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Authorized for public release by the FOMC Secretariat on 2/3/2021

BOARO OF GOVERNORS
OF THE

FEDERAL RESERVE SYSTEM
WASHINGTON, D.C. 20551

December 18, 1975

CONFIDENTIAL (FR)
CLASS II-FOMC

To:

Federal Open Market Committee

From:

Murray Altmann

Attached for your information is a copy of a briefing
on corporate profits presented to the Board of Governors on
December 8, by Mrs. Martha Scanlon.

Also attached is a

follow-up memorandum to Chairman Burns from Mrs. Scanlon.
These materials are being circulated to the Committee
in accordance with
last FOMC meeting.

Attachments

the

instructions of the Chairman at the

Authorized for public release by the FOMC Secretariat on 2/3/2021

Board Briefing
Martha Scanlon
December 8, 1975

CORPORATE PROFITS

Corporate profits, by whatever concept measured, increased
very substantially in the third quarter.

Based on preliminary

Department of Commerce estimates, the increase was close to 20 per
cent at a quarterly rate.

Whereas, normally, profits tend to react

strongly to changes in economic growth, the magnitude of the recent
recovery in earnings is greater than in previous postwar recessions.
This strength reflects the unusually strong increase in GNP in the
third quarter, corporate pricing policies, and large productivity gains.
To place current profit movements in perspective, it is
useful to compare the recent downturn and subsequent surge with profit
behavior in previous postwar cycles.
are shown in Chart 1.

Corporate profits in recent years

The top line of the chart is profits before

taxes for all corporations; the second line is profits before taxes
for domestic nonfinancial corporations (foreign and financial institution
profits are excluded); the third line is profits before taxes, excluding
inventory profits, for domestic nonfinancial corporations.
As indicated by the top two lines of the chart, total profits
of corporations have shown considerable volatility in the recent downturn and recovery.

Following record highs in the third quarter of 1974,

profits for all corporations fell approximately 36 per cent below this
peak in the following two quarters.

Nonfinancial corporations recorded

Authorized for public release by the FOMC Secretariat on 2/3/2021

an even larger decline of 42 per cent between the third quarter of last
year and the first quarter of this year.

The magnitude of these declines

is much larger than in any previous post war recession.
However, as you are aware, corporate profits in 1974 were
greatly inflated by the rise in inventory profits.

The very rapid

reduction in profits in the current recession primarily was due to the
marked shrinkage in

these inventory profits, which dropped from an annual

rate of $51 billion in the third quarter of 1974 to $7 billion in early
1975.

In the last two quarters, inventory profits have risen somewhat,

but they still remain well below their 1974 levels.
When inventory profits are excluded--as in line 3 of the
chart--the figures indicate much more modest declines in operating
profits or profits plus IVA.

For nonfinancial corporations, pretax

profits plus IVA fell approximately 10 per cent in the most recent
downturn.

This contrasts with previous recessions, when such profits

declined between 16 and 30 per cent.

Moreover, in most instances, the

decline in real product was considerably less severe during these earlier
cycles.
On the other hand, the surge in earnings in the last two
quarters has been much stronger than in any other postwar recovery,
whether inventory profits are included or excluded.

Chart 2 shows the

percentage increase in nonfinancial corporate profits excluding inventory

Authorized for public release by the FOMC Secretariat on 2/3/2021

gains for the six postwar recovery periods.

Starting from the profit

trough (which is plotted at the origin), the chart indicates the
cumulative percentage increase in profits that occurred in subsequent
quarters of the recovery period.
dashed line on the chart.

The latest recovery is shown by the

The profit low in this recession came in

the first quarter of this year.

One quarter later, profits had risen

14 per cent above this low; and the third quarter preliminary
estimates are 40 per cent higher than the first quarter trough.
For other postwar cycles, the recovery in profits was much less
rapid.

In 3 out of 5 postwar recoveries, pretax profits plus IVA were

less than 40 per cent above their trough 4 quarters later.

Thus, it

appears that a substantial amount of the recovery in profits that is
typical for economic upturns in general has already occurred in the early
stages of the current recovery.
The third quarter surge in profits reflects partly an increase
In addition, there has been a substantial jump

in total real output.

in the share of corporate output represented by profits.
illustrated in Chart 3.

This is

Profit share, as shown in Chart 3, is defined

as the ratio of pretax domestic profits plus IVA to gross product
originating in the nonfinancial corporate sector.
As the chart indicates, there is a strong cyclical movement
in this measure as well as a longer run downtrend.
this ratio has fluctuated around a depressed level.

Since 1969,
The profit

Authorized for public release by the FOMC Secretariat on 2/3/2021

-4-

share generally declines in a recession as a result of rising unit
costs; and rises in a recovery as productivity gains accompany rising
output.

In the most recent cycle, there has been less of a decline in

the profit share during the downturn than in other postwar recessions;
while the subsequent rise has been much more rapid than in previous
strong cyclical recoveries.
In part, this movement in profit shares relects the
behavior of corporate prices in the most recent cycle.

Despite large

amounts of excess capacity and slack in the economy, there has been
less price decline and more price increase than in previous postwar
cycles, suggesting manufacturers have been more successful in maintaining
profit margins during the downturn.

Morvover, in a number of industries

where margins had eroded, firms raised prices even with relatively
small or no gains in demand.

Furthermore, as a result of the unusually large increase in
real output early in the recovery, productivity has risen sharply--at
close to a 12 per cent rate for nonfinancial corporations in the third
quarter.

These productivity gains contributed to the marked rise in

the profit share in the last quarter--to its highest level since 1969-and were only partly reflected in a reduction in the rate of inflation.

Authorized for public release by the FOMC Secretariat on 2/3/2021

Additional increases in the profit share are not expected to
be large.

As slack is taken up in the economy, further increases in

output will very likely be accompanied by much smaller increases in
productivity.
It should be noted that the surge in profits in the last two
quarters has improved over-all corporate cash flow and liquidity.
Liquidity ratios for nonfinancial corporations have returned to '73
levels from '74 lows.

But it is not clear how much additional rebuilding

of liquidity corporations intend.
It should also be noted that there has been considerable
divergence in the performance among individual industries.

In general,

preliminary data suggest the strongest increases in profits have been
registered in manufacturing--particularly among producers of durable
goods.

Railroads, airlines and utilities have also reported strong

gains.

But comprehensive data on individual industry performance will

not be available until a later date.
Before closing, I might add that major revisions in the
National Income Account figures are expected later this month.

These

revisions will affect the level and movements in corporate profits since
the late '50s, but my understanding is that the pattern of developments
shown in recent quarters will not be significantly changed.

Authorized for public release by the FOMC Secretariat on 2/3/2021
CHART 1
CORPORATE PROFITS
Seasonally Adjusted Annual Rates
Billions of dolars

Profits before taxes, all corporations
Profits before taxes, domestic nonfinancial corporations
Profits before taxes less inventory profits, domestic nonfinancial
corporations.

160

140

120

80

60

40

20

1969

1970

1971

1972

1973

1974

1975

Authorized for public release by the FOMC Secretariat on 2/3/2021
CHART 2
PROFITS IN CYCLICAL RECOVERIES
Cumulative Percentage Increase from Profit Trough

(Profits before taxes less inventory profits,
domestic nonfinancial corporations, SAAR)

Per cent
50

45

40

35

30

Date of
Profit Trough
1949
1953
1958
1961
1970
1975

Profit
Trough

+1

+3
+2
Quarter following Profit Trough

-

Profit decline in
Preceeding Year
(per cent)

IV
IV
I
I
IV
I

-19.6
-25.3
-28.5
-19.9
-16.5
-6.5

+4

Authorized for public release by the FOMC Secretariat on 2/3/2021

CHART 3
PROFIT SHARE
Domestic Nonfinancial Corporations
Per cent
50

Profit before taxes, less

25

inventory profits as a per cent

of gross product originating
in the nonfinancial corporate

20

sector.

15

10

1948

52

50

54

56

606264666870727458

Authorized for public release by the FOMC Secretariat on 2/3/2021

BOARD OF GOVERNORS
THE
OF

FEDERAL RESERVE

SYSTEM

Office Correspondence
TO

Chairman Burns

From

Martha Scanlon

Date

Subject:

Corporate

December 9, 1975
Profits

At Monday's briefing on corporate profits, the question was
raised about movements in profits after taxes.

(The charts used in

the briefing showed changes in profits before tax or PBT.)

Attached

are three charts identical to those shown in the briefing, but which
are based on after tax profits (PAT).

For comparison, a copy of the

briefing and charts showing movements in pretax profits are also
attached.
Changes in PAT reflect essentially the same behavior as
pretax profits.

In particular, total profits after tax declined

sharply in the recent recession--more sharply than in previous cycles.
When inventory profits are excluded, however, PAT show a much more
moderate decline and more rapid recovery than in earlier cycles.
Since the third quarter of last year, PAT plus IVA have risen continuously,
reaching record levels in most recent periods.

Authorized for public release by the FOMC Secretariat on 2/3/2021
CHART 1A
CORPORATE PROFITS AFTER TAXES
Seasonally Adjusted Annual Rates

Billions of dollars
160

Profits after taxes, all corporations
Profits after taxes, domestic nonfinancial corporations
Profits after taxes less inventory profits, domestic nonfinancial
corporations.

120

100

80

60

40

1969

1970

1971

1972

1973

1974

1975

Authorized for public release by the FOMC Secretariat on 2/3/2021
CHART 2A
PROFITS IN CYCLICAL RECOVERIES
Cumulative Percentage Increase from Profit Trough

(Profits after taxes less inventory profits,
domestic nonfinancial corporations, SAAR)

Per cent
50

Date of
Profit Trough
1949
1953
1958
1961
1970
1975

Profit
Trough

3

-

IV
IV
I
I
IV
I*

Profit decline in
Preceeding Year
(per cent)
-20.0
-29.1
-27.0
-22.9
-12.2
27.3

+4

Quarter following Profit Trough
PAT plus IVA trough occurred in third quarter of
1974--a decline of 36 per cent from a year earlier. PAT plus IVA in the third quarter of
1975 were 128 per cent above the previous year low.

* Date of trough in profits before taxes.

Authorized for public release by the FOMC Secretariat on 2/3/2021
CHART 3A
PROFIT SHARE
Domestic Nonfinancial Corporations

1948

50

52

58

60

70

72

74