Still Pointing to Growth

Profits are probably the most critical of economic weather vanes. They both measure the current pace of business and offer some vital clues as to whether employers will be able to raise the job-generating capital that is vital to the U.S. free-enterprise system (see ESSAY). In both areas, the profit vane presently seems on target: wavering slightly, but still pointing toward more growth. During the period of explosive recovery in the first three months of the year, corporate profits staged a dazzling comeback from the depressed levels of the nation's worst postwar recession. Then, as many experts predicted, business from April through June tapered off to a more sustainable pace. Yet the second-quarter earnings reports now flowing from company headquarters show that despite the slowdown, corporations continued to show solid profit gains. Moreover, according to most economists, earnings will go on rising smartly at least throughout the rest of the year.

All in all, second-quarter profits were an estimated 30% or so over the same period last year. That is far below the 49.8% increase in the January-March period, but the comparison is somewhat distorted: first-quarter earnings in 1975 were well below those of the succeeding quarters. Actually, when the first and second quarters of this year are compared, profits are virtually unchanged after seasonal adjustments --even though earnings in the April-June period were hindered by a slowdown in the rate of expansion of the nation's output of goods and services.

The economy's rate of expansion slipped from a boomy 9.2% in the first quarter to a merely salutary 4.4% in the second. The Commerce Department's June index of leading indicators, the Government's key barometer of future business trends, inched up only .3%, the smallest rise in seven months.

The moderation in growth also hampered a faster reduction in the still high unemployment rate, which is itself a drag on the economy (see box following page).

So far most economists are not unduly concerned by the slowdown. They continue to prediet a 6% increase in real G.N.P. (not counting inflation) for the remainder of this year and a reduction in the level of joblessness to 7%. Even so, growth in second-half profits is likely to slow down. One reason for the strong first-half showing is that companies were able to raise prices faster than their labor costs went up, thus improving profit margins. That advantage will diminish in the months ahead as the economy picks up momentum and industry comes closer to using its full capacity. Albert Sommers, chief economist of the Conference Board, a business research group, predicts that profits in the last half will grow by slightly more than 20% on a year-over-year basis. For all of 1976, however, most experts agree that earnings should be 25% to 30% higher than in 1975.

Most businessmen are still basking in the bright glow of second-quarter gains. Leading the earnings parade of manufacturers were the automakers, who were helped by price boosts on the 1976s and an unforeseen rush by buyers to larger, option-filled models that return a fatter profit than smaller cars. General Motors and Chrysler both announced record earnings for the period, $909 million and $155 million respectively; G.M., after paying its stockholders 60-c- a share in March, will move its third-quarter dividend back up to 85-c-. Ford's earnings quadrupled over the same period last year, to $441.9 million.

Strong Demand. Oil company profits continued to improve moderately, helped by price hikes for gasoline and other petroleum products. Texaco's earnings were up 23% and Continental's 27%. Exxon, the industry leader, reported a decline of 2.6%, largely because of a drop in its foreign earnings. Other industries benefiting from price boosts were aluminum, copper and lead producers, along with electric utilities. Strong demand for all product lines also boosted profits of electrical equipment makers such as General Electric and RCA. Others scoring substantial second-quarter gains were producers of building materials, apparel and forest products; even the long buffeted airline industry took off (TIME, Aug. 9).

The steel companies, which weathered the slump better than firms in most other industries, have fared unevenly during the recovery: the industry leader, U.S. Steel, registered a 7% earnings dip compared with the same period last year, partly because of lagging capital goods demand. Among the few industries reporting an outright earnings slump, the most notable was banking; many institutions suffered heavy loan losses in the real estate industry, which was badly battered by the recession. Most banks are now showing strong signs of recovery, and their earnings are generally expected to improve in the months ahead.

The big question now is whether the surge in profits so far has been enough to induce businessmen to start spending in earnest for new plant and equipment. Until recently, the recovery has been spurred almost solely by increased spending by suddenly more optimistic consumers and by businessmen rebuilding their inventories. These spurs are still present, but most economists agree that business investment must rise substantially if the U.S. economy is to have a strong 1977.

Yet there is sharp disagreement among experts about whether businessmen will take the big capital-spending plunge. Irwin Kellner, vice president and economist of Manhattan's Manufacturers Hanover Trust Co., believes that they will. He notes that sales at many companies are up, cash reserves are fat and the outlook for continued growth seems inviting. In those circumstances, Kellner argues, an increase in capital spending is probable.

But others, among them IBM's David Grove, a member of TIME Board of Economists, are not completely convinced. In Grove's view, many companies are still operating well below capacity and do not see the need for large amounts of new plant and equipment in the near future. Moreover, Grove believes that the slowdown in the economy has dimmed prospects for consumer spending, expanded personal income and inventory investment next year. Thus businessmen will probably remain cautious. If Grove is right, the widespread conviction that a full-blown expansion is now in the bag could well prove illusory.

This file is automatically generated by a robot program, so viewer discretion is required.