Earnings: Hitting Bottom

The recession that has now mercifully ended produced the worst earnings slump since the 1930s: between the third quarter of 1974 and the first quarter of this year, after-tax profits of the nation's corporations plunged 34%. Now there is solid evidence that the decline has at long last hit bottom. Manhattan's First National City Bank reports that during the second quarter, after-tax earnings of 912 large manufacturing firms rose 10% above the first quarter. Profits of nonmanufacturing companies, such as banks, utilities and retail chains, increased 15%.

Some of the biggest profits gains came in the machinery industry--up 25% from the first quarter, largely as a result of heavier demand for coal-mining and farm equipment. Food processing enjoyed a 33% rise, mainly because lower costs for sugar, wheat and shortening fattened profit margins. Another pleasant surprise: General Motors reported net income up more than 400% above the first quarter, and 8.8% ahead of a year ago, on the strength of a long-awaited pickup in its car sales. American Motors also showed a healthy increase: net income rose to $10.1 million, v. a $47.8 million first-quarter loss.

Of course, not all industries shared in the improved second-quarter performance. Steel profits were down 26% from the first quarter, utilities 8%, and aluminum and other nonferrous metal producers 11%. Airlines flew in the red because of high jet-fuel costs and an un-economically low percentage of filled seats. Overall, though, the Citibank study painted a brighter second-quarter earnings picture than many experts had expected. Says Citibank Economist Robert Lewis: "The upturn in earnings is further proof that the economy has begun to bounce back."

Some other surveys point to a similar, though much less dramatic bottoming-out of the profits decline. Working from such data as sales volume and the percentage of industrial capacity in use, rather than from a sampling of corporation reports to stockholders, Data Resources Inc.'s president Otto Eckstein estimates that second-quarter after-tax earnings of all U.S. companies rose 3.4% above the first three months. Standard & Poor's Corp. calculates a modest 3.7% decline. Still, S. & P. Economist Richard Scruggs believes the second quarter probably marked "the end of the drop" in corporate earnings.

Compared with a year ago, to be sure, profits still look bad. Citibank calculates that second-quarter earnings of the 1,331 firms in its survey fell 17% below a year earlier (see chart); manufacturers were down 22%. Scruggs predicts that for all of 1975, corporate earnings will sink 20% to 25% under 1974--the most severe year-to-year drop since 1938.

Solid Profits. The figures are not quite as bleak as they look. Last year profits of many companies were swollen by inflation, which raised the prices of goods the companies held in bulging inventories. During 1975, these artificial profits have largely disappeared: companies have drastically reduced their inventories, and the prices of merchandise remaining in stock are rising less rapidly. During the second quarter, Citibank calculates, less than 10% of all corporate pretax profits were traceable to rising inventory values, v. nearly 33% during the same three months of 1974. Inventory values, the bank's economists believe, should continue to be less of a distorting factor in profit reports for the rest of this year. That is good news for the whole economy. The more that executives believe the post-recession recovery in their companies' profits is solidly based, the more likely they are to step up spending for new plant and equipment and begin rehiring workers.

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