Profits: Not Good Enough

After all of the attention focused on the stock market and the possibility of a recession, first-half earnings reports by U.S. business seemed to add up to a happy surprise. Impressive second-quarter gains were reported last week by many companies, including Hertz, Raytheon, Pepsi-Cola and Eastman Kodak. In a survey of 934 corporations, the First National City Bank of New York found that earnings were 13% better in this year's second quarter than in last year's second quarter, with the food industry up 12%, paper 15%, aerospace 27%, railroads 32%, textiles and autos each 44%.

Steel was most conspicuous on the down side -24%. And rubber was down 8%, tobacco 4%. But it wasn't the prevalence of ups that mattered most. By almost any measure, profits are not growing as fast as they should be.

Five calendar quarters have gone by since the economy started recovering from the recession of 1960-61. To judge by past performance, the "fifth quarter" of recovery should be a strong period, with profits at or near their peaks. At that point in the 1951 recovery, corporate profits (before taxes) were 15.5% of the gross national product. Profits now are less than 9% of the G.N.P., lower than in any other postwar equivalent period of recovery.

There are also signs that profits in the current recovery have "peaked out" without getting as high as 1959's record quarter. The annual rate of pretax earnings rose to $51.4 billion in last year's final quarter -half a billion short of the all-time high. It has dropped since in successive quarters, first to $50.1 billion, then to $49.5 billion.

Declining profits on increased sales are visible almost everywhere -even in Detroit, where automakers are having their best sales year since 1955. On first-half sales of $4 billion. Ford earned $268 million -less than the $286 million that it earned on sales of only $2.9 billion in the first half of 1959. American Motors' sales in its present fiscal year are about the same as two years ago, but profits are down 30%. Chrysler is an exception. By virtue of severe cost-cutting measures that will slash $60 million off the payroll this year, it has turned last year's first-half $16 million deficit into a $12 million profit, even though sales and earnings are well below 1959 and 1960. As usual, smoothly managed General Motors is doing fine. For the past six years, in fat times and lean, it has consistently brought home returns of 6.7% to 7.8% on sales -and in this year's first half, the figure jumped to 10%.

Few companies can match General Motors' steady return on its sales, but nowadays few can afford not to try.

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