Profits and Prices

THE prices at wholesale of ‘nonagricultural’ commodities are to-day at a lower level than any which they reached in the drastic depression of 1921-1922. At the close of 1925 the Bureau of Labor Statistics reported them at 165 on the basis of the five-year period 1910—1914 as 100. In April of 1927 they fell below 151, and they have remained at approximately that figure.

These nonagricultural commodities represent in the main the products of mining and manufacturing industries. It is small wonder, then, that the financial world is concerned, for falling prices are commonly assumed to connote declining profits. The experience of the post-war depression, when the prices of these commodities plunged from a level of 254, which they had reached in May 1920, to the low point of 155, which they approximated several times in the latter part of 1921 and finally reached in the early part of 1922, is still vivid. This drastic decline of ninety-nine points was accompanied by a fall in the profits of all corporations. Thus the recessions in the price level in 1927 have elicited an abundance of dire predictions.

Whal is the relation between the level of prices and profits? A study of the facts, available in the Statistics of Income annually compiled by our Treasury, leads to the conclusion that the decline in the general level of prices which has occurred since the spring of 1923 has not had the disastrous effects upon the profits of corporations which one would have expected.

The decline in the prices of industrial products would naturally affect the profits of mining and manufacturing corporations most directly. In 1920 the price level stood at an average of 241 for the year, and the total profits of all mining and manufacturing corporations before paying income taxes and before deducting depreciation were $5,537,000,000. By 1925 the price level had declined to 165, but the profits amounted to $6,013,000,000. It is clear that the level of prices was not the primary factor in the determination of relative profits in these two years.

Or take the year 1922 as a basis for comparison. The average of prices was 168; the year began with 158 in January and closed with 175 in December. Yet in this year of rising prices industrial profits were only $4,536,000,000. The price level was higher than in 1925 and the general trend of prices was upward, yet profits were only three fourths what they were in the later year. What were the other factors which entered into the situation?

There are two: a greater volume of output in the latter year, and greater efficiency, especially in the utilization of labor. On these points we have the definite statistics of the Federal Reserve Board. In 1920 the index of physical output stood at 87; in 1922 it was 85; and by 1925 it had risen to 104. This product was created with a volume of employment, represented by 103 in 1920, by 90 in 1922, and by 95 in the year 1925. Pay rolls had stood at 124 in 1920, at 89 in 1922, and at 107 in 1925. The labor cost per unit of output was, therefore, much smaller in 1925 than in 1920, and was slightly less than in 1922. With the increased volume of output overhead costs were materially reduced per unit of product, and the profits were correspondingly increased.

The years 1926 and 1927 bear out these conclusions. The level of prices in 1926 was 161, a new low figure to that date. But output rose from 104 to 108, and labor costs declined. As a result, the industrial profits of 1926 were from 10 to 15 per cent higher than in the previous year. The final statistics have not yet been published by the Government. In 1927 the level of prices was 152, which is markedly less than two years previous. Output declined slightly below the previous year, but remained above 1925; and the wages per unit of product remained low. The profits of the year will be approximately the same as 1925, despite the lower price level. Prices declined five points between the beginning and the end of 1927, but this was offset by a volume of production slightly larger than in 1925.

On the basis of these generalizations, the outlook for profits in 1928 depends upon the course of prices during the year, rather than upon the general level of prices; upon the volume of physical output; and upon the efficiency of labor and management. The fulcrum of the matter is really the prospect for physical output. If the demand for commodities is sufficient to keep production at a high level, prices are almost certain to advance somewhat throughout the year. Thus far the opinion of economists, financiers, and forecasters is almost unanimous that the year will see a new high level of production. Certainly, by all the tests which have been evolved by students of the business cycle, industry is due for renewed activity in the spring of 1928. The index of physical output should, therefore, rise above the figure of 108 which it attained in 1926. This points to higher profits for the year.

Prices of nonagricultural commodities are at the lowest level which we have witnessed since the war. This is a striking fact, but even more striking is the fact that they have not fallen further in the last nine months, despite the recession of demand which occurred in the latter half of 1927. Agricultural prices have advanced decidedly since midsummer. Such an advance, through its stimulus of farm purchasing power, is normally followed by rising prices of other commodities. The deposits of country banks have increased rapidly since late summer, and are moving up in exactly the same manner as they did when the prices of agricultural products rose in the summer of 1924. Foreign demand for American raw materials and manufactured products bids fair to be large. The prospect is for a moderate but sustained rise in prices throughout 1928.

The efficiency of labor and of management is always increased by a recession such as we have witnessed during the last nine months. The year 1928 should, therefore, set a new mark in efficiency. If we do experience this increase in physical output, together with a rising or at least a sustained price level and new attainments in efficiency, then the industrial profits for 1928 will reach a new high level.

Corporate profits in lines of business other than manufacturing and mining have been less affected by the level of prices. These other profits had amounted to $2,850,000,000 in 1920. They fell less in 1921 than did industrial profits, and in 1922 were slightly higher than two years earlier. By 1923 they had reached $3,813,000,000, and by 1925 were $4,938,000,000. They depend much more upon the volume of output than upon the general price level. In fact, the profits of some industries, especially railroads and public utilities, are actually increased by the decline in manufacturing and mining prices. There is no reason to expect these profits to decline during 1928.

In 1922, dividends paid to persons other than corporations amounted to $2,634,000,000; in 1925, the latest published figures available, they amounted to $4,014,000,000. They have certainly grown materially since that year. With a further advance in profits, and with a low price level, dividends should continue to increase.