Returns for domestic nonfinancial business.

Lally, Paul R. ; Hodge, Andrew W. ; Corea, Robert J. 等

THE profitability of domestic nonfinancial corporations declined in 2007, both before-taxes and after-taxes, according to statistics from the Bureau of Economic Analysis (BEA). (1)

Aggregate rates of return for domestic nonfinancial corporations along with various Q ratios, which reflect the financial market value of assets relative to their replacement-cost value, are published annually by BEA. For the second year, BEA included statistics on the rates of return for major industries.

Taken together, these broad measures of profitability may be useful to economists and policymakers. These returns show which industries are gaining in returns and the relative volatility of returns, allowing for better comparisons.

The returns of nonfinancial corporations are based on preliminary estimates from BEA's national income and product accounts (NIPAs) and the fixed assets accounts. The industry returns estimates are calculated using additional data from BEA's annual industry accounts. To calculate the Q ratios, additional data were used from the Federal Reserve Board's flow-of-funds accounts.

Nonfinancial corporate returns

Aggregate returns. In 2007, the rates of return for nonfiancial corporations decreased both before- and after-taxes. Before subtracting taxes on corporate profits, the rate of return on capital for nonfinancial corporations decreased to 8.2 percent in 2007 from 9.0 percent in 2006 (table 1 and chart 1). After subtracting taxes on corporate profits, the rate decreased to 5.6 percent in 2007 from 6.5 percent in 2006.

With the decline in 2007, the pretax return remains well below the peak of 10.4 percent reached in 1997. More broadly, the pretax return has held in a range from 7 percent to 10 percent since 1968 (chart 1). Other measures of corporate profits have shown a rising trend over the last 30 years. However, this measure, which excludes the rapidly growing financial sector and compares returns against produced assets rather than GDP or corporate value added, shows a more stable range of profitability.

The return in this article is calculated as the ratio of the net operating surplus to produced assets. For non-financial corporations, the net operating surplus is the return accruing to capital after labor costs, intermediate inputs, and consumption of fixed capital are deducted from receipts. The net operating surplus can be measured as the sum of corporate profits, net interest, and business current transfer payments (table 2). (2) Produced assets refer to the net stock of capital plus inventories valued at current cost.

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 value of Q above 1 indicates that financial-markets value of corporate assets is above the replacement costs, reflecting the perceived potential for positive returns on the assets. Such a situation may induce businesses to invest in newly produced assets instead of acquiring assets at financial-market costs; alternatively, it may induce financial investors to reduce the prices that they offer for financial assets. Similarly, a value of Q below 1 indicates that the cost of purchasing a company's existing physical assets at financial market prices would be less than the replacement costs of those assets.

Three Q 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. (3) 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. It also subtracts land from the numerator (because land is not included in the denominator). (4)

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All three ratios trace similar patterns (chart 2 and table 3). They reached record levels in 1999; all three dropped sharply in 2000 and continued decreasing until 2002. In 2003-2004, results were mixed, two ratios increased, while one decreased. In 2005-2006, all three ratios decreased. In 2007, the pattern was mixed: Q1 decreased slightly, Q2 held steady, but Q3 dropped substantially as the estimated value of land increased more than enough to offset the combined increase in the market value of outstanding equities, in the book values of outstanding corporate bonds, and in the value of net liquid assets.

Q ratios alone provide a limited explanation of investment behavior. The record Q ratios of the late 1990s were associated with strong capital investment trends. Otherwise the long-term relation appears weaker. It may be that investment is partly related to the change in Q ratio: stronger when Q ratios are rising, and weaker when they are falling. For example, nonresidential fixed investment fell 4.2 percent in 2001 and 9.2 percent in 2002. While the Q ratios had fallen sharply, they remained historically high in these 2 years, still either well above or near 1.0, the theoretical point where new investment might be preferred.

Nonfinancial industry returns

Aggregate returns can also be calculated using data from BENs annual industry accounts. The industry rates of return, which include proprietors' income in industry net operating surplus, declined slightly in 2006 (table 2). (5)

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The pretax rate of return for nonfinancial industries declined slightly to 13.6 percent in 2006 from 13.8 percent in 2005. The annual industry accounts do not provide after-tax data. The industry rate of return for 2007 will be included with the December 2008 update of the annual industry accounts.

The inclusion of proprietors' income in industry net operating surplus clearly accounts for most of the difference between the industry rate of return and the corporation rate of return. However, several differences in definition and statistical methods 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 industry rate and the pretax corporation rate, the annual pattern of change of both is similar (chart 3).

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Specific industry groups

Returns were also updated for four broad nonfinancial industry groups: mining, construction, and utilities; manufacturing; wholesale and retail trade; and "other" nonfinancial industries.

Returns declined in 2006 in three of the four industry groups (chart 4). The sharpest decline was in the mining, construction, and utilities group; the return for this group fell 1.0 percentage point in 2006 after increasing in each of the preceding 3 years. Nonetheless, this was the only industry group whose 2006 return exceeded its 1997 return. Returns for the wholesale and retail trade group and the "other" nonfinancial industry group declined in 2006 for the second straight year. In contrast, the return for manufacturing industries increased in 2006 for the third consecutive year.

Returns were also calculated for the information-communication-technology (ICT) industries subset. (6) The return to ICT-producing industries increased in 2006 for the fifth consecutive year.

Users may find these consistent series of sector returns and capital stocks helpful for comparative studies. For example, ICT-producing industries had returns above the nonfinancial industries' average from 1997 to 1999. They also achieved the largest percentage growth in their investment stock, with produced assets up 38.6 percent in 1997 to 2001.

By 2001, however, ICT returns fell to -0.7 percent, the only sector with negative returns in 1997-2001. ICT returns recovered to 13.0 percent in 2006, still below the nonfinancial industries' average of 13.6 percent. ICT-producing industries' asset growth slowed to only 8.0 percent from 2002 to 2006, the smallest percentage increase of the reported sectors.

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(1.) Statistics for nonfinancial corporations for 2007 are based on preliminary data for the national income and product accounts, fixed asset accounts, and the flow-of-funds accounts.

(2.) 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. Corporate profits exclude profits earned by foreign subsidiaries of U.S. corporations but include profits earned by U.S. subsidiaries of foreign corporations.

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

(4.) 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. The value of land is estimated as the difference between the value of real estate and the value of structures. Net liquid assets is 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/Zl/> and <www.federalreserve.gov/releases/h15/>.

(5.) Industry rates of return are also calculated as the ratio of the net operating surplus to produced assets. For the industry return, the net operating surplus includes corporate profits, net interest, and business current transfer payments as well as proprietors' income, which mainly reflects the income of the unincorporated self-employed. In addition, real estate is excluded from the nonfinancial industry data--the net operating surplus and produced assets--to allow better comparison with the nonfinancial corporate returns data.

(6.) The subset of ICT-producing industries 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.

Table 1. Rates of Return and Shares of Net Value Added for Domestic
Nonfinancial Corporations and Nonfinancial Industries, 1997-2007

[Percent]

 Nonfinancial
 corporations

 Rates of return

1997 10.4
1998 9.7
1999 9.5
2000 8.6
2001 7.0
2002 7.3
2003 7.7
2004 9.1
2005 9.0
2006 9.0
2007 8.2

 Shares of net value added

1997 18.7
1998 17.2
1999 16.8
2000 15.2
2001 13.2
2002 13.8
2003 14.5
2004 16.7
2005 16.9
2006 17.2
2007 16.0

 Nonfinancial industries

 Mining,
 Total construction, Manufacturing
 utilities

 Rates of return

1997 14.9 10.4 16.4
1998 14.0 9.2 16.3
1999 13.6 9.8 15.3
2000 12.3 11.0 13.7
2001 11.7 11.0 11.2
2002 11.9 9.9 11.6
2003 12.8 11.7 11.3
2004 13.8 13.1 13.2
2005 13.8 14.0 13.4
2006 13.6 13.0 13.9
2007 ... ... ...

 Shares of net value added

1997 20.2 32.1 28.1
1998 22.0 28.8 27.8
1999 21.3 29.2 26.5
2000 19.5 30.6 23.8
2001 19.3 31.2 21.5
2002 19.7 29.4 22.2
2003 20.7 32.9 21.4
2004 22.2 35.9 24.3
2005 22.5 38.4 24.9
2006 22.3 37.4 24.9
2007 ... ... ...

 Nonfinancial industries

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

 Rates of return

1997 14.3 16.3 22.0
1998 12.5 15.3 18.8
1999 12.1 14.9 14.6
2000 10.2 13.1 4.6
2001 10.9 12.6 -0.7
2002 11.7 12.9 5.0
2003 12.1 14.1 7.6
2004 12.1 15.1 10.5
2005 11.6 14.8 12.1
2006 11.3 14.6 13.0
2007 ... ... ...

 Shares of net value added

1997 19.7 16.2 22.7
1998 17.5 20.1 18.9
1999 16.9 19.4 14.5
2000 14.8 17.4 4.6
2001 15.8 17.4 -0.9
2002 16.8 18.0 6.2
2003 17.3 19.3 9.2
2004 17.6 20.3 12.3
2005 17.3 20.1 13.7
2006 16.8 20.1 14.2
2007 ... ... ...

(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 producing industries
(ICT): 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 1CTproducing industries are included in "other'
industries.

NOTE. Industry-wide rates of return for 2007 will be available from
the December 2008 update of the Annual Industry Accounts.

Table 2. Net Operating Surplus and Produced Assets of Domestic
Nonfinancial Corporations and Nonfinancial Industries, 1997-2007

[Billions of dollars]

 Nonfinancial
 corporations

 Net operating surplus

1997 736.3
1998 717.4
1999 742.7
2000 716.5
2001 611.8
2002 650.8
2003 709.2
2004 879.9
2005 940.0
2006 1015.0
2007 981.6

 Produced assets, average of
 year-end values

1997 7,056.0
1998 7,419.0
1999 7,809.2
2000 8,295.2
2001 8,705.2
2002 8,950.8
2003 9,185.0
2004 9,682.7
2005 10,474.0
2006 11,261.6
2007 11,906.4

 Nonfinancial industries

 Total Mining,
 Construction, Manufacturing
 utilities

 Net operating surplus

1997 1278.1 164.0 320.1
1998 1257.5 151.7 331.3
1999 1288.5 166.7 322.4
2000 1243.7 194.5 300.2
2001 1243.9 208.5 251.1
2002 1301.6 197.5 261.5
2003 1435.7 240.4 255.1
2004 1646.6 291.9 306.0
2005 1776.4 353.5 325.4
2006 1888.1 368.7 354.8
2007 ... ... ...

 Produced assets, average of year-end values

1997 8,580.9 1,584.2 1,951.6
1998 9,011.4 1,649.8 2,030.7
1999 9,483.3 1,694.8 2,112.6
2000 10,074.4 1,776.0 2,195.8
2001 10,587.0 1,897.3 2,236.9
2002 10,919.2 1,985.8 2,247.2
2003 11,252.7 2,057.6 2,255.9
2004 11,896.2 2,231.8 2.3
2005 12,871.5 2,533.0 2,434.4
2006 13,868.6 2,826.4 2,551.5
2007 ... ... ...

 Nonfinancial industries

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

 Net operating surplus

1997 202.9 591.1 71.3
1998 188.1 586.4 65.8
1999 192.4 607.0 55.4
2000 174.2 574.9 19.2
2001 192.5 591.8 -3.2
2002 210.4 632.3 22.5
2003 225.3 714.9 33.8
2004 240.9 807.8 47.3
2005 247.5 850.1 56.5
2006 260.6 904.0 63.5
2007 ... ... ...

 Produced assets, average of year-end values

1997 1,422.5 3,622.8 323.7
1998 1,500.7 3,830.3 349.3
1999 1,595.2 4,080.8 378.5
2000 1,702.5 4,400.3 417.5
2001 1,762.6 4,690.2 448.8
2002 1,801.0 4,885.2 451.8
2003 1,867.4 5,071.8 445.3
2004 1,985.6 5,364.1 452.2
2005 2,141.7 5,755.7 467.6
2006 2,300.2 6,184.4 487.9
2007 ... ... ...

(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 producing industries (ICT):
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: Nonfinancial industries' net operating surplus will be
available from the December 2008 update of the annual industry
accounts.

Table 3. Q-type ratios, 1960-2007

 01 ratio Q2 ratio Q3 ratio
 (1) (2) (3)

1960 0.75 0.91 0.50
1961 0.88 1.04 0.64
1962 0.83 0.99 0.61
1963 0.88 1.04 0.68
1964 0.98 1.15 0.80

1965 1.06 1.22 0.88
1966 0.86 1.02 0.70
1967 1.02 1.20 0.88
1968 1.11 1.29 0.99
1969 0.85 1.02 0.73

1970 0.77 0.95 0.64
1971 0.83 1.02 0.70
1972 0.96 1.14 0.81
1973 0.68 0.85 0.52
1974 0.39 0.55 0.19

1975 0.46 0.61 0.35
1976 0.51 0.67 0.41
1977 0.41 0.56 0.31
1978 0.38 0.52 0.29

1979 0.39 0.52 0.30
1980 0.45 0.58 0.36
1981 0.37 0.48 0.28
1982 0.38 0.50 0.30
1983 0.44 0.55 0.34

1984 0.40 0.52 0.30
1985 0.47 0.61 0.39
1986 0.53 0.69 0.47
1987 0.51 0.69 0.45
1988 0.54 0.73 0.48
1989 0.63 0.83 0.59

1990 0.57 0.76 0.56
1991 0.74 0.94 0.79
1992 0.79 1.00 0.93
1993 0.85 1.06 1.00
1994 0.80 1.01 0.92

1995 1.01 1.22 1.12
1996 1.14 1.36 1.21
1997 1.38 1.61 1.41
1998 1.56 1.81 1.53
1999 1.94 2.21 1.84
2000 1.53 1.80 1.35
2001 1.24 1.54 1.11
2002 0.88 1.18 0.74
2003 1.09 1.41 0.93

2004 1.12 1.42 0.91
2005 1.04 1.32 0.79
2006 1.02 1.31 0.70
2007 1.01 1.31 0.58

(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 book value of
outstanding corporate bonds plus net liquid assets and less the value
of land divided by the net stock of produced assets valued at current
cost.