MAY 1945

SURVEY OE

Ct ENTBUSINESS

UNITED STATES DEPARTMENT OF COMMERCJE

BUREAU OF FOREIGN AND DOMESTIC COMMERCE

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urvey of

CURRENTBUSINESS

25, No. 5

^ ^

Functions "The Bureau ofnd Domestic Commerce • • • tomote, and develop the foreignstic commerce of the United

|jL«M7 creating the Bureau, Aug.\s7Stau408].']

rtment of CommerceField Service

a., 603 Rhodes Bldg.lass., 1800 Customhouse.

Y., 242 Federal Bldg.3, S. C, Chamber of Commerce

SjHl., 357 U. S. Courthouse.|2, Ohio, Chamber of Commerce.II14, Ohio, 750 Union Commerce

xM Chamber of Commerce Bldg.olo., 566 Customhouse.Mich., 1018 New Federal Bldg.

, Tex., 603 Federal Office Bldg.i 1, Fla., 425 Federal Bldg.r 6, Mo., 724 Dwight Bldg.

12, Calif., 1540 U. S. Post Officethouse.\ Tenn., 229 Federal Bldg.11, Minn., 201 Federal Bldg.s 12, La., 408 Maritime Bldg.

J18, N. Y., 17th Floor, 130 W. 42d St.L 2, Pa., 1510 Chestnut St.

19, Pa., 1013 New Federal Bldg.Oreg., Room 313, 520 S. W. Mor-

|19, Va., Room 2, Mezzanine, 801' St.

|Mo., 107 New Federal Bldg.sco 11, Calif., 307 Customhouse.

;jiGa., 403 U. S. Post Office andiBldg.

Fash., 809 Federal Office Bldg.

MAY 1945

ContentsPage

THE BUSINESS SITUATION 1

Recent Trends in Employment 2

Record Consumer Expenditures 4

CORPORATE EARNINGS BY SIZE OF FIRM.. 6

NEW CONSTRUCTION BY STATES, 1939-43.... 13

PROBABLE POSTWAR SALES IN MICHIGAN.. 16

STATISTICAL DATA:

Business Population Expands in 1944 18

New or Revised Series 19-20Monthly Business Statistics S-lGeneral Index Inside back cover

—Content* of this publication are not copyrighted andmay be reprinted freely. Mention of source will be appreciated.

Published by the Department of Commerce, HENRY A. WALLACE, Secretary, and issued through the Bureauof Foreign and Domestic Commerce, Amos E. Taylor, Director. Subscription price of the monthly SUBVET OFCURRENT BUSINESS, $2; Foreign, $2.75 a year. Single copy, 20 cents. Price of the 1942 Supplement is 50 cents.Make remittances only to Superintendent of Documents, U. S. Government Printing Office, Washington 25, D. C.

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The Business SituationBy Division of Research and Statistics, Bureau of Foreign and Domestic Commerce

APRIL marked the close of a chapterin the economic history of the war.Pressure on aggregate munitions outputis now generally recognized as a thingof the past, and no longer is there evenspeculation on the possibility of a newhigh in munitions output this year. Thesole question from the economic point ofview is how rapidly will munitions pro-duction decline, and how well can therelease of resources be dovetailed intoexpansion of the output of nonmilitarygoods.

The final stage of the period nowclosed, which period dates from the lastGerman counteroffensive toward the endof 1944, was marked by renewed effortsto expand numerous munitions programson the basis that the two-front war wouldcontinue indefinitely. As previouslypointed out, this tended to stabilize out-put with little change in the distributionof resources between war and nonwaruses, by emphasizing the continuing highrequirements for materials and man-power for military purposes. But the de-cisive defeat of all German armiesthroughout Germany and in Italy by theend of April made the ending of large-scale military operations in Europe amatter of days at most.

Certainly the need for a large flow ofsupplies of other than maintenancegoods, such as food, to the armies inEurope had already ended.

Cutbacks Had Little Effect in April.

The new phase of the war economywas reflected in April in a reorienta-tion with respect to future procurementplans, resulting in the cancelation ofexpansion ahead. It did not immedi-ately slow down the flow of munitionsfrom factories, or the flow of materialand components into them. Conse-quently, the volume of economic activ-ity was little altered in April, with man-ufacturing and primary distributioncontinuing substantially unchanged.

As a matter of fact, events were rob-bing VE-day of some of its dramatic qual-ity by reason of the fact that the Ger-mans, by insisting upon the pulveriza-tion of many of their cities, includingBerlin, have made the fact of final de-feat a wavering point in time, insofar asthe actual definite planning of our mili-tary procurement ahead is concerned.Nevertheless, it was clear that repro-gramming of munitions production wasunderway.

What has happened to date is a seriesof individual cuts in procurement forlater months without fixing the limitsof the large reductions ahead in actualproduction and without translatingthese cuts into canceled orders.

The Magnitude of the Reduction.

While the general outlines of the pe-riod ahead are clear, the uncertaintythat exists stems from the fluid state of

the procurement program. Thoughthere is no question that averagemonthly munitions production for theremainder of the year will be consider-ably below that of the first 4 months, themagnitude of the reduction has not yetbeen determined.

The problem confronting the businesscommunity is clearly illustrated in thechart on this page. While the produc-tion and purchasing policies of businessare tied to the outlook for particularproducts, in general the programmingfor munitions producers was motivatedby the outlook as seen in the chart.

Orders for materials, components, andsubassemblies, inventory accumulation,and hiring policies were geared to mu-

Chart 1.—Monitions Production(Average per Month)

BILLIONS OF DOLLARS8

6 h

1st 2nd 1st 2nd 1st 4HALF HALF HALF HALF MONTHS

1943 1944 -1945-

Sources : War Production Board and U. S.Department of Commerce.

nitions production projections for the re-mainder of the year at approximately thesame levels that have persisted for overa year and a half. The schedule shownon the chart—as of March 1, projectedon the assumption of a two-front war—has in recent months been the basis forfuture planning and is now recognized ashaving little meaning.

While the cutbacks thus far announcedwill take time to work out, the effect onproductive activity will soon become ap-parent. The change in outlook fromone of maintaining aggregate output, asseen in the last bar on the chart, to anuncertain Wt significant decline, willsoon begin to show up in declining orders,inventories, and the flow of materials andcomponents. Owing to large inventoriesof many intermediary products, the de-cline in manufacture of parts and sub-assemblies will tend to be more rapidthan the reduction in deliveries of fin-ished products.

Thus, even though the reduction inoutput of munitions may be gradual inthe coming weeks, the repercussions inmanufacturing as a whole of the changein outlook will be mounting rapidly. Theprospect is that the real impact of thechange in military procurement will befelt in the last half of the year.

Some indications of the magnitude in-volved for individual segments afterVE-day were given in a report by theWPB Chief of Operations at the end oflast month. For example, the criticalfield artillery items then scheduled at$34,000,000 for the fourth quarter areexpected to be almost wiped out, withonly $1,500,000 remaining in the sched-ule for that quarter. The fourth quar-ter schedule for tanks was curtailed inApril from roughly 9,000 to 6,000. How-ever, after VE-day, it is expected that theschedule for the same period would becut in half down to 3,000.

Although the over-all cuts will not beso large as indicated by these individualcases, there is little doubt that the re-lease of resources from munitions activ-ity will be very large and the shifts inresources significant. The individualcases cited above are also illustrative ofthe likelihood that very large segmentsand, in some instances, entire facilitiesformerly engaged in civilian productionwill be released from production of mili-tary goods.

Reconversion Steps.

Recognition of the impending shifts inresources is found in the steps taken re-cently to prepare the automotive indus-try for reconversion to peacetime pro-duction. The automotive companieswere permitted last fall to place ordersfor machine tools that would be neededfor the resumption of passenger car pro-duction. Deliveries on these had beendelayed due to the prior claims for addi-tional facilities to meet rising munitionsschedules. Since the orders for recon-version tools did not carry a preferencerating, they were placed at the tail-endof the order boards.

At the end of March, there were closeto $90,000,000 of unrated orders for ma-chine tools, including tools for the pro-duction of war-supporting items as wellas for consumer items. There were atthe same time over $200,000,000 of ratedorders for direct military and exportneeds. At the current production rate,the unrated orders represented a back-log of close to 3 months added to therated order backlog of over 6 months.Undoutedly the accumulating contractterminations will involve subsequentcancellation of a substantial part of therated order backlog.

But, as will be the case for many in-termediate and finished product manu-facturers, the unravelling of the orderboards and rearrangement of productionwill take time. In the light of this situa-

638154—45-

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2 SURVEY OF CURRENT BUSINESS

Chart 2.—Industrial Distribution of Nonagricultural Employment 1

MILLIONS OF PERSONS MILLIONS OF PERSONS

20 -

10 -

1939 1940 1941 1942MONTHLY AVERAGES *•

- 10

1945D. D. 45-329

1 Includes all full-time and part-time wage earners and salaried workers in nonagricultural estab-lishments who are employed during the pay period ending nearest the 15th of the month. Proprietors,self-employed persons, domestic servants, and personnel of the armed forces are not included,self-employed persons, domestic servants, and personnel of the armed forces are not included.2 Includes all metal-using industries, the rubber industry, selected chemical industries, and Govern-ment-operated navy yards and manufacturing arsenals.3 "Other manufacturing" represents total manufacturing less the munitions industries.4 Includes Federal, State, and local Government. Government-operated navy yards and manufac-turing arsenals, and Federal force-account construction are excluded.5 Includes trade, finance, service, construction (including Federal force-account construction), andmiscellaneous.

Sources : U. S. Department of Labor and War Manpower Commission.

tion and the impending release of re-sources, the War Production Boardgranted permission for the automotiveindustry to receive preference ratings for$50,000,000 of machine tools. Moreover,preference will also be given to $35,000,-000 of new construction and $40,000,000of other types of equipment.

While this action may speed up de-livery of some of the tools and equip-ment needed, delay can still be expectedin the retooling of the automotive plantsas long as large backlogs for other cus-tomers remain on the books of the equip-ment manufacturers.

The general policy on reconversionhad not been fully formulated by theend of April. Some of the orders re-stricting the use of materials were modi-fied and there was some easing in theissuance of spot authorizations in thetighter labor market areas. However,aside from the steps taken to expeditethe retooling of the automotive indus-try, the actions that will involve sub-stantial resumption of civilian output—made feasible by reduced military sched-ules—were still in the offing.

Recent Trends in EmploymentShifts in the utilization of manpower

will be a prominent feature of the transi-tion to one-front-war production. The

impact of declining munitions produc-tion on employment will be seen in ashortening of the work-week, in anexodus of workers from war plants toother occupations, and in some with-drawals from the labor force as a resultof retirements or to return to schooland the home. The net result will bean easing of the labor situation and anincrease in unemployment.

Although manpower has been in a highstate of flux throughout the war years,the adjustments now under way are tak-ing place in a considerably changed en-vironment. The wide swings of employ-ment that have occurred in munitionsindustries while aggregate output wasmaintained are symptomatic of the in-cidence on employment during theimpending decline in output.

As production for war gradually givesway to production for peacetime living,the pressure on the manpower supplywill be modified. The amount of muni-tions to be provided in the first yearafter VE-day is still very large; never-theless, it is evident that a sizable re-lease of manpower is in the offing.

There will be demands for reabsorbingthese workers, but these demands willnot always be immediately effective.The necessary complement of raw ma-terials, plant facilities, machinery, and

May 1945

qualified manpower will not always besimultaneously available. Some delayswill occur in rehiring workers because ofthe time needed for reconverting facili-ties to civilian output. Moreover, manyof the workers that will be released fromshipbuilding, aircraft, and ammunitionplants will be located in areas affordingfew alternative job opportunities.

The Setting for the Transition.

Almost a third of our labor force isnow engaged in direct war work—some12 million persons in the armed forcesand about 9 million workers in munitionsindustries. Also dependent on war pro-curement programs are several millionadditional workers in other industrieswhose output is largely being divertedeither directly or indirectly to the mili-tary agencies.

Chart 2, showing the industrial pat-tern of nonagricultural employmentsince 1939, provides the general settingfor the manpower shifts already inprocess.

From an over-all standpoint, and put-ting aside the rapid expansion of the mu-nitions industries, this chart seems tobelie the great changes that have oc-curred in the civilian sector of the econ-omy during the war. If the top, cross-hatched area, representing employmentin the munitions industries, is removed,the industrial pattern of employmentappears to have remained remarkablystable for several years. One must gobehind the broad industry groups shownto detect large ups and downs in em-ployment trends.

Aside from the channelling of 12 mil-lion persons into the armed forces, themajor distortion in the industrial dis-tribution of manpower occasioned by thewar has been the disproportionate ex-

Chart 3.—Employment inMunitions Industries 1

MILLIONS OF PERSONS1.0

O.5

0.0

9.5

9.0

8.5

A

1-i 11 i t 1. . . . •

\

\ V

1 1 , < 1 1 < 1 1 1 1

—

—

—

* —

1943 1944 1945D.D. 45-336

1 See chart 2, footnote 2.

Sources: U. S. Department of Labor and War-Manpower Commission.

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May 1945

pansion of the munitions industries—chiefly the metal-using industries—andthe accompanying restriction of employ-ment in other industries—chiefly con-struction and trade.

The 9 million persons employed in themunitions industries in March 1945 con-stituted 24 percent of total nonagricul-tural employment. Monthly averageemployment in these same industries in1939 was 3V2 million workers, or roughly12 percent of that year's nonagriculturaltotal.

Less striking but nevertheless sub-stantial gains in employment since 1939were made in transportation and publicUtilities and in Government (excludingGovernment employment in navy yardsand manufacturing arsenals which areincluded in munitions industries). Forthe most part, these gains were of a war-supporting character.

The remaining industries, with theexception of construction, are currentlyemploying only slightly more workersthan in 1939, despite large increases inbusiness volume in almost all cases. Theconstruction industry, which is notshown separately in the chart, has beenreduced to roughly one-third of its 1939complement of employees.

Some reversal of trends is evidentfrom the chart. Munitions employmenthas been declining since the latter partof 1943, and all of the nonmunitionsgroups—except Government and trans-portation and public utilities—are cur-rently below their average employmentin 1942-

SURVEY OF CURRENT BUSINESS

Distribution of Munitions Workers.The approximate distribution of mu-

nitions workers in March 1945 was asfollows:Ordnance -, 1, 650, 000Aircraft (prime and subcontrac-

tors and parts suppliers) 1,650,000Shipbuilding 1, 350, 000Iron and steel 1,200,000Machinery, other than electrical-- 1,050,000Electrical machinery 500,000Communication and electronic

equipment 450,000Nonferrous metals 300,000All other1 850,000

Total 9, 000, |0001 Residual item reflecting employment in

the rubber industry, the professional andscientific instruments industries, and certainmiscellaneous groups. The figure is not anaccurate measure of the size of these groupsbecause of incomparabilities between the es-timates of employment in the componentindustries and the estimate of over-all mu-nitions employment.

The aircraft and shipbuilding indus-tries were employing 3 million workers inMarch—one-third of all munitions work-ers. This concentration of employmentwas somewhat less than in November1943. As noted below, the aircraft andshipbuilding industries have been releas-ing workers at a faster rate than any ofthe other major munitions industries.

Drop in Munitions Employment.The swings in munitions employment

in recent years are traced in chart 3. Attheir peak in November 1943, the muni-tions industries employed about 10 V2

million workers. Since then, these in-dustries have been a net supplier ofmanpower, releasing about IV2 millionpersons through March of this year.However, few of those released have beenreflected in a net expansion of nonmuni-tions employment because of the con-tinued expansion of the armed forces.

The brief period from December 1944to February 1945 interrupted the down-trend in munitions employment. Inthese months, intensive recruiting forthe critical production programs fully-offset the number of workers being re-leased from industries with decliningproduction schedules, notably shipbuild-ing.

In March, reduced manpower require-ments once again dominated the netmovement in munitions employment.The decline is currently being acceler-ated as a consequence of the militarydecisions reached in Europe.Contrasting Trends in Employment.

The recent trends in employment indifferent sectors of the munitions indus-try are contrasted in chart 4. The diver-gent patterns which are indicated reflecta combination of factors—productioncutbacks, changes in product designs,shifts in the work-week, and manpowersavings.

Employment in most of the munitionsindustries has tended to conform to thepattern reflected in the over-all muni-tions employment figures. The down-ward movement has been dominated bythe 460,000 workers released from air-craft production between November

Chart 4.—Employment Trends in Munitions Industries x

MILLIONS OF PERSONS2.5

2.0 -

MILLIONS OF PERSONS2.5

MILLIONS OF PERSONS

2.0

1.5

1 O

ORDN/

. I I I . h i Ml

WCE

N

Mi l l . MM

-

n n l !

MILLIONS OF PERSONS2.5

- 2.0

1.5

1.0

IRON AND STEELAND THEIR PRODUCTS

1.0

MACHINERY OTHERTHAN ELECTRICAL

mil.

.5

.4

NONFERROUSMETALS ANDTHEIR PRODUCTS

1943 1944 1945

.4 ~

6

.5

.4

.3

1 1COMMUNICATIONAND ELECTRONICEQUIPMENT

smi'in in

, — "

!

•

.....In...

1943 1944 1945 1943 1944 1945 1943 1944 1945D.D. 45-337

1 Data for shipbuilding and ordnance are for the pay period ending nearest the 15th of the month; aircraft data are for the end of the month. Datafor the other groups are bimonthly estimates as of the 1st of the month through November 1944 and as of the 15th of the month thereafter. All seriesexcept shipbuilding and aircraft are based upon ES-270 reports to the War Manpower Commission. Percentage changes shown in reports for identicalplants were used in computing bimonthly estimates.2 Includes employment in airframe, engine, propeller, glider, and special-purpose aircraft plants, and modification centers. Prime contractors, sub-contractors, and parts suppliers are included.3 Includes construction and repair of naval and cargo vessels in U. S. navy yards and private shipyards.4 Excludes "communication and electronic equipment" which is shown separately.

Sources : War Manpower Commission and U. S. Department of Labor.Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

SURVEY OF CURRENT BUSINESS May 1945

1943 and March 1945 and by the 380,000workers dismissed from shipbuilding.The singularly stable movement in theiron and steel group and the rising em-ployment trend in the communicationand electronic equipment industry arethe chief examples of employment trendscontrary to the over-all movement.

The effect of the Belgium Bulge oflast December on military procurementschedules and hiring policies is evidentin the chart in the levelling-off of air-craft employment and in the smallincreases in several other munitions pro-grams. However, the increases are moremarked in chart 5, which shows the de-tail on employment in the ordnancegroup.Employment in Ordnance Programs,

Factories producing guns, ammuni-tion, motorized equipment, and othercombat materiel classified as ordnanceaccounted for about 1.7 million of the9 million munitions workers in March.Because of the diversity of products, em-ployment trends have varied consider-ably in different segments of the indus-try. This is brought out clearly by theindexes shown in chart 5.

Chart 5.—Employment Trends inOrdnance Production 1

INDEX, JANUARY 1943 = 100140

GUNS AND FIRE CONTROL

^.SIGHTING AND\ / FIRE CONTROL

40 I i i i i i I i i i I i

140

120

100

80

60

40

AMMUNITION_

- EXPLOSIVESAND FIREWORKS

SMALL ARMS

1 I I i I 1 I i i i i

ARTILLERY ANDr OTHER

\\

\

* * \ ,

i i i i i 1 i i I i I

_

i i i i i 1 i i I i i

MOTORIZED EQUIPMENT140

120

100

80

6 0

40 I I i i i i I i i i i i I i i i i i I i i i i i I i i i i i I M I I I I1943 1944 1945

a D. 45-3281 Bimonthly estimates based upon ES-270 re-

ports to the War Manpower Commission, exceptdata for "explosives and fireworks," which arecompiled by the U. S. Department of Labor.Percentage changes shown in ES-270 reportsfor identical plants were used in computing bi-monthly estimates.

Sources : Indexes computed by the TJ. S. De-partment of Commerce from data of the WarManpower Commission and the U. S. Departmentof Labor.

Employment in the small arms am-munition plants has fluctuated verywidely during the past two years. Theemployment index reached a peak of 117in mid-1943 (January 1943=100) andthen fell steadily to 48 in November1944. By March, the index had re-covered to 60.

In contrast, the index of employmentin plants producing motorized equip-ment other than tanks rose 19 percentduring 1943 and has remained practicallystable since then, with the exception ofthe small rise in 1945.

Unemployment Compensation Payments.A further indication of the dynamic

nature of employment trends in recentyears is supplied by information on re-cipients of unemployment compensationpayments. Chart 6 presents data on thenumber of beneficiaries by labor-marketareas, classified as of January 1945.

In areas where an acute labor shortagewhich would endanger essential war pro-duction either existed or was anticipated,the weekly average number of benefici-aries in the last quarter of 1944 and thefirst quarter of 1945 was appreciablyabove the corresponding periods of thepreceding years. In all other areas, onthe other hand, the number showedpractically no year-to-year changes un-til February and March of this year,when it fell about 15 percent below thenumber of beneficiaries in the corre-sponding months of 1944.

At first glance, the picture shown inthe chart is difficult to comprehend.Why should the number of workersdrawing unemployment benefits in-crease so much more in acute-shortageareas than in other areas? With thepreceding discussion as a background,however, the answer to this questionshould be apparent.

Most of the areas of acute labor short-age are the important centers of muni-tions production. They have been theareas particularly affected by cut-backsand the continual shifting of militaryprocurement programs. The chart ismerely a reflection of the fact that thesechanges have become more important inthe past year.

It should be noted, however, that therelative number of persons drawing ben-efits has been lower in the acute-shortageareas than in the country as a whole. InJanuary 1945, for example, the shortageareas accounted for 40 percent of thetotal employment in plants reporting tothe War Manpower Commission, but foronly 29 percent of total number of work-ers drawing benefits.

Record Consumer ExpendituresIn the light of the impending changes

in the economy as a result of the shift toa one-front war, it is of interest to con-sider the status of consumer expendi-tures for goods and services which willbecome an expanding component of na-tional expenditures.

Continuing the strong upward trendof the past 3 years, consumer expendi-tures for goods and services rose to anannual rate of 104 billion dollars duringthe first quarter of 1945, after adjust-

Chart 6.—-Unemployment Compen-sation Beneficiaries by Labor-Market Areas

THOUSANDS OF BENEFICIARIES100

8 0 -j

6 0

2 0

ALL OTHER AREAS

ACUTE-SHORTAGE AREAS

I I I I 1 I I IA M J J A S

— WEEKLY AVERAGES -0 N D

DO. 45-3271 Areas in which acute labor shortages existed,

or were anticipated, which would endanger es-sential production. (Classified as group I areasby the War Manpower Commission in January1945.)

Source : Social Security Board.

ment for seasonal variations. Thisrepresents a gain of 4 percent from theseasonally adjusted rate of the fourthquarter of last year, and of 9 percentover a year ago. Indications are thatin April there was no slackening in thisrate of gain from a year ago. The de-tailed data are shown in table 1.

Expenditures for services, which at thepresent time constitute about one-thirdof all consumer expenditures, increased5 percent in the first quarter of this yearfrom a year ago. This increase wasmatched by a similar rise in the prices ofservices which in effect suggests thatconsumers did not secure more "real"services for their expenditures and, ifquality considerations are weighed, theyprobably got less this year. Expendi-tures for services include housing, homemaintenance, household utilities, per-sonal services, transportation, medicalcare, recreation, and miscellaneousservices.

Consumer expenditures for goods, onthe other hand, increased much morethan those for services—11 percent abovethe first quarter of 1944, and 5 percentabove the fourth quarter 1944 on a sea-sonally adjusted basis. The strikingfeature of the increase since the firstquarter of 1944 is that about 90 percentof the increase of 1.7 billion dollars wasaccounted for by the rise in expendi-tures for two major items of consump-tion—food and clothing (includingshoes).

These are the very areas where certaingoods, particularly the low-priced items,have been more difficult to obtain thisyear and in which trading-up, eitherforced or otherwise, was prevalent.Does the dollar increase in consumerexpenditures for goods this year indicate

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May 1945 SURVEY OF CURRENT BUSINESS

that more goods were available? Nodefinite answer is possible. Data onphysical quantities of goods purchasedare not available except for a few com-modities. Under such circumstances, amethod which is very frequently resortedto in evaluating the changes in physicalquantities is to adjust the dollar expendi-tures for price changes.Adjustment for Price.

Using as the basic price data the re-ported indexes included in the cost ofliving of the Bureau of Labor Statisticsand reweighting the commodity groupprices so that they are appropriatelycombined in terms of the relative im-portance of the various component itemsof consumer expenditures, the averageincrease in the prices of commoditiespurchased by consumers in the firstquarter of this year is found to be 4 per-cent above the average for the first quar-ter of 1944. Since the dollar increase inconsumer expenditures for goods was 11percent in this period, use of the indexas a deflator suggests an increase inquantities but, as has been stated in ourprevious discussions of this subject, suchmethods under existing conditions donot necessarily yield the correct answer,if indeed there can be said to be a correctanswer with so much shifting and inef-fective quality controls.

Other evidence suggests that the quan-tity of goods purchased by consumerswas not more than a year ago, and in-deed may have been somewhat less. Thisevidence is based on (1) the stability of

Table 1.—Consumer Expenditures forGoods and Services 1

Item 1939 1941

First quar-ter,2 at annu-

al rate

1944 1945

I Billions of current dollars

Total goods and services 61.7

Total goodsNondurable goods

FoodClothingTobaccoGasoline and oilOther nondurable goods.

Durable goodsFurniture, furnishings

and household equip-ment

Automobiles and parts.._Other durable goods

Total services

Total goods and services

Total goodsNondurable goods

FoodClothingTobaccoG asoline and oilOther nondurable goods- _

Durable goodsFurniture, furnishings

and household equip-ment

Automobiles and parts--..Other durable

Total services

61.7

39.032.618.16.81.82.13.86.4

3.02.31.1

22.7

74.6

49.240.122.38.42.22.44.79.1

4.33.31.5

25.4

95

65

5

559.035.13.3.1.6.6.

3.

000645

66

2'. 330. 0

104.0

72.565.338.515.62.71.76.87.2

4.1.7

2.431.5

Billions of 1939 dollars

61.7

39.032.618.16.81.82.13.86.4

3.02.31.1

22.7

69.7

44.936.619.87.72.12.44.68.3

4.02.91.4

24.8

72.5

47.542.724.09.22.61.55.44.8

2.7.4

1.725.0

i

50.845.926.010.32.31.65.74.9

2.8.4

1.724.9

1 Detail will not necessarily add to totals due to round-ing.

2 Seasonally adjusted.Source: U. S. Department of Commerce.

production for civilian use and (2) thefact that consumer goods inventoriesshowed only a small decline during thepast 12 months.

The dollar value of manufacturers'shipments for civilian use in the firstquarter of this year is estimated at 60billion dollars. The details underlyingthis estimate were given in last month'sSURVEY. In the first quarter of 1944, thecivilian shipments were almost thesame—60 billion dollars. Since whole-sale prices increased only slightly fromlast year, these results indicate that thequantity of goods shipped by manufac-turers for civilian use was about the samethis year as a year ago.

Available data on mineral productionalso indicate that the amount destinedfor civilian use was not larger in the firstquarter of this year than last year.Furthermore, the volume of agriculturaloutput for civilian use was definitely lessthis year than in the early part of 1944,principally because of the reduced flowof meats to civilians.

Thus, the production indicators pointto a volume of goods for civilian use inthe first quarter of this year which wasperhaps as large as in the first quarterof 1944—certainly not larger.

Although production was supplemen-ted in some lines by reducing retail in-ventories, the total contribution to thetotal new supply from this source wasnot significant—the value of retail in-ventories at the end of March was only2 percent below that of a year ago. Thiswould account for only slightly morethan 1 percent of the increase in pur-chases of goods of 1.7 billion dollarswhich occurred from the first quarter of1944 to the first quarter of this year.

The discrepancy between these resultsobtained by dividing the sales by theprice index, and by estimating the sup-ply of goods available to consumers, maybe attributed to a combination of threefactors: (1) Possible errors in the basicestimates of prices, consumer expend-itures and production, (2) some furtherincrease in trading-up, and (3) increasedpurchases at prices above ceilings es-tablished by the Office of Price Adminis-tration.

That the rise in consumer expendi-tures is not overstated is confirmed bythe consistency of sales reports frommany sources—reports made to the Fed-eral Reserve banks by departmentstores, reports collected by Dun andBradstreet on retail trade, and reportsto the Department of Commerce by in-dependent and chain organizations. Allof these point to the substantial in-crease in consumer expenditures forgoods in the first quarter of this yearfrom a year ago.

There is very little information avail-able from which the trend in trading-upduring the war period can be deter-mined. The principal incentive to vol-untary trading-up has been the steadyand sharp rise in the consumer income.Shortages of certain types of low-pricedgoods, particularly wearing apparel,were an important factor in the invol-untary trading-up.

Voluntary trading-up probably didnot increase since the first quarter of

Chart 7.-—Consumers'Expenditures

BILLIONS OF 1939 DOLLARS80

1929 1933 1939 1941 1945-^•« ANNUAL TOTALS *• AT ANNUAL

RATE DO 45-316

1 Seasonally adjusted.Source: U. S. Department of Commerce.

1944 since the disposable income of indi-viduals (exclusive of pay to the armedforces) was not greater in the first quar-ter of this year than a year ago. Thatthe disposable income did not increasewas due to the higher tax paymentsfalling due in the first quarter of 1945.Despite the higher level of taxes and con-sumers' purchases, however, net savingsof individuals were still at the high an-nual rate of about 36 billion dollars.

How much additional involuntarytrading-up occurred because of furthershortages of low-priced goods in the firstquarter is impossible to determine.However, the involuntary trading-upthat did occur appears to have beenlargely centered in certain types ofwearing apparel the supply of which wassmaller this year.

Thus, it appears that in addition tosome further trading-up, an importantreason for the difference between the"real" consumer expenditures for goods,as measured by adjusting the dollar ex-penditures by the reported price change,and the physical quantities purchased isincreased purchases by consumers atover-the-ceiling prices, though it is im-possible to measure the magnitude ofthis factor. It may be noted that thereported prices include some over-ceilingquotations although admittedly not allsuch transactions.

Expenditures in Reconversion Period.The fact that consumer expenditures

are currently at record levels raises thequestion of their probable volume in thereconversion period. Great reliance hasbeen placed by many on the stimulatingeffects of deferred demands for suchconsumer durables as automobiles, ra-dios, refrigerators, and other electricalappliances.

It is true, of course, that pent-up de-mands are large and that consumershave accumulations of savings to makethem effective. The areas where suchdeferred demands will have their great-est impact, however, are rather limited.

{Continued on p. 15)Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

SURVEY OF CURRENT BUSINESS May 1945

Corporate Earnings by Size of FirmBy Joseph L. McConnell

THE concern for small business hasbeen renewed and reinforced by thereduction in the ranks of this segmentof the Nation's economy which hasoccurred during the war with improvedalternative sources of employmentand goods shortages. These wartimechanges in concentration of industrywere analyzed in an article that appearedin last month's SURVEY.1 It was indicatedthere that the immediate postwar out-look was for a reversal in trend in con-centration and a substantial growth inthe number of small businesses.

Encouragement of this trend and thepreservation of opportunities for smallbusiness enterprise in the postwar dec-ades is requisite for the general economichealth of the country, since it serves asa proving ground for new technologiesand new, vigorous entrepreneurial talent;often serves as an automatic check onthe size of monopoly profits; and providesa framework of leadership which sup-ports and stabilizes the basic institutionsof our society.

Regardless of the importance of non-economic considerations, any program ofgeneral aid to small business must bedrawn in the light of the fullest possibleknowledge of its earning power in bothprosperity and depression. To subsidizeand protect economic inefficiency wouldbe socially wasteful and its cost wouldhave to be weighed carefully against thenoneconomic values to be gained fromthe prevention of further concentrationof industry. Furthermore, it would bea continuing process and might even en-danger the very goals which we seek toattain, especially the long-run goal ofincreasing the Nation's economic produc-tivity by sifting out the more efficientfirms for survival.

Comparative EarningsThe purpose of this study is to compare

the earning power of small, mediumsized, and large scale industry at differ-ent levels of industrial production.

For this purpose the statistics of cor-porate income, compiled for the years1931 to 1941 by the Bureau of InternalRevenue from corporate income tax re-turns, were analyzed to obtain theratios of net income to stockholders'equity, by asset size classes, for the vari-ous industrial divisions and the 21 man-ufacturing groups at different levels ofbusiness activity.

It cannot be asserted positively thatthe 200,000 corporations with assets un-der 50 thousand dollars reporting to theBureau of Internal Revenue and supply-ing balance sheets can be taken to rep-

resent all small business, the bulk ofwhich is unincorporated. But at leasttrends in the earnings of small corpora-tions with changes in the volume ofbusiness activity can be taken as roughlyindicative of the direction and extentof changes in the earnings of unincor-porated firms.

Stockholders' equity was chosen as thebase for expressing earnings as a rate,since the dissimilarities of small andlarge firms in proportions of direct laborand capital equipment used are such asto greatly impair the meaningfulness ofthe "profits ratio"—net income as aratio to sales. This fact plus the diffi-culty of computing or estimating thecosts to small firms of nonequity capitalmakes the ratio of net income to assetsof little value for present purposes.Moreover, the rate of return on equitycapital is favored because it is the ratethat stockholders are able to obtain inpractice which ultimately determinessurvival.

There are two principles of signifi-cance for the future of small businesswhich must stand out in any analysisof the statistical tables and charts inthis study. First, from any level an in-crease in business activity results in animprovement in the earnings of smallercorporations relative to the earnings ofthe larger throughout the size range.Second, it is only at production levelssubstantially above that of 1939 that the

smallest firms in most industries can beexpected to yield any return on invest-ment after paying a reasonable wage forthe managerial services of the owner.Profits and the Business Cycle.

The broad outlines of the effects ofvarying levels of industrial activity onthe relative profitability of corporationsof different sizes can be observed by ref-erence to the "net profit" column oftable 1 and to chart 1. Reported netprofit of all corporations is here pre-sented by asset size classes without ad-justment for the tendency of the salariesof officers of small corporations to absorba large part of net income in good years.

At the bottom of. the depression in1932 the largest corporations—thosehaving assets above 50 million dollars—were, in the aggregate, able to hold on toa slender margin of profit. But the re-ported losses in the smaller size classesextended in unbroken procession downto a loss of over 30 percent of equity inthe smallest size class.

As our economy recovered through theensuing nine years to 1941, this curve ofreported corporate profit by size grad-ually changed in shape as it rose. By1936 the corporations of size 1 to 50 mil-lions in assets began to exceed the indus-trial giants in average profit rate, whilethe smallest reported losses of only 6percent.

With the recovery after the 1938 re-cession the highest earnings rate moved

Chart 1.-

PERCENT+ 20

+ 10 -

0 -

- 1 0

-Percentage Ratio of Net Profits Before Taxes to Equity for AllCorporate Industries, by Assets-Size Classes

NOTE.—Mr. McConnell is a member of theBusiness Structure Unit, Bureau of Foreignand Domestic Commerce.

1 "Industrial Concentration of Employ-ment," SURVEY OF CURRENT BUSINESS, April1945.

-30 ~

-40100 250 500 1,000 5,000 10,000 50,000TO TO TO TO TO TO AND249 499 999 4,999 9,999 49,999 OVER

ASSET-SIZE CLASS (THOUSANDS OF DOLLARS) *-D.D. 45-324

Source : U. S. Department of Commerce, based upon data of the U. S. Bureau of Internal Revenue.

UNDER50

50TO99

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

May 1945 SURVEY OF CURRENT BUSINESS

progressively downward through thesize classes, until in 1941 it was reportedby the firms just under 1 million dollarsin asset size. In the same year the ratereported by the smallest corporationswas up to 3 percent—6 percent belowthe giants and 12 percent below themedium-sized firms.

Officers' Compensation.

The complete story of the changes inthe relative earnings position of thesmaller firms is not revealed by an exam-ination of reported net income alone.The smaller corporations exist as muchto provide an income in the form of amanagerial wage to corporate officerswho are owners as well as workers as topay dividends to all stockholders.

In fact, in each of the first three sizeclasses—up to 500 thousand dollars inassets—officers' compensation is a largeramount than net profit even in a year asprosperous as 1941. For those under 50thousand dollars in assets the compensa-tion was about 15 times as large as re-ported net profit in that year.

Most of this compensation of officersmust be regarded as a true cost and notas a distribution of residual profit, eventhough important parts of profit are ab-sorbed in increases in the salaries of theofficer-owners of small firms in certainindustries as the more profitable levels ofoperation are attained.

Profit Plus Officers' CompensationIn the "total return" columns of table

1 and in chart 2, the sum of officers' com-pensation and net profit is presented asa ratio to equity to demonstrate, in arough way, the extremity of the depres-sion-prosperity swing in the return tothe owners of small business for theirinvestment of capital and for their labor.

The fact that total return fell belowzero in 1932 in the smallest size classmeans that in the aggregate these firmsincurred losses in excess of one-third oftheir labor cost—for the compensatedofficers comprise about one-fifth of thelabor force by number and are normallyrewarded at a higher rate than the hiredlaborers.

In the second size class, the fact thattotal return was negative is less signifi-cant since salaried officers in firms ofthis size—50 thousand dollars to 100thousand dollars of assets—compriseonly about 5 percent of the labor forceby number and normally receive lessthan one-fifth of the "wages" paid.

By 1941 the percentage ratio of offi-cers' compensation plus net profit toequity for firms with less than 50 thou-sand dollars of assets had risen to 46percent in all industries combined, to 65percent in all industries except finance(table 2), and to 70 to 90 percent insome of the more prosperous componentindustrial divisions. By comparison,the return to the officers and owners ofthe largest companies was relatively sta-ble, increasing only 9 percent in thesame period.

In terms of dollars per firm the totalreturn to the owners of a typical corpo-ration with assets under 50 thousanddollars rose from below zero to 3,200 dol-

Chart 2.—Percentage Ratio of Net Profits Before Taxes and Officers' Com-pensation to Equity for All Corporate Industries, by Assets-SizeClasses

PERCENT4-50

+ 40

+ 30

+ 20

+ 10

- !O

1938-"

1934

100 250 500 1,000 5,000 0,000 50,000TO TO TO TO TO TO AND249 499 999 4,999 9,999 49,999 OVER

ASSET-SIZE CLASS (THOUSANDS OF DOLLARS) • -D.D. 45-322

Source : U. S. Department of Commerce, based upon data of the U. S. Bureau of Internal Revenue.

UNDER50

50TO99

lars between 1932 and 1941. If financecorporations are excluded, the rise wasfrom below zero to 4,600 dollars.

Adjustment of Reported Profit.

The unrefined analysis of net profitand net profit plus officers' compensa-tion, which has been presented in tables1 and 2 and charts 1 and 2, serves onlyto show the broad outlines of the varia-tions between 1931 and 1941 in relativepositions of small and large corporationswith respect to earnings. To analyzethe earnings with shifts in basic eco-nomic conditions, it is necessary to con-centrate upon particular years, afteradjustment of the reported net profit toshow the earnings of small and largecorporations on a comparable basis.

Corporate income data for the years1939 and 1941 were chosen for the de-tailed analysis of separate industrygroups. Since we had attained in 1941 alevel of industrial production 60 per-cent above the average for 1935-39 andhad not yet encountered—except in met-als manufacturing—the widespread dis-locations of production which followedupon our entry into the war, the data ofcorporate income for that year repre-sent the nearest approximateion to im-mediate postwar conditions of produc-tion which we have experienced inrecent years.

The data for 1939, which are analyzedin detail for contrast with 1941, repre-sent conditions in a year when businessactivity was much lower and relativelystable. It is near enough to 1941, how-ever, to minimize problems of compa-rability due to basic long-term changesin the structure of American industry.

Officers' Compensation in Small Firms.The most difficult problem involved in

measuring the relative earning power oflarge and small corporations springsfrom the fact that the smaller corpora-tions are usually wholly owned by one,two, or three corporate officers who arealso full-time workers in their own con-cern. This is true of 70 percent of thenonfinancial corporations with assetsunder 50 thousand dollars and 50 percentof the nonfinancial corporations withassets between 50 thousand dollars and250 thousand dollars.

As workers these officer-owners arerecipients of wages the amount of whichis determined not by bargaining in themarket but by the recipients. This isbecause there is no outside stock interestto limit the corporate officers' compensa-tion paid or credited to a drawing ac-count and claimed as a deduction on thetax return as the market value of theservices rendered.2

2 The statistics of corporate income com-piled and published by the Bureau of InternalRevenue are compiled from income tax re-turns as originally filed with the Bureau.The disallowance of portions of the claimedofficers' compensation deductions is not re-flected in the available statistics. There-fore, all statements made herein with respectto reported officers' compensation have nonecessary relevance to amounts allowed bythe Bureau of Internal Revenue as deductionsin the computation of taxable net income.Moreover, since the method used in this studyinvolves the pooling and redivision of profitand officers' compensation, the disallowanceof claimed officers' compensation deductionsincreases taxable income and has no effecton the conclusions reached here.

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

8 SURVEY OF CURRENT BUSINESS May 1945

Table 1.—Reported Corporate Net Profit Before Taxes and Total Return to Officers and Owners: Percentage of Equity, AllIndustries, 1931-41

Assets size(Thousands of dollars)

Under 5050-99100-249250-499 .500-9991,000-4,9995,000-9,99910,000-49,99950,000 and over

50,000-99,999100,000 and over

Total

1931

Netprofit

— 21 6- 8 . 9-G .3- 4 . 4- 3 . 6- 2 . 7— 1.5

- . 22.4

- . 3

Totalre-

turn

5 74.11.7.8

- . 2- . 9— 4

.62.7

1.5

1932

Netprofit

—32 8- 1 3 . 8- 9 . 7- 7 . 1- 6 . 1- 4 . 1- 3 . 8- 2 . 4

.5

- 2 . 6

Totalre-

turn

-6 .9- 3 . 1- 3 . 1-3 .0

-3!o- 2 . 9- 1 . 8

.7

- 1 . 1

1933

Netprofit

- 2 0 . 6- 5 . 2- 4 . 0- 2 . 6— 1.7— 1.5—1.3

- . 31.1

- . 5

Totalre-turn

5.95.32.51.51.00

—.5. 2

1.3

1.0

1934

Netprofit

14 7- 2 . 2- . 6

.4

.91.51.73.03.1

2.1

Totalre-

turn

17.99.86.44.73.62.92.53.53.2

3.6

1935

Netprofit

10.9- . 51.52.62.93.63.54.94.7

4.0

Totalre-

turn

25 312.39.37.36.05.14.35.44.8

5.6

1936

Netprofit

6 22.75.05.86.16.46.66.65.46.85.1

5.7

Totalre-

turn

35 518.614.511.49.88.37.57.25.67.25.3

7.6

1937

Netprofit

-8.21.83.94.95.36.06.06.95.46.25.2

5.5

Totalre-

turn

34.518.113.810.89.17.97.07.55.66.65.4

7.4

1938

Netprofit

— 13 1- 1 . 0

1.12.22.83.23.44.23.24.03.1

3.0

Totalre-

turn

26 513.910.37.76.55.04 44 83.44.43.2

4.8

1939

Netprofit

—8 22.04.35.25.46.26 16.84.95.84.7

5.3

Totalre-

turn

33 417.413.911.19.48.27 27.45.16.14.9

7.2

1940

Netprofit

—6 62.86.07.27.37.97 68.06.58.06.2

6.8

Totalre-

turn

36 219.616.813.911.910.28 78 7

% 6 . 78.46.4

8.9

1941

Netprofit

3 09.9

12.214.214.914.714 713.09.8

12.89.2

11.6

Totalre-

turn

46 429.024.922.620.617.616.113.910.013.39.3

14.0

Source: U. S. Department of Commerce. Based on data from U. S. Bureau of Internal Revenue.

Role of Depreciation.Since the small firm's depreciable as-

sets usually consist of single units ofvarious items of equipment, the makinggood of depreciation occurs only irregu-larly. Therefore, in the absence of genu-ine losses the owner-officer can, withoutimpairing working capital, disburse tohimself as salary not only the marketvalue of his services and the net incomeof the corporation but also additionalamounts equal to the annual deprecia-tion charge on the longer-lived pieces ofequipment.

This tends to facilitate the reportingof annual losses by a few corporations ineach of the smaller asset classes and de-presses the average reported net profit(or increases the average reported netloss) of all firms in the asset class. Itdoes not, however, affect total return—officers' compensation plus net profit (orless net loss)—since all such increases inofficers' compensation result in a de-crease in net profit or increase in netloss.

As some corporations in the groupunder consideration make good the de-preciation of past years or expand oper-ations by acquisition of noncapital as-sets, the reinvestment does not appearas an offset to the net losses being re-ported by the others. On the contrary,it appears in the balance sheet only, theincrement in assets being matched by acredit to the capital stock account, todonated surplus, or even to a liabilityaccount "due to officers."

In summary, the reporting of a smallnet loss in several successive years byall corporations having assets below 50thousand dollars, or between 50 thou-sand dollars and 100 thousand dollars, isnot necessarily inconsistent with a mod-erate prosperity among this group offirms.Officers' Compensation in Larger Firms.

On the other hand, the true rate ofreturn on stockholders' investment inmedium-sized corporations is not greatlyaffected by overstatements (relative tothe market value of their services) ofofficers' compensation. For instance,the statistics of an aggregate of corpo-rations of asset size between 1 milliondollars and 5 million dollars are domi-nated by those whose stock ownership

is dispersed, so that the interest of non-officer stockholders serve as a check onsalaries paid.

Furthermore, in this size class re-ported officers' salaries in a good yearamount to only about 3 percent of stock-holders' equity. Even if all corporationsof this size were closely held and thereported officers' compensation were 100percent above the market value of theirservices, the resultant effect on the rateof return on equity would be to under-state it by only 1.5 percent.

Redistribution of Officers' Compensation.That reported officers' compensation

does in fact vary to absorb the profits ofsmall corporations is empirically deter-minable. An examination of variationsin average profit and average officers'compensation per firm from industry toindustry and from year to year in thesame industry reveals that in the small-est size class changes in net income be-fore the deduction of officers' salaries areabsorbed about equally by changes in netprofit and reported officers' compensa-tion. Among aggregates of larger firmsthis absorption decreases with increasesin size and becomes insignificant in theexpression of the profit rate for aggre-gates of firms with more than 1 milliondollars in assets each.

Thus, in order to measure industrialvariations in the change in profits ofsmall business between 1939 and 1941and to estimate the absolute level ofthose profits on a basis comparable tothat of the million dollar and largerfirms, it was necessary to adjust the re-ported profit figures of the firms under1 million dollars in total assets.

The method followed in making thisadjustment is described in some detail inthe discussion of methods below. Inbrief, it consisted of transferring to netprofit the balance of reported officers'compensation after an allowance hadbeen made for, first, the actual amountspaid to officers who are actually em-ployees and only nominally owners, and,second, the probable market value of theservices of the officers who were owners.

The number of "officer-owners" perfirm, their percentage of stock owner-ship and the portion of their time de-voted to the business, was determinedfrom a study of a sample of 1941 cor-

poration income tax returns. The prob-able market value of their services wasdetermined largely from an analysis ofthe rates of pay of the officers of those ofthe corporations in the sample with suf-ficient nonofficer stock ownership to re-strict the salaries to their market value.Table 2 gives the ratios of profit andofficers' compensation plus profit toequity before adjustment. The ratesafter adjustment are presented in table3 and chart 3.

Adjusted ProfitsThe fact that improvements in the

level of industrial activity bring relativeimprovements in the earning position ofsmall firms is demonstrated in the "allindustries except finance" sections intable 3 and chart 3. In 1941 as com-pared with 1939, firms with assets over5 million dollars enjoyed an increase inprofit rate of 8 percent; the 1 million to5 million dollar firms; 12 percent; andthe firms under 50 thousand dollars, 18percent. After these changes weremade, the smallest firms matched theearnings rate of the largest, and thoseranging from 50 thousand dollars to 5million dollars in size operated mostprofitably at rates approximating 20 per-cent. These figures, however, representa composite of widely divergent trendsin the separate industrial divisions.

Areas of Low Earnings.For the manufacturing division the

pattern of earnings by size resembledthat of all industries except finance, butwas on a higher level in 1941. The im-provement of the small firms relative tothe large was scarcely present in miningand quarrying, and was not present atall in the two manufacturing groups—products of petroleum and coal, andstone, clay, and glass—which, althoughclassed as manufacturing, are in partextractive.

The smaller firms in the extractive in-dustries owe their poor earnings posi-tion, and usually also their small size,to a natural limitation on their suppliesof raw material and to partial exhaus-tion of whatever deposits they onceowned. In addition, the small "prairiedog" refineries in petroleum have beenunable to keep pace with the sweepingtechnological changes which occurredDigitized for FRASER

http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

May 1945 SURVEY OF CURRENT BUSINESS 9in the industry in recent years. Yetbeyond the half-million mark the aver-age rate of profit declines with increasesin size.Areas of High Earnings.

Of the broad industrial divisions, it is

principally in the wholesale section oftrade and among the service industriesthat the small firms show to best advan-tage at the high level of business activ-ity prevailing in 1941. In 1939, the aver-age rates of return to wholesalers rangedfrom 7 percent in the smallest size class

to 10 percent in the fifth size class—firms with assets between 1 and 5 mil-lion dollars.

By 1941 this portion of the curve hadreversed itself and the range was stead-ily downward from the 32 percent returnfor the firms under 50 thousand dollars

Table 2.—Reported Corporate Net Profit Before Taxes and Total Return to Corporate Officers and Owners: Percentage of Equity, byIndustries, 1939-41

Assets size (thousandsof dollars)

Under 50

50-99

100-249

250-499

500-999

1,000-4,999

5,000-9,999. _______

10,000-49,999

50,000-99,999

100,000 and over __

Tota l

Year

Net JTotalprofit return

19391941193919411939194119391941193919411939194119391941193919411939194119391941

19391941

All indus-tries

- 8 . 23.02.09.94.3

12 25*2

14.25.4

14.96.2

14.76.1

14.76.8

13.05.8

12.84.79.2

5.311.6

33.446.417.429.013.924.911.122.69.4

20.68.2

17.67.2

16.17.4

13.96.1

13.34.99.3

All indus-tries except

finance

Netprofit

Total

-7 .9

3^013.05.5

15.86.9

18.47.5

19.88.2

20.28.1

20.48.0

17.86.7

16.75.1

11.4

6.615.3

Mining andquarrying

Netprofit

38.3|i—14.4|65.021.636.017.131.214.328.712.326.810.623.69.3

22.08.7

18.67. 1

17.15.2

11.5

9.118.3

- 7 . 0i - 3 . 8

11.7i - . 515.7i .2

i 7.712.216.8

1.95.61.35.82.67.12.88.44.69.0

2.67.4

Total

1 - 5 . 2*4. 51 1.618.913.7

i 11.71 3.1

i 11.514.419.5

6.1.86.53.07.53.18.74.79.0

3.58.4

Manufac-turing

N e t Totalprofit [return profit [return

-9 .65.03.0

14.76.2

19.38.3

22.18.5

24.39.8

25.09.6

24.29.8

22.38.9

26.07.4

17.5

8.4|21.3

38.758.923.440.618. 736.116.133.213.531.812.528.610.926.010.623.39.3

20.67.6

17.7

10.624.0

Publicutilities

Net Total Netprofit

7.813.311.615.410.718.78.2

14.36.6

12.06.8

10.26.09.84.38.93.35.1

4.06.8

"Wholesaletrade

Totalreturn profit .return profit return

-5 .412.54.1

15.46.4

17.68.0

19.79 3

2l'. 69.8

22.510.522.29.2

22.37.2

-1 .9.5

5.3

7.318.6

47.070.226.142.320.435.817.332.616.431.313.228.212.424.410.424.38.1

- . 9.5

5.6

14.428.1

Retail trade

Net Total

- 5 . 85.83.1

12.34.5

14.65.8

15.25.8

15.27.7

16.56.3

14.78.1

14.210.011.714.822.2

7.115.2

28.542.919.232.315.729.313.325.111.222.310.820.3

16*. 69.1

15.410.512.315. 022.4

13.22.6

Service

Net Total

-10.06.44.0

12.15.9

11.16.2

11.06.6

10.65.4

10.30

1.43.49.27.57. 24.46.2

4.39.0

73.592.025.635.717.624.613.520.211.917.08.8

13.1.22.44.3

10.87.97.95.0

13.2

Finance

Netprofit

- 9 . 6- 8 . 9- 1 . 2- . 1

.8

.9

.11.8.1

1.92.52.12.52.74.12.03.84.13.84.8

3.23.4

Totalreturn

11.310.44.66.14.75.22.84.72.14.33.3. 63.33.64.72.74.24.54.15.1

4.24.4

Construction

Net Total

Agriculture,forestry and

fisheries

Netprofit return profit return

-14.74.8

- . 515.42.2

17.83.7

22.74.3

24.18.3

25.421.232.17.4

21.3

5.022.3

61.187.927.050.818.541.815.340.011.136.312.32.323.536.08.2

23.4

- 8 . 51.7

- 2 . 44.6

- . 26.7.1

6.21.85.2

.5 |4.7

- . 4 ,6.71.8

18.8

Total

18.838.6

8.28.6

1.66.7

7. 416.94.5

13.23.9

12.02.69.13.27.01.25.6. 2

7.41.9

19.0

8.26.8

3.58.9

Under 50

50-99

100-249

250-499

500-999

1,000-4,999 -_

5,000-9,999 _____ _

10,000-49,999 ._-

50,000-99,999____

100,000 and over

Total

Year Total man-ufacturing

19391941193919411939194119391941193919411939194119391941193919411939194119391941

19391941

- 9 . 65.03.0

14.76.2

19.38.3

22.18.5

24.39.8

25.09.6

24.29.8

22.38.9

26.07.4

17.5

8.421.3

38.758.923.440.618.736.116.133.213.531.12.528.610.926.010.623.39.3

26.67.6

17.7

10.624.0

Food andkindredproducts

17.25.2

12.48.6

14.68.8

14.810.515.98.0

15.810.114.213.917.87.0

10.5

23.430.318.424.216.224.315.822. 713! 520.612.919.09.2

17.310.814.914.418.37.3

10.8

9. 2;13.6

13.416.0

Beverages

13.314.421.221.018.525.410.321.312.820.216.220.820.317.617.122.412.016.9

16.220.7

44.747.137.738.828.737.215.628.416.825.218.723.621.719.218.123.413.117.5

19.724.3

Tobaccomanufac-

tures

Textilemill

products

Apparel andproducts

made fromfabrics

-27 .3-15 .1- 1 . 9

1.43.16.83.0

- 2 . 16.4

14.5.54.37.4

11.412.411.114.721.717.022.0

14.718.7

8.12 24.0

14.614.314.616.29.15.2

11.621.47.66.58.5

12.13.011.814.22.017.522.3

-16.5.2

- 2 . 516.42.0

20.24.5

23.75.3

23. 05.6

21.36.9

19.67.5

17.010.79.1

"26." 3

15.519.3

6.220.0

35.871.220.645.314.436.911.033.89.3

28.7.8

24.18.1

21.28.3

1711.39.5

-13.92.62 2

12.94.7

16.48.1

19.510.022.69.8

21.84.8

15.112.616.2

8.923.3

6.4

50.874.27.849.624.342.220.836.519.135.414.427.86.2

17.313.617.3

7.833.0

Leatherand

products

-19.36.0

.411.42.0

14.37.5

15.16.2

17.27.7

18.58.6

15.76.5

13.411.212.0

7.015.4

33.459.723.540.716.434.717.227.311.524.10.822.410.017.57.2

15.011.412.3

1121.2

Rubberproducts

.215.112.916.213.426.112.224.614.033.13.26.610.49.4

10.421.3

7.417.3

8.919.0

43.74.637.448.628.043.221.738.319.643.716.530.111.711.110.822.3

7.617.5

10. 120.6

Lumber andtimber basic

products

-12 .610.6

- 1 . 618.21.

24.22.6

21.3.3

21.32.7

18.21.1

14.6- . 28.8

4.312.1

21.252.313.537.710.838.57.5

29.86.3

26. 14.0

20.21.5

15.4.0

9.3

4.412.2

3.818.1

-14.52.52.1

11.83.5

14.06.4

17.66.4

19.48.6

22.55.0!

17.98.4

18.47.7

11.5

6.118.0

32.353.119.635.314.28.213.727.211.026.311.620. 06.4

19.49.0

19.38.3

12.3

11.624.7

Paper andallied

products

-4.613.55.217.88.220.910.322.09.322.98.22.68.823.26.016.8-4.012.24.510.0

6.318.4

37.058.128.044.921.438.119.733.614.529.610.826.010.124.86.817.6-3.713.14.710.2

8.921.1

Year

Under SO-

100-249-.

250-499-.

19391941193919411939194119391941193919411939194119391941193919411939194119391941

Total 19391941

500-999

1,000-4,999.

5,000-9,999,

10,000-49,999 |

50,000-99,999

100,000 and over..

Printingand pub-

lishing

Chemicalsand alliedproducts

Petroleumand coalpsoducts

I

-17.3- 1 .

2.58.05.6

10.38.3

11.47.2

10.710.214.510.413.611.113.36.37.2

|

53.462.925.733.720.126.718.121.913.217.613.418.212.015.612.114.46.67.42.12.1

- 9 . 34.64.3

13.58.5

17.411.220.510.521.414.023.215.625.711.818.414.526.215.924.0

29.4 249.521.234.519.730.318.330.315.428.016.626.317.127.212.519.315.126.916.024.1

15.324.4

-24.9-63 .4

2 4.8- 6 . 7U2.5

16.52 1.518.4

2 12.221.425.19.92 8.513.811.311.51.0

15.12.36.

2.97.6

Stone, clay,and glassproducts

Iron andsteel andproducts

25.I-28 .52 18.62 16.72 21.1

29.02 6.726.7

2 15.727.72 8.122.42 9.314.711.812.01.2

15.42.46.4

- 6 . 3- . 13.8

10.6.8

13.87.7

15.210.419.47.6

16.67.3

10.610.823.812.628.611.223.5

3.1 9. 37.8 20. 3

I

24.136.318.728.015.925.213.522.514.25.09.6

19.38.5

11.711.624.913.129.411.724.1

11.622.

- 3 . 016.83.3

26.29.3

29.69.5

32.88.2

35.19.9

34.010.240.67.2

28.25.8

25.83.6

21.7

6.227.5

44.070.924.356.522.349.217.346.013.343.12.538.411.843.08.0

29.46.0

26.13.9

22.0

8.230.4

Nonferrousmetals and

products

Electricalmachineryand equip-

ment

- 3 . 914.3.7

26.39.7

24.112.430.11.333.513.328.11.221.910.729.76.0

22.315.623.1

12.225.6

51.578.726.463.025.245.324.147.017.344.216.332.812.323.411.30.86.1

22.815.823.3

-12.311.4- . 920.68.8

29.212.833.613.038.113.842.415.041.211.434.4

29.412.641.2

14.728.9

12.641.7

30.682.122.452.624.352.222.951.319.048.217.147.416.943.712.435.9

30.612.741.3

14.541.7

Machinery,except

electrical

- 7 . 416.93.7

23.46.0

29.18.9

32.09.5

36.510.836.611.937.510.037.212.434.93 9

l l ! 7

30.8

70.721.851.717.348.316.544.614.45.713.541.113.539.910.938.613.035.74.1

12.0

11.434.3

Automobilesand

equipment

Transporta-tion equip-

ment, exceptautomobiles

Miscella-neous

2-19.92 8.9

2 . 42 11.2- 4 . 82 20.0

11.425.710.127.711.138.68.3

34.28.4

30.09.7

36.315.622.

13.825.5

2 19.62 62.2 17.72 34.6

8.12 38.0

19.940.615.637.213.942.10.436.39.4

31.510.336.915.722.8

-25 .8.5

-24 .318.22.1

3 14.03.0

2 19.15.7

*30.29.7

2 29.218.8

2 31.513.3

2 13,6.3

2 26.5.7

2 37.7

14.426.3

7.82 27.1

214.043.8

- 3 . 736.011.7

2 29.410.9

2 30.610.4

2 37.812.2

2 32.319.9

2 33.214.2

2 14.46.8

2 26.9- . 4

2 38.0

2 28.0

- 9 . 77.0

- 2 . 613.15.2

18.67.7

23.38.4

28.510.324.18.3

28.514.828.1

!59.012.012.1

24.1

37.865.915.741.817.538.315.335.913.438.513.228.59.4

30.915.929.6

2 59.812.412.6

14.53L.2

1 Capital assets have been substituted for equity to partially correct for the distorting effect of prior-year losses.2 Ratio to a hypothetical equity obtained by applying the equity-assets pattern of total manufacturing to assets of the class to be adjusted.Source: U. S. Department of Commerce. Based on data of the U. S. Bureau of Internal Revenue.

638154—45 2

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10 SURVEY OF CURRENT BUSINESS May 1945

in assets to an average rate of return of22 percent which prevailed for the firmsin each size class between 250 thousanddollars and 50 million dollars of assets.

The earnings curve for the service in-dustry in this two-year period also re-versed itself in the smaller size classes.In the smallest size group the earningsrate went up more than 20 percent,while the firms falling in the 100 thou-sand dollar to 5 million dollar range im-proved their position by only about 5 per-cent. In both wholesaling and servicethe largest firms had the lowest averagerates of return.

In retailing, the very largest firms hadthe highest average earnings rates inboth 1939 and 1941, and the 1941 gainsof the medium and smaller firms relativeto these were only moderate. Likewise,the general pattern of size and earningsremained the same in both years in pub-lic utilities,3 although the firms with as-sets of less than a half-million dollarsgained noticeably on the larger firms.

The constancy of this pattern with achange in the total business activity inthe Nation is to be expected, since inmost of the branches of public utilities,markets tend to be exclusive to each firmand shifts of demand to the services ofsmall firms previously operating at un-dercapacity output are limited, if notimpossible.Manufacturing.

Among the 21 industries of the man-ufacturing division there are discerniblemany different patterns of profits ratesby size of firm. Exclusive of the petro-leum refining, and the stone, clay, andglass industries, which have already beendiscussed, and the metals groups, foodproducts and tobacco are outstandingexamples of industries in which largesize and high profits coincide.

These two classes of products have onepoint in common. When they are pro-duced by large companies they areusually marketed nationally, or at leastover a wide area, and come to the ulti-mate consumer under the manufac-turer's brand. Under these conditions,the fact that the larger companies areable to spread advertising and othermarketing costs over a larger outputmay be a strong contributing factor intheir higher earnings.

Between 1939 and 1941, food manufac-turing corporations under 1 million dol-

Chart 3.—Percentage Ratio of Adjusted Corporate Net Profits BeforeTaxes to Equity, by Assets-Size Classes and Industry Groups

3 The reported profit rates of the four divi-sions, mining and quarrying; public utili-ties; finance; and agriculture, forestry, andfisheries; and for the three manufacturingindustries, food, tobacco, and petroleum re-fining, are not adjusted but are presented asreported to the Bureau of Internal Revenue.Several factors operate to minimize the needfor adjustment in these groups. Amongthese factors are the low level of profits tothe small firms in 1939 and the small in-crease in earnings in 1941 as compared with1939; the prevalence of the parent-subsidiaryrelationship and ownership dispersion inpublic utilities; the fact that many smallfinance corporations exist for legal purposesand are merely nominal in their operations;and the prevalence of dispersed ownershipamong the cooperative agriculture servicecompanies in the agriculture, forestry, andfisheries division. There is no evidence thatprofits have been diminished by significantamounts in any of these industries by thepayment of excessive officers' compensation.

AGRICULTURE,FORESTRY, ANDFISHERIES

FINANCE,INSURANCEAND REALESTATE

ASSET-SIZE CLASS (THOUSANDS OF DOLLARS) -

1 Capital assets have been substituted for equity in all assets-size classes under $1,000,000 topartially correct for the distorting effect in prior years.

Source: U. S. Department of Commerce, based upon data of the U. S. Bureau of Internal Revenue.

lars in assets increased earnings slightlyrelative to the larger firms, and in bothyears the firms in the 50 million to 100million-dollar size class had the highestearnings rates. All others down to thesmaller firms had the lower averageearnings rates.

Not much change in the entire foodindustry could be expected over thisperiod since the product is essentially aninelastic demand good, considerable in-creases in the national income producingonly slight increases in the output of theindustry.

The beverage industry is unique in tworespects. The smaller firms, except forthose with assets under 50 thousand dol-lars, seem to earn the larger rates ofprofit at both high and low levels of in-dustrial activity. Furthermore, it is themedium and large firms which werehelped most by the upswing in 1941.The small-firm portion of the industryis composed for the most part of softdrink manufacturers, who sell at a cus-tomary price in a market where limita-tions on transportation provide protec-tion against profit-destroying competi-tion.

Textiles, apparel, leather, and rubberproducts are outstanding illustrations ofindustries in which the small firms earnthe highest rate of profit with high busi-ness volume. But even at the lowerlevels of production prevailing in 1939,the profits of the small apparel and rub-ber firms equalled or exceeded those inthe larger size classes.

It should be remembered, however,that in such an industry group as rub-ber products the meaningfulness of thecomparative earnings data is even morelimited than in most industries becauseof the noncomparability between thesmall and large firms in product, type ofmarket in which the product is sold, andother economic conditions surroundingproduction and marketing.

In both lumber and furniture the smallfirms were lifted in 1941 from a low in-come level to equality with the medium-sized firms—and in the case of lumberto a position well above the largestfirms. The slope of the curve in thepaper industry remained the same inboth years—the highest earnings ratesamong the small corporations and thelowest among the largest. As in manyindustries, however, the 1941 prosperitybrought the very smallest firms up tofull equality with the second size class.

In chemicals manufacture, size andprofits are closely correlated at a lowlevel of production, but in 1941 all savethe smallest firms pulled up to a com-parable profit level with the largest.Generalization with respect to the rea-sons for the shape of the size-profitscurve in chemicals is not possible sincethe industry consists of very diversesections, industrial chemicals being soldon a competitive basis to industrial buy-ers while drugs and toilet articles aremarketed largely under brand names tononindustrial users under conditions ofimperfect competition.

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

May 1945 SURVEY OF CURRENT BUSINESS 11

In the examination of the 1941 earn-ings rates in the five metals groups, itmust be borne in mind that whereas the1939-41 business improvement was nor-mal in most industries, in the sense thatthe usual assortment of goods was pro-duced under the usual conditions exceptfor the stimulus of a greatly increaseddemand, in the metals group the rearma-ment program had caused some disloca-tions. Where and to what extent the rel-ative earning power of corporations ofdifferent sizes was affected is difficult tojudge.

Of the six groups, the small firms iniron and steel and nonferrous metals, ina position of equality of earnings withthe larger firms in 1939, improved to asuperior earnings rate in 1941. In elec-trical machinery and machinery otherthan electrical, the small firms movedfrom a definitely inferior position to nearequality with the larger firms. In auto-mobiles and transportation equipmentother than automobiles (aircraft andboats and ships), the small firms im-proved from a very inferior position butdid not attain a rate of earnings com-parable to that of the most profitablefirms in the two industries.

ConclusionIn summary, it can be said that in al-

most all branches of industry the earn-ing power of the small firms relative tothe medium and large firms is markedly

improved when the economy movestoward higher operating rates. The ex-ceptions consist of certain industrieswhich are largely or partly extractive—mining and quarrying, petroleum refin-ing, and stone, clay, and glass manufac-turing—and the manufacture of foodand tobacco products.

In several industry groups the smallfirms are definitely superior in earningpower to the medium-sized and largefirms at a high level of production.Outstanding among this latter group ofindustries are wholesale trade, the serv-ice division, and certain manufacturingindustries such as textiles, apparel,leather, paper, iron and steel and non-ferrous metals.

The principal instance of an industryin which small corporations abound butin which they do not attain a profit ratecomparable with that of the larger firmsis the broad field of retailing. But evenin this field it was only the smallestfirms, those with assets under 50 thou-sand dollars, which failed to achieve ap-proximate equality with the largerfirms in 1941.

The explanation lies, in part, in thefact that retailing, at least in most of itsbranches, is one in which entry is rela-tively easy, and the smaller size firmsmay remain in business because of pro-longed absence of prospects of adequatework as an employee of others.

Under these circumstances, evein ifthe only reward in prospect is a reason-

able compensation for the labor of theowners, new firms may be establishedand old ones continued in operation. Ifcompetition is imperfect, the adverse ef-fect on the profits of the larger firms inthe same industry group may not besignificant.

No attempt is made in this study toappraise the factors other than earningpower which contribute to long-run ten-dencies toward concentration. But tothe extent that ability to earn a rela-tively high rate of profit on stockholders'equity is the determinant of survival, andwith the exceptions noted above, the me-dium-sized and small firms seem able tohold their own with the very largestfirms so long as a high level of productionis maintained.

MethodsThe basic data for this study were

taken from the Statistics of Income, pub-lished by the Bureau of Internal Revenuefor the years 1931 to 1941, and from theSource Book, an additional compilationof statistics of income which is unpub-lished but which was made available forpurposes of this study by the Bureau ofInternal Revenue. Statistics of corpora-tion income are not available by assetsize before 1931 and had not been madeavailable for 1942 at the time of the com-pletion of this study.

The ratio of net income to stockhold-ers' equity was chosen as the means of

Table 3.—Adjusted Corporate Net Profit

Industry

All industries, except finance. __Mining and quarryingTotal manufacturing . _*. -Public utilitiesWholesale tradeRetail tradeServiceFinanceConstructionAgriculture, forestry, fisher-

iesManufacturing industries:

Food and kindred products.-BeveragesTobacco manufactures . .Textile mill productsApparel and products made

from fabricsLeather and productsRubber productsLumber and timber basis

productsFurniture and finished lum-

ber productsPaper and allied productsPrinting and publishingChemicals and allied prod-

ucts . . . .Petroleum and coal prod-

uctsStone, clay and glass prod-

uctsIron and steel and products,.Nonferrous metals and prod-

uctsElectrical machineryMachinery, except electrical-Automobiles and equipment-Transportation equipment,

except automobilesMiscellaneous

Under 50

1939

- 3 . 4i —14.4

. 8- 2 . 1

7.4—5 5—1.4—9 6

.6

—8 5

- 8 . 919 1

-27.3- 3 . 2

10 0—3 6

8 2

-13.9

— 5 68.87.7

-10 .1

2 -24.9

- 4 . 18.5

13.0- 5 . 2- 2 . 5

2 -15 . 1

2-19.8.3

1941

14.71 —7.0

21.17.7

32.19 4

21.0—8 927.4

1 7

- . 820 6

2-15.126.8

31 924 432 9

19.6

17 231.017.7

8.6

2-63.4

6.938.2

40.332.736.5

2 26.7

8.026.4

50-99

1939

7.61 —3.8

10.07.8

11.85.98.8

—1.29.0

—2.4

1.825 2

- 1 . 95.6

16 810 023 2

- . 5

6 514.712.8

9.2

24.8

5.911.2

12.87.29.6

2 3.8

- 1 7 . 63.7

1941

21.21 1.726.313.327.318.319.1

i

32.9

4 6

7.225 61.4

28.7

32 525 033 3

23.1

21 331.020.3

21.7

2-6.7

15.543.0

47.737.237.9

2 20.0

22.527.5

Before Taxes by Assets

100-249

1939

6.0i - . 5

8.411.69.04.54.7

.84.8

- . 2

5.217 4

3.12.9

J9 55 5

18 2

- . 1

4 711.710.3

10.6

2 12.5

6.412.7

15.313.6

1:12.16.6

1941

19.6i 5.725.415.424.017.610.8

.928.0

6.7

12.426 1

6.825.4

28 622 834 1

27.0

17 628.616.6

20.7

16.5

15.439.8

35.040.738.3

2 27.8

H9.026.7

250-499

1939

7.3i .28.8

10.79.65.86.2

5.5

.1

8.612 53.04.5

11 08 5

13 5

2.6

7.012.09.5

11.2

2 1.5

7.710.2

13.214.08.9

11.4

3.08.3

1941

20.0i 7.725.218.722.616.511.01.8

26.4

6.2

14.622 7

- 2 . 125.0

24 018 026 7

22.8

19.024.014.0

21.5

18.4

16.036.0

32.838.035.527.4

2 21.025.8

Size: Percentage of

Assets size (thousands of dollars)

500-999

1939

7.812.2

9.28.29.85.86.6

.15.0

1.8

8.813.56.45.3

10 47.0

14 2

3.3

6.810.08.0

10.5

2 12.2

10.48.7

11.813.79.5

10.1

5.79.0

1941

20.316.825.014.322.616.110.61.9

25.7

5.2

14.821.014.923.7

23 0J8.134 5

21.8

20.523.212.0

22.0

21.4

19.435.7

34.040.037.029.0

2 30.229.0

1,0004,999

1939

8.21.99.86.69.87.75.42.58.3

10.516.2

5.55.6

9 87.7

13 8

2.7

8.68.5

10.2

14.0

2 5.9

7.69.9

13.313.810.811.1

9.710.3

1941

20.25.6

25.012.022.516.510.3

2.125.4

4.7

15.920.84.3

21.3

21 818.526 6

18.2

22.522.614.5

23.2

19.9

16.634.0

28.942.436.638.6

2 29.224.1

5,000-9,999

1939

8.11.39.66.8

10.56.3

- . 22.5

21.2

- . 4

8.020.3

7.46.9

4 88.6

10.4

1.1

5.08.8

10.4

15.6

2 8.5

7.310.2

11.215.011.98.3

18.818.3

1941

20.45.8

24.210.222.214.71.42.7

32.1

6.7

15.817.611.419.6

15 115.79 4

14.6

17.923.213.6

25.7

13.8

10.640.6

21.941.237.534.2

3 31.528.5

Equity, by Industries, 1939-41

10,000-49,999

1939

8.02.69.86.09.28.13.44.17.4

1.8

10.117.112.47.5

12 66.5

10 4

- . 2

8.46.0

11.1

11.8

11.3

10.87.2

10.711.410.08.4

13.314.8

1941

17.87.1

22.39.8

22.314.29.22.0

21.3

18.8

14.222.411.117.0

16 213.421.3

8.8

18.416.813.3

18.4

11.5

23.828.2

29.734.437.230.0

-13.828.1

50,000-99,999

1939

6.72.88.94.37.2

10.07.53.8

13.912.014.710.7

11.2

7.7- 4 . 0

6.3

14.5

1.0

12.65.8

6.0

12.49.7

6.3

1941

16.78.4

26.08.9

- 1 . 911.7

7.24.1

17.816.921.7

9.1

12.0

11.512.27.2

26.2

15.1

28.625.8

22.329.434.936.3

2 26.5259.0

100,000and over

1939

5.14.67.43.3

.514.84.43.8

8.2

7.0

17.0

7.4

4.3

4.52.1

15.9

2.3

11.23.6

15.612.63.9

15.6

.712.0

1941

11.49.0

17.55.15.3

22.26.24.8

8.6

10.5

22.626.3

17.3

12.1

10.02.0

24.0

6.3

23.521.7

23.141.211.722.6

2 37. 712.1

5,000and over

1939

6.23.48.53.96.8

10.43.83.8

14.2

5.5

9.617.415.57.6

9.28.78.0

1.3

6.95.18.4

14.0

2.8

10.45.1

12.512.68.6

14.2

8.012.4

1941

14.37.9

20.66.4

15.816.76.44.0

26.3

9.8

13.320.219.618.5

15.713.717.2

11.1

16.516.510.2

22.6

7.3

22.525.3

24.639.129.025.0

27.120.7

1 Capital assets have been substituted for equity to partially correct for the distorting effect of prior year losses.2 Ratio to a hypothetical equity obtained by applying the equity-assets pattern of total manufacturing to assets of the class to be adjusted.Source: U. S. Department of Commerce. Based on data from the U. S. Bureau of Internal Revenue.Digitized for FRASER

http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

12 SURVEY OF CURRENT BUSINESS May 1945

expressing earnings as a rate since theheterogeneity among the size classeswith respect both to the use of capitalequipment and the equity-assets rela-tionship was so great as to render otherratios less meaningful.

"Compiled net profit or loss" was usedas reported by the Bureau of InternalRevenue to represent the net income ofthe corporations. It is slightly defectivefor present purposes since it includessome nonoperating items, such as divi-dends and interest income and gains andlosses from the sale of capital and otherassets. While the inclusion of theseitems in a comparison of individual cor-porations would cause the results to bemisleading, the effect of their inclusionin a study of relative rates by size aggre-gates of corporations is negligible.

Stockholders' equity is the total of pre-ferred stock, common stock, surplus re-serves, and surplus and undivided profitsless surplus deficits. Equity is reportedas of the end of the reporting corpora-tion's fiscal year and, with the exceptionsnoted below, was used without adjust-ment. Obviously, average equity for theentire year is the correct base for thecomputation of the profit rates. For agroup of corporations which are classi-fied in a particular asset size class, equityat the end of the year may deviate fromthe average equity for the year. If thecorporations with income are treatedseparately from those incurring deficits,this deviation may get to be of significantproportions in each separate group. Theprincipal factors making for a diver-gence between average equity and equityat the end of the year are the earning ofprofits or the incurring of losses (both ofwhich are presumed to alter true equityevenly through the year), the declara-tion of a dividend, the donation of sur-plus or sale of stock, and part-year op-eration. Statistics are available for theadjustments to correct for the effect ofprofits, losses, and dividends, but not forthe other factors