019 910.1

196.1

38 519.917 38 9

193 5

37 419.416.28.4

192.4

41.821.220.610.5

196.8

39.920.518.79.6

194 9

45.022.523.811.9

200 0

1957

39 719.618 89.3

202.9

43.020.922 110.7

206.2

40.719.919 89.7

203.9

37.818.816 98 4

201 0

36 318.215.47.7

199.5

41 620.320 710.1

204.8

39.319.418.49. 1

202 5

44.821.523.911. 5

208 0

1958

35.418.116.78.5

195.8

no c

19.419.910.0

198.9

36.218.417.69.0

196.6

33.317.214.77.6

193 7

31.816.513.26.9

192.2

36.918.718.39.3

197.3

34.717.816.18.3

195. 1

40.120.021.510.7

200 5

1959

45.420.622.210.1

220.8

48.421.625.211.3

223.8

46.220.823 010.4

221.6

43.119.719.99.1

218.5

41.819.218.68.6

217.2

46.621.023.410.5

222.0

44.620.321.411.0

220 0

49.922.126 711.9

225 3

1960

42.618.820.39.0

226.2

45.419.823.110.1

229.0

43.119.020.89.2

226.7

40.718.118.48.2

224.3

39.317.617.07.6

222.9

43.419.121. 19.3

227.0

41.518.419.28.5

225.1

47.020.424.710.7

230.6

1961

41.418.219.48.5

228.0

44.219.222.29.6

230.8

41.918.319.98.7

228.5

39.917.617.97 9

226.5

38.417.116.47.3

225.0

42 018.420 08.7

228.6

40.117.718.18.0

226.7

45.819.723.810.2

232.4

1962

44.418.222.39.1

244.1

49.619.927.411.0

249.3

47.219.125.010.1

246.9

45.018.422.89.3

244.7

43.417.921.28.7

243.1

47.319.125.110.2

247.0

45.218.523.09.4

244.9

51.420.529.211.6

251. 1

Including corporate inventory valuation adjustment and excluding profits originating in the rest of the world.

Source: U.S. Department of Commerce, Office of Business Economics.


12 SUEVEY OF CURRENT BUSINESS October 1063

In the basic calculations, lives 25percent longer than tax lives have beenapplied also to the other depreciationformulas and valuation procedures dis-cussed previously in the text. All ofthese additional variants, which arenot shown in this report, exhibit thecommon pattern of retardation ofprofits.4

Appendix

This appendix outlines the procedures usedto derive the profits variants in the article.The national income version of corporateprofits is not discussed here since the assump-tions and data embodied in it are describedelsewhere.5

The corporate profits series based on variousvaluation bases, service lives, and depreciationformulas were obtained by executing the follow-ing steps:

1. Series were prepared for (a) total non-farm, nonresidential capital consumptioncharges,6 and (b) corporate depreciationcharges, including farms and residences,based on the straight line method, historical-cost valuation, and service lives used for taxpurposes. This was done by adjusting theseries underlying the national income accountsto eliminate the effects of major legal andadministrative changes affecting depreciationaccounting: the accelerated amortization ofdefense facilities authorized in World War IIand the Korean War, the permission to usedouble-declining or sum-of-the-years-digitsmethod in 1954, and the reduction in servicelives authorized by Guidelines in 1982.

2. From the depreciation variants in TheCapital Goods Study7 a depreciation seriesfor nonfarm, nonresidential structures andequipment which was highly correlated withthe series defined in l(a) was selected. Thisseries was based on the following assump-tions: straight line depreciation, historicalcost valuation, and service lives 20 percentshorter than Bulletin F lives.

3. Forty-four additional depreciation vari-ants for nonfarm, noresidential structures and

4. None of the profit variants published in this articlecorresponds precisely to the series that would emerge if thelives suggested by the Treasury Guidelines had been used tocalculate depreciation throughout. A comparison of theseries based upon current tax practice with those based uponlives 25 percent shorter probably gives the closest approxima-tion that can be found in this report to the effects of Guidelineson service lives.

A comparisDn of corporate earnings based on straight linedepreciation, and historical cost valuation reveals a differenceof $2.3 billion between the tax service life and the 25 percentshorter than tax lives variants in 1962. A similar comparisonbetween the two service life assumptions for the double-declining balance depreciation method and historical castvaluation yields a difference of nearly $2 billion. Thesefigures cannot be compared directly with the estimates thathave been made of the effects of Guidelines on reportedcorporate depreciation and profits. However, they appearto be of the same order of magnitude.

5. U.S. INCOME AND OIH PUT, U.S. Department ofCommerce, Office of Business Economics, Washington, D.C.1958; NATIONAL INCOME, 1954 Edition, A Supplementto the SURVEY OF CURRENT BUSINESS, U.S. Department ofof Commerce, Office A Business Economics, WashingtonD.C.; and Robert E. Graham, Jr. and Jacquelin Bauman,op. tit.

6. This capital consumption series excludes chargesattributable to accidental damage but includes depreciationcapital outlays charged to current expense for railroad in-vestment and passenger cars which had not been previouslyincluded in the capital consumption series in the nationalincome accounts.

7. This study is described in the article by Jaszi. et al. towhich reference has been made.

equipment were then selected from TheCapital Goods Study. These were based onvarious combinations of straight line, double-declining and triple-declining balance methods,historical cost and two types of current costvaluation bases, and five different service lifeassumptions.

4. The ratios of all variants in (3) to thedepreciation series defined in (2) wrere calcu-lated. These ratios cover nonfarm, non-residential depreciation.

5. Each ratio in (4) was then multiplied bythe series defined in l(b). This yielded 44alternative estimates of corporate deprecia-tion covering all depreciation in the corporatesector. The shortcut procedure implied forcorporate farm and residential depreciationis justified by the smallness of these twoitems.

6. Total corporate depreciation charges,unadjusted for tax changes, were then addedback to the corporate profits that are com-puted for the national income accounts.

7. From the gross corporate profits seriesin (6) the alternative depreciation seriesdeveloped in l(b) and (5) were deducted.This produced 45 alternative profit series,each based on a different set of assumptionsconcerning the accounting for depreciationcharges. Only eight of these are discussedin the text. The others are available forexamination.

Manufacturing Output

(Continued from p. 4}

Total new bookings for metal-cuttingarid forming tools received by machinetool builders have been running wellabove year-ago levels. From Januarythrough August new domestic orderswere one-fourth above those in thecomparable 1962 period and the highesttotal for the period since 1957. Back-logs for metal-cutting tools expandedto 5.6 months of shipments at theAugust rate of deliveries—up from 4.2at the beginning of the year and 4.1 inAugust 1962.

Output of freight and passengerequipment—aircraft, motor trucks,ships, and railroad equipment—showedlittle change through May and thenadvanced sharply, mainly as a resultof a large increase in motor trucks. Innonautomotive equipment lines, over-all activity showed little change fromJanuary to August. In the case ofrailroad freight cars, deliveries to ClassI railroads in the first 8 months of theyear were only slightly above the yearearlier period but there was some im-provement during the summer months.New bookings for freight cars were 40percent higher and backlogs, while still

very low relative to the late 1950;s,also advanced. The prospective in-crease in shipments is a reflection of theimprovement in railroad earnings, whichhas been underway for the past year orso. Total capital expenditures of rail-roads this year, it may be noted, areprogrammed at $1.1 billion, a 25-percentincrease over 1962, with the bulk of therise earmarked for equipment purchases.

In the commercial equipment sector—office, service, and telephone equip-ment, fixtures and office furniture—output peaked in the summer monthsof 1962, continued on a high plateauthrough December, and then tendeddownward this year to a rate 2 percentunder the July 1962 peak. The smallreduction in output followed an almostuninterrupted 4-year rise which liftedthe commercial equipment index some60 percent over this period, by far thelargest increase in the business equip-ment sector.

Output of farm machinery, while fol-lowing an erratic pattern so far thisyear, has been running well above lastyear's production. For the first 8months, output was 14 percent abovethe same period last year and 10 percenthigher than the average for all of 1962.

Current cyclical upturn in perspec-tive

The present cyclical upswing inmanufacturing production which beganin February 1961 has now extendedover a period of 32 months. This is11 months longer than the entire ad-vance of the 1958-60 upturn and 2months less than the full 1954-57expansion. The 1949-53 rise, whichencompassed 3 years of the Koreancrisis, lasted 50 months. It should bepointed out that within the longerrecoveries there have been periods ofvarying duration during which outputremained relatively flat, as was thecase in the second half of 1962 and thesummer of 1963. The increase in out-put over the latest 32-month period hasamounted to 23 percent. This risematches the relative advance after 32months in the 1954-57 upturn but fallsshort of the rise during the Koreanperiod.


by FRED CUTLER and SAMUEL PIZER

Foreign Operations of U.S. IndustryCapital Expenditures, Sales, and Financing

JL HE latest survey of the foreignoperations of U.S. industrial firms,1 con-ducted in the summer months by theOffice of Business Economics shows thefollowing principal developments:

(1) An increase of 8 percent in plantand equipment expenditures abroadfrom 1962 to 1963, to a total of $4.9billion, with the largest gain in thepetroleum industry. For 1964, thecompany projections indicate some re-ductions in outlays, but a continuedhigh rate of growth in foreign pro-ductive capacity.

(2) Sales of the foreign manufactur-ing units reached $28.1 billion in 1962,an increase of $2.5 billion from theprevious year. Outstanding increaseswere reported for chemicals, electricalmachinery and automobiles. Of thetotal sales, $1.4 billion were exports tothe United States and $3.2 billion wereexport sales to third countries (i.e, weresold to foreign countries other than thecountry of production).

(3) Financing of the foreign affiliatesshifted increasingly to non-U.S. sources.A total of $5.8 billion was required tofinance mining, petroleum and manu-facturing operations abroad in 1962(apart from dividends and branchprofits paid out). Of this total, 16percent was supplied directly fromparent companies and other U.S.sources, by far the lowest proportionsince the collection of these data beganin 1957. About 60 percent of thefinancing required was supplied frominternal sources of the foreign affiliates

1. A representative sample of large U.S. firms (exceptthose in finance or shipping abroad) having foreign branchesand subsidiaries is covered, and the results are expanded touniverse totals for certain key categories. Data for plantand equipment expenditures are expanded for all industriesby area, but country detail is developed only for the threemajor industries, manufacturing, mining and smelting, andpetroleum; data for sales are given only for the manufactur-ing sector; data for sources and uses of funds are derivedonly as area aggregates for the three major industries.

(earnings and depreciation charges),and about 25 percent from externalcapital sources abroad.

In the following article these majoraspects of the foreign operations ofU.S. companies are examined in some

CAPITAL EXPENDITURES ABROAD BY

U.S. MANUFACTURING COMPANIES

• Outlays Are Projected to Rise in Most Areas• Planned Common Market Expenditures Dip

From High Level

Million $600

400

200

,̂ Canada

>/ / fr*+• Common Market f v%>** X * & S

'

Other Europe

Other Areas

0 I I i 1 ( I 1 1

Chemicals Show Strong Growth

6 0 0 r ; &'Transportation Equipment >?• *tf

^ ^».

Othe

400

200

Primary & Fabricated Metals

I I I I I1957 58 59 60 61 62 63


detail. This discussion is closely re-lated to the article on internationalinvestments published in the AugustSURVEY OF CURRENT BUSINESS, whichgave data on net capital flows, bookvalue, and income as used in thebalance of payments accounts. Toround out the information necessaryto evaluate the overall effects of theexpansion of producing units operatedby foreign subsidiaries and branches ofU.S. firms, a new annual survey isbeing initiated giving data on exportsfrom the United States to these foreignaffiliates.

Plant Expansion Abroad

At midyear, U.S. firms estimatedthat expenditures for property, plantand equipment by their foreign affiliateswould exceed $4.9 billion during 1963,about 8 percent more than in 1962.This would represent a high volume ofcapital outlays and compares with $4.8billion in 1957, when these surveysbegan. At the same time, companiesprojected a decline for 1964 to $4.5billion. Actual expenditures in 1962were $4.6 billion, slightly less than the$4.8 billion previously projected forthat year. Manufacturing investmentsexceeded projections, while petroleumoutlays fell short.

In the past few years projectedexpenditures for manufacturing com-panies have been on the low side; thissuggests that final totals for thisindustry in 1963, as well as in 1964,may turn out to be higher than nowprojected. On the other hand, pro-jections of future capital outlays byoil companies have consistently ex-ceeded actual investment experience.For mining companies, little divergencehas been observed between actual andprojected capital outlays. It is not

13Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

14 SURVEY OF CURRENT BUSINESS October 1963

yet possible to derive correction factorsfor these projections of foreign outlays.

Actual and Projected Plant and EquipmentExpenditures Abroad, 1960-64

[Millions of dollars]

Manufacturing

Actual expendituresExpenditures as pro-

jected 1 year aheadExpenditures as pro-

jected 2 years ahead..

Petroleum



jected 2 years ahead _ _

Mining and smelting



jected 2 years ahead..

1960

1.337

1,314

na

1, 467

1,575

na

426

358

na

1961

1, 697

1,755

na

1,534

1,776

na

312

438

na

1962

1,949

1,866

1,706

1,633

1,829

1,794

371

395

407

1963

2, 057

1,735

1,950

1,811

321

343

1964

1,971

1,653

258

na = Not available.

Manufacturing investments stillrising

In 1963, for the first time, capitaloutlays by U.S. controlled foreign man-ufacturing companies are expected toexceed $2 billion despite a leveling ininvestments by European affiliates,which are barely topping 1962 outlays.In other areas, however, investmentactivity appears to be stronger, particu-larly in Canada and Latin America,since 1963 outlays are expected toexceed the previous year's total byabout $50 million each.

The chemical industry which israising capital investments by morethan $150 million this year, accountsfor the major change in the manufac-turing total. Outlays by other manu-facturing industries are currentlyrunning near or below the 1962 levels.Capital investments in the transporta-tion equipment industry, which hadbeen rising rapidly in earlier years, arenow $60 million below the 1962 amountswith Common Market countries show-ing a drop of more than $80 million,now that major expansion aims appearto have been met. However, thesefigures do not include purchases byU.S. companies of existing enterprisesor minority interests.

New investment in Europe, whichhad risen by about $100 million in1962, remains practically unchanged atbetter than $950 million in 1963, alittle under half of the world total. A

decline in Common Market countriescaused by a drop of investments in thetransportation equipment industry isbeing balanced by higher outlays inother European countries, primarily inthe United Kingdom. Plant andequipment expenditures by chemicalcompanies (including sizable amountsfor petrochemical firms largely financedby oil companies) are rising by morethan 50 percent.

New capital investments in theUnited Kingdom and in Germany willaccount for over two-thirds of the fundsnow being invested by U.S. controlledcompanies in Europe. Higher outlaysin 1963 were reported for other CommonMarket countries, except France, withinvestments for new chemical and othermanufacturing facilities rising by morethan 50 percent.

Not much change is foreseen bycompanies in projecting 1964 capitalspending for Europe; chemical com-panies expect to raise investmentsfurther, but companies in the trans-portation equipment industry (pri-marily automobiles) predict anothercut in their capital investment programs.

U.S. companies reported spendingfor new plant in Canada at the rate of$520 million in 1963, 10 percent morethen expenditures in 1962. This rela-tive increase is in line with projectionsfor all of Canadian industry. ForU.S. companies there is a strong risein outlays by chemical companies,which accounted for 25 percent of allU.S. manufacturing expenditures.

In Latin America, as in Canada,renewed highs for capital spending aretied to the rapidly expanding chemicalcompanies, which expect to show a riseof 60 percent over 1962, to account forone-third of all manufacturing spendingby U.S. companies in Latin America.

Most of the increase in manufactur-ing investment in Latin America iscentered on Mexico, where expendi-tures for plant and equipment arerising rapidly; the total for 1964 nowpredicted is double 1962 outlays. In-vestments in other countries in SouthAmerica and the Caribbean area, bol-stered by a few major projects forfertilizer and other chemical plants inArgentina and Trinidad, showed littlechange for the year. The decline in

1964 totals is caused primarily by thecompletion of some of these majorprojects, rather than by a widespreaddecrease of investment activity, andremains well above the average of the1957-62 period despite the disturbedpolitical and economic conditions insome of these countries. Projectedexpenditures in Argentina are particu-larly affected by project terminations,and are dropping by 40 percent between1962 and 1964. Outlays in Brazil in1964 are expected at the 1962 level,somewhat down from the $80 millionfor 1963.

In the rest of the world (Africa, Asiaand Oceania), a sustained growth ofmanufacturing investments continues,with an increasing volume of invest-ments going into the automotive andmachinery industries, and into petro-chemical and other chemical plants.About one-half of these outlays arebeing made in Australia, and invest-ment spending is substantial in Japanand India.

MANUFACTURING

CAPITAL EXPENDITURES BY U.S.

COMPANIES HERE AND ABROAD

' Relative Movements of Plant andEquipment Outlays

1957=100

160

140

120

100

80

60

120

100

80

60

1957 58 59 60 61 62 63

* Excludes primary Iron & Steel, & Petroleum

U.S. Department ot Commerce, Office of Business Economics 63-10-9

PETROLEUM AND MINING

I J_ I I J_


October 1963 SURVEY OF CUKEENT BUSINESS 15

Petroleum investments expanding

Oil companies report current spend-ing for plant and equipment of $2billion for 1963 and project expendi-tures of $1.7 billion for 1964, notgreatly different from the 1958-62average. In addition to these capital-ized expenditures and investments,companies also charged against incomecertain exploration and developmentcosts. Figures for 1962 are shownbelow.

Exploration and Development ExpendituresCharged Against Income, 1962

[Millions of dollars]

All areas

CanadaLatin America ._. -..EuropeOther areas . ---

Total

411

1579320

141

Petro-leum

371

1278720

137

Mining

40

306

(x)4

(x) Less than $500,000.

Most of these investments and ex-penditures are being made in the EasternHemisphere, reflecting the continuedconstruction and expansion of oil refin-ing facilities in Europe and other areas,particularly the Far East, and thebuildup of related transportation andmarketing operations. Investment andexpenditures made for

Survey of Current Business October 1963 - FRASER...SURVEY OF CURRENT BUSINESS OCTOBER 1963 VOL. 43,...

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