The Profits Paradox

In last week's flood of first-quarter earnings reports, corporation after corporation told a happy-sounding story. Taken as a whole, every major U.S. industry had done better than in the recession-bound first quarter of 1961 and record dollar earnings were frequent. Among the most successful:

AUTOS. With first-quarter auto sales the highest since 1956, Detroit set up a happy babble. Loudest voice in the chorus was that of General Motors, which reported a record first-quarter net of $374 million --up a whopping 99% from last year. Also at an alltime high: G.M.'s 55% share of the domestic auto market.

AEROSPACE. Increased defense spending and the stepped-up U.S. space program boosted earnings generally. North American Aviation, prime contractor on the Apollo mooncraft, increased its net 20% to $8.600.000. Long-suffering General Dynamics showed a gain of 157% to $10.7 million--largely because of tax credits resulting from its previous massive losses building commercial jet transports.

OIL. Though overproduction sent gasoline prices tumbling to their lowest level in twelve years during March, oil companies managed modest profit gains as a result of automation, rising chemical production and expanded overseas operations.

Texaco raised its quarterly dividend from 40-c- to 45-c- on the strength of a 7% profits gain (to a record $115 million), and Shell Oil's earnings increased 10% to $38 million. Heartened by April's climb in gasoline prices, oilmen predicted continued gains for the second quarter. In a few industries, a combination of overcapacity, intense competition and high costs produced a less uniformly rosy picture. Among them:

ELECTRONICS. With many small producers (especially of semiconductors) aban doning the field and others curtailing product lines, the electronics industry's vast overcapacity began to dwindle, and some profits curves turned up. Research-heavy Raytheon, which is engaged in an intensive cost-cutting program, increased its earnings 83% to $2,500,000. But once glamorous Texas Instruments, still heavily in semiconductors, slipped 36% to $2,400,000--though the company saw enough promise in its future to declare a cash dividend of 20-c- a share, its first since 1945.

TRANSPORTATION. Increased freight traffic sent the Great Northern's first-quarter net leaping from $168,000 in 1961 to $1,900,000 this year, and enabled the sprawling Pennsylvania to cut its deficit to $1,400,000 from 1961's $13 million.

Among the struggling airlines, cost-conscious Braniff turned a 1961 first-quarter deficit into a $106,000 profit, but United, plagued by foul weather and "excessive competition," lost $8,000,000--more than 30 times its first-quarter 1961 deficit.

STEEL. Thanks to a flurry of first-quarter hedge buying against the possibility of a strike, most steel companies reported earnings double or more those of a year ago. Bethlehem gained nearly 400% to $39 million. Inland more than 100% to $17 million and U.S. Steel 75% to $56 million. But few steel companies came even within shouting distance of their profits in first-quarter 1960, when steel users bought avidly in the wake of a 116-day strike. And steelmen cautioned that their earnings will surely lag during the current quarter as their customers use up swollen inventories.

Despite the generally solid ring of 1962's first quarter, much of U.S. business shared the steel industry's worries.

For U.S. industry as a whole, profits have declined from 5% of total sales in 1946-50 to 3.1% last year--and for many firms, caught between stable prices and rising costs, the shrinkage persists. Profits as a percentage of invested capital, which some businessmen consider the most important of earnings barometers, also continue to trend downward. Barring a round of price inflation, U.S. industry had only one hope of widening its profit margins significantly: a tireless campaign to cut its costs by increasing its productive efficiency.

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