Returns for domestic nonfinancial business.

Hodge, Andrew W. ; Corea, Robert J. ; Green, James M. 等

THE PROFITABILITY of domestic nonfinancial corporations rose in 2011 for the second consecutive year, according to statistics from the Bureau of Economic Analysis (BEA). A similar but broader measure of profitability for nonfinancial industries--which includes proprietors' income--rose in 2010, the most recent year for which these statistics are available, after declining for 4 consecutive years.

Once a year, BEA reports on aggregate rates of return for domestic nonfinancial corporations, nonfinancial industries, and a few major industry groups--mining, construction, and utilities; manufacturing; wholesale and retail trade; and "other" nonfinancial industries. Various Q ratios, which compare the financial market value of assets with their replacement costs, are also presented.

These broad measures of profitability may be useful to economists and policymakers. They show differences in rates of return by industry group and annual changes in these rates of return. Industry sector performance is now available through 2010, and corporate performance is available through 2011. Thus, the statistics presented in this article show the full effect of the recent recession, and the corporate returns data capture 2 full years of the recovery through 2011.

The returns in this article are calculated as the ratio of the net operating surplus to the net stock of produced assets. For nonfinancial corporations, the net operating surplus is the return accruing to capital after labor costs, taxes on production and imports (less subsidies), consumption of fixed capital, and intermediate inputs are deducted from receipts. The net operating surplus is defined as the sum of corporate profits, net interest, and business current transfer payments (table 1). (1) Produced assets refer to the net stock of capital plus inventories valued at current cost.

These corporate returns statistics for 2008-2010 have been revised based on estimates from the national income and product accounts (NIPAs) and the fixed assets accounts. The statistics on industry returns are calculated using data from the annual industry accounts, the NIPAs, and the fixed assets accounts. To calculate the Q ratios, additional data were drawn from the Federal Reserve Board's flow-of-funds accounts.

Corporate returns

In 2011, corporate rates of return on both a before-tax and an after-tax basis rose for the second consecutive year. Before-tax rates of return rose 0.2 percentage point to 9.3 percent in 2011 after sharply increasing 1.6 percentage points in 2010 from the cyclical low of 7.5 percent in 2009 (chart 1 and table 2). Since 1970, before-tax corporate rates of return have remained in a range from a low of 6.5 percent in 1982 to a high of 10.7 percent in 1997.

Other measures of profits--such as BEA's measure of corporate profits from current production--have shown a rising economic share since 1970. The measures presented in this article exclude the volatile financial sector. They compare returns of nonfinancial corporations with their assets rather than with gross domestic product (GDP) or corporate value added. Business assets have grown at roughly the same rate as profits since 1970. Therefore, returns on assets have remained in a stable range since 1970, as shown in chart 1, which also shows net returns as a share of net value added.

Industry returns

Rates of return can also be calculated for industry sectors using data from the annual industry accounts, which provide annually updated data on 65 industries that together account for total economic activity. Similar to the method used to calculate the rates for nonfinancial corporations, the rates of return for industry sectors are calculated as net operating surplus divided by the net stock of produced assets.

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Like the net operating surplus of nonfinancial corporations, the net operating surplus of nonfinancial industries includes corporate profits, business transfer payments, and net interest. However, it also includes proprietors' income, which reflects the income of sole proprietorships and partnerships. (2) For this article, real estate, which includes owner-occupied housing, is excluded from the nonfinancial industry data to allow for a better comparison with the nonfinancial corporate returns data, which do not reflect home ownership.

Most of the difference between the total industry rates of return and the corporate rates of return can be attributed to the inclusion of net operating surplus and produced assets of proprietors in the industry estimates. However, several statistical differences between the annual industry accounts and the NIPAs also affect the estimates. Notably, the annual industry accounts include adjustments that (1) exclude the financial services-producing establishments of primarily nonfinancial corporations and (2) include the nonfinancial services-producing establishments of primarily financial corporations as well as a share of the NIPA statistical discrepancy. Despite the differences between the total industry rates and the pretax corporate rates, the annual patterns of change of each are similar (chart 2).

After declining for 4 consecutive years, the rates of return to total nonfinancial industries increased 2.3 percentage points to 13.9 percent in 2010. Similarly, the nonfinancial industries' share of net value added increased 2.8 percentage points to 24.5 percent in 2010 from 21.7 percent in 2009.

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Specific industry groups

Along with the total returns for nonfinancial industries, returns were calculated for the following four nonfinancial industry groups: mining, construction, and utilities; manufacturing; wholesale and retail trade; and "other" nonfinancial industries (table 2 and chart 3). (3)

For all four industry groups, rates of returns increased in 2010. The manufacturing industry group had the largest increase, 5.3 percentage points, growing to 19.5 percent in 2010 from 14.2 percent in 2009. For the manufacturing group, the 2010 rate of return was the highest for all years in the series. Mining, construction, and utilities experienced the slowest growth among the four industry groups; the rate of return was 5.8 percent in 2010, up 0.5 percentage point from 5.3 percent in 2009.

Similar to the industry groups' rates of return, their shares of net value added also increased. The manufacturing industry group had the largest increase, 6.7 percentage points, growing to 38.7 percent in 2010 from 32.0 percent in 2009. The "other" nonfinancial industries group had the slowest growth; the share was 21.8 percent in 2010, up from 20.0 percent in 2009.

Rates of return were also calculated for information-communication-technology (ICT)-producing industries. (4) The returns for these industries increased 8.6 percentage points to 32.4 percent in 2010 from 23.8 percent in 2009, the second consecutive year of growth. The notable increase reflects an increase in net operating surplus and a decrease in produced assets. Likewise, the ICT share of net value added increased for the third straight year, increasing 4.9 percentage points to 30.4 percent in 2010 from 25.5 percent in 2009.

Users may find these consistent series of nonfinancial industry rates of return and capital stock helpful for comparative studies. For example, from 2006 to 2010, the mining, construction, and utilities industry group consistently had the lowest rates of return, reflecting the highest average percentage growth in produced assets, which grew at an annual rate of 4.9 percent. Conversely, returns to the manufacturing industry group regularly exceeded the national average, reflecting slow growth (an average of just 2.4 percent) in produced assets over the period.

Q ratios

Tobin's Q, or simply "Q," is the ratio of financial-market valuation of corporate assets to the current-cost value of the assets. A Q ratio above 1 indicates that financial markets value corporate assets above the replacement costs; as a Q ratio rises above 1, companies may be more inclined to make direct investments in plant and equipment. A value of Q below 1 indicates that the financial markets value corporate assets below the replacement costs; as Q falls below 1, companies may be more inclined to buy other companies for their capacity than to make direct investments.

Three Q-type ratios for domestic nonfinancial corporations are defined as follows:

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

* Q2 adds the book value of outstanding corporate bonds to the numerator used in Q1. The inclusion of bonds makes Q2 a more complete measure of invested capital, but including them at historical cost is clearly inconsistent with the underlying rationale for Q, which is to provide a comparison of market valuation with replacement cost.

* Q3 adds an estimate of the market value of outstanding corporate bonds and net liquid assets to the numerator used in Q1. (5)

All three Q ratios reached record highs in 1999 since BEA began reporting this series (chart 4 and table 3). By 2008, all three Q ratios reached record lows for the decade, and Q1 and Q3 fell below 1, partly reflecting the recession-related stock market declines. All three ratios were also depressed because the capital stock (the denominator) continued to grow, though at lesser rates, in 2007 and 2008. The capital stock used for these calculations, which are not adjusted for inflation, had grown in every year since 1960 until a decline in

2010. In that year, the lagged effect of reduced new fixed asset investments in dollar terms combined with a reported dollar inventory decline reduced the dollar value of the produced asset capital stock by $98.9 billion, or 0.8 percent.

The stock market recovery began in April 2009, and financial asset values for all three measures were higher on average in 2009 and 2010. By 2010, the three Q measures had further recovered to levels that ranged from 0.85 for Q3 to 1.48 for Q2, though still below the 2007 levels. In 2011, all three Q measures declined, to 0.74 for Q3, to 1.42 for Q2, and to 1.05 for Q1. Financial asset values for the three reported measures were roughly unchanged, and the stock market component was down only 1.0 percent. However, all three Q ratios declined because of the renewed rise of the produced asset capital stock denominator, which was up 5.5 percent in 2011.

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(1.) Corporate profits and net interest are based on tabulations of "company" data rather than "establishment" data. As a result, net operating surplus of nonfinancial corporations includes the income earned by the corporation's financial services-producing establishments, and it excludes income earned by the nonfinancial establishments of financial corporations.

(2.) Proprietors' income reflects both the return accruing to capital and the return to proprietors' and partners' labor, but these returns are not identified in the data.

(3.) The "other" nonfinancial industry group consists of agriculture, forestry, fishing, and hunting; transportation and warehousing; information; rental and leasing services and lessors of intangible assets; professional and business services; administrative and waste management services; educational services, health care, and social assistance; arts, entertainment, recreation, accommodation, and food services; and other services, except government.

(4.) This industry group consists of computer and electronic products; publishing industries (includes software); information and data processing services; and computer design and related services. Computer and electronic products are included in the manufacturing group; the other ICT-producing industries are included in the "other" nonfinancial industries group.

(5.) The market value of bonds outstanding is approximated by a procedure developed by James Tobin and Dan Sommers. In brief, the process begins with published book values of bonds outstanding and the assumption that a bond matures in 10 years and carries a coupon rate equal to the Baa rate that prevailed in the year the bond was issued. Net liquid assets are estimated as financial assets less liabilities other than municipal securities, corporate bonds, and mortgages. The data are from the Board of Governors of the Federal Reserve System, Flow of Funds Accounts of the United States, statistical release Z.1 and "Selected Interest Rates," statistical release H.15 (Washington, DC: Board of Governors). The data are available at www. federalreserve.gov/releases/Z1 and www.federalreserve.gov/releases/h15.

Table 1. Net Operating Surplus and Produced Assets of Domestic
Nonfinancial Corporations and Nonfinancial Industries, 2000-2011

[Billions of dollars]

                                    Nonfinancial Industries

       Nonfinancial      Total     Mining,        Manu-     Wholesale
       corporations               utilities,    facturing   and retail
                                     and                      trade
                                 construction

                         Net operating surplus (before tax)

2000          708.2    1,320.1          197.9       298.8        219.4
2001          626.7    1,310.4          204.5       248.7        215.2
2002          647.1    1,395.6          181.6       272.3        221.8
2003          699.2    1,492.3          215.9       269.5        237.8
2004          877.5    1,756.4          257.0       373.7        248.6
2005        1,025.1    1,900.9          279.1       432.9        260.9
2006        1,163.7    2,017.5          303.7       482.7        273.5
2007        1,137.4    2,109.5          293.7       507.4        285.9
2008        1,070.8    2,040.3          278.4       422.7        255.2
2009          964.2    1,849.8          186.0       411.4        263.4
2010        1,167.8    2,216.8          201.8       560.0        311.7
2011        1,260.2        ...            ...         ...          ...

                   Produced assets, average of yearend values

2000        8,219.5   10,036.4        1,736.4     2,200.7      1,698.8
2001        8,648.3   10,574.7        1,859.1     2,253.4      1,760.8
2002        8,952.1   10,973.8        1,989.1     2,275.2      1,802.9
2003        9,238.2   11,360.3        2,096.4     2,290.4      1,877.3
2004        9,746.6   12,019.3        2,267.4     2,350.2      2,007.0
2005       10,550.8   13,030.7        2,565.9     2,474.8      2,179.7
2006       11,405.9   14,101.2        2,884.9     2,610.7      2,339.4
2007       12,155.1   15,048.0        3,161.3     2,762.1      2,477.4
2008       12,838.6   15,900.0        3,447.9     2,899.1      2,577.9
2009       12,906.1   16,004.0        3,501.7     2,900.0      2,537.5
2010       12,807.2   15,913.5        3,493.0     2,875.5      2,503.9
2011       13,507.5        ...            ...         ...          ...

         Nonfinancial Industries

         Other        Addendum:
       industries   ICT-producing
          (1)        industries
                         (2)

2000        604.0           -28.2
2001        642.1           -45.3
2002        719.9            33.2
2003        769.1            55.5
2004        877.1            98.9
2005        928.0           118.3
2006        957.7           115.9
2007      1,022.5           112.2
2008      1,084.1           114.6
2009        989.0           134.1
2010      1,143.3           179.6
2011           ...               ...

Produced assets, average of yearend values

2000      4,400.6           413.4
2001      4,701.5           448.0
2002      4,906.7           455.9
2003      5,096.3           453.6
2004      5,394.8           464.1
2005      5,810.3           486.0
2006      6,266.3           510.3
2007      6,647.2           534.1
2008      6,975.2           559.6
2009      7,064.9           564.2
2010      7,041.0           554.1
2011           ...               ...

1. Consists of agriculture, forestry, fishing and hunting;
transportation and warehousing; information; rental and leasing
services and lessors of intangible assets; professional,
scientific, and technical services; administrative and waste
management services; educational services; health care and social
assistance; arts, entertainment, and recreation; accommodation
and food services; and other services, except government.

2. Information-communication-technology (ICT)-producing
industries consists of computer and electronic products;
publishing industries (includes software); information and data
processing services; and computer systems design and related
services. Computer and electronic products are included in
manufacturing; the other ICT-producing industries are included in
"other" industries.

Note. Industrywide net operating surplus for 2011 will be
available from the fall 2012 update of the annual industry
accounts.

Table 2. Rates of Return and Shares of Net Value Added for Domestic
Nonfinancial Corporations and Nonfinancial Industries, 2000-2011

[Percent]

        Nonfinancial     Nonfinancial Industries (before tax)
        corporations

       After   Before   Total     Mining,      Manufacturing
        tax     tax              utilities,
                                    and
                                construction

                                Rates of return

2000     6.5      8.6    13.2           11.4            13.6
2001     6.0      7.2    12.4           11.0            11.0
2002     6.1      7.2    12.7            9.1            12.0
2003     6.1      7.6    13.1           10.3            11.8
2004     7.1      9.0    14.6           11.3            15.9
2005     7.1      9.7    14.6           10.9            17.5
2006     7.5     10.2    14.3           10.5            18.5
2007     6.9      9.4    14.0            9.3            18.4
2008     6.6      8.3    12.8            8.1            14.6
2009     6.1      7.5    11.6            5.3            14.2
2010     7.3      9.1    13.9            5.8            19.5
2011     7.5      9.3     ...            ...             ...

Shares of net value added

2000    11.5     15.1    20.4           30.9            23.9
2001    11.2     13.6    20.0           30.5            21.3
2002    11.8     13.9    20.7           27.6            23.1
2003    11.7     14.5    21.1           30.3            22.5
2004    13.3     16.9    23.1           32.8            28.6
2005    13.5     18.4    23.5           32.7            31.2
2006    14.4     19.6    23.7           32.5            34.1
2007    13.8     18.6    23.6           30.8            34.9
2008    13.8     17.5    22.6           28.9            30.7
2009    13.8     16.8    21.7           23.5            32.0
2010    15.5     19.3    24.5           25.5            38.7
2011    15.9     19.8     ...            ...             ...

         Nonfinancial Industries (before tax)

       Wholesale      Other        Addendum:
       and retail   industries   ICT-producing
         trade         (1)        industries
                                      (2)

2000         12.9         13.7            -6.8
2001         12.2         13.7           -10.1
2002         12.3         14.7             7.3
2003         12.7         15.1            12.2
2004         12.4         16.3            21.3
2005         12.0         16.0            24.3
2006         11.7         15.3            22.7
2007         11.5         15.4            21.0
2008          9.9         15.5            20.5
2009         10.4         14.0            23.8
2010         12.5         16.2            32.4
2011

Shares of net value added

2000         17.9         18.1            -7.9
2001         17.4         18.4           -14.0
2002         17.6         19.8             9.1
2003         18.1         20.1            14.5
2004         18.0         21.3            22.6
2005         17.9         21.2            24.8
2006         17.8         20.7            23.3
2007         18.0         20.7            21.8
2008         16.4         21.2            21.9
2009         17.7         20.0            25.5
2010         19.9         21.8            30.4
2011

1. Consists of agriculture, forestry, fishing and hunting;
transportation and warehousing; information; rental and leasing
services and lessors of intangible assets; professional,
scientific, and technical services; administrative and waste
management services; educational services; health care and social
assistance; arts, entertainment, and recreation; accommodation
and food services; and other services, except government.

2. Information-communication-technology (ICT)-producing
industries consists of computer and electronic products;
publishing industries (includes software); information and data
processing services; and computer systems design and related
services. Computer and electronic products are included in
manufacturing; the other ICT-producing industries are included in
"other" industries.

NOTE. Industrywide rates of return for 2011 will be available
from the fall 2012 update of the annual industry accounts.

Table 3. Q-type Ratios, 1960-2011

       Q1 (1)   Q2 (2)   Q3 (3)            Q1 (1)   Q2 (2)   Q3 (3)

1960     0.77     0.93     0.75     1986     0.52     0.69     0.67
1961     0.90     1.07     0.89     1987     0.51     0.69     0.65
1962     0.85     1.02     0.86     1988     0.54     0.73     0.68
1963     0.90     1.07     0.92     1989     0.63     0.82     0.78
1964     1.01     1.18     1.05     1990     0.57     0.76     0.72
1965     1.08     1.25     1.12     1991     0.74     0.94     0.89
1966     0.87     1.04     0.94     1992     0.79     1.00     0.96
1967     1.03     1.21     1.11     1993     0.85     1.06     1.01
1968     1.12     1.30     1.20     1994     0.80     1.01     0.94
1969     0.86     1.03     0.95     1995     1.01     1.22     1.12
1970     0.78     0.96     0.86     1996     1.02     1.24     1.10
1971     0.84     1.03     0.92     1997     1.24     1.48     1.29
1972     0.97     1.15     1.03     1998     1.49     1.75     1.52
1973     0.68     0.86     0.74     1999     1.87     2.15     1.83
1974     0.39     0.55     0.41     2000     1.52     1.79     1.41
1975     0.46     0.62     0.57     2001     1.26     1.56     1.17
1976     0.52     0.67     0.68     2002     0.92     1.23     0.84
1977     0.41     0.56     0.53     2003     1.18     1.49     1.09
1978     0.38     0.53     0.50     2004     1.24     1.55     1.13
1979     0.40     0.53     0.52     2005     1.20     1.49     1.01
1980     0.46     0.58     0.57     2006     1.28     1.56     1.06
1981     0.37     0.48     0.49     2007     1.29     1.58     1.09
1982     0.38     0.50     0.51     2008     0.78     1.07     0.70
1983     0.43     0.55     0.55     2009     0.96     1.28     0.82
1984     0.39     0.52     0.51     2010     1.12     1.48     0.85
1985     0.46     0.60     0.60     2011     1.05     1.42     0.74

1. Q1 is the market value of outstanding equity divided by the
net stock of produced assets valued at current cost.

2. Q2 is the market value of outstanding equity plus book value
of outstanding corporate bonds divided by the net stock of
produced assets valued at current cost.

3. Q3 is the market value of outstanding equity plus market value
of outstanding corporate bonds plus net liquid assets divided by
the net stock of produced assets valued at current cost.