Profitability and Capital Costs for Manufacturing Corporations and All Nonfinancial Corporations

Abstract

This paper is a progress report on our effort to measure and analyze the profitability of U.S. corporations over the postwar period. We are particularly interested in comparing the behavior of manufacturing corporations (MC) to that of the larger aggregate of all nonfinancial corporations (NFC). We analyzed NFCs in an earlier paper using data from both capital markets and the National Income and Product Accounts (NIPA). This paper's approach is basically the same.' Rates of return derived from the NIPA are solid, useful numbers. However, we believe the capital market data are essential. A decline in the real rate of return on capital does not make investors worse off or weaken the incentive to invest if the real cost of capital declines proportionally. Also, an independent measure of rate of return can be obtained from returns realized by investors in debt and equity securities. If the only object were to measure corporate profitability, we believe market rates of return would be superior to the NIPA figures. However, both types of data are needed to investigate the determinants of profitability and to assess profitability relative to the cost of capital.

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