Postwar Low for Margins

Looked at in one way, corporate profits withstood last year's recession fairly well. This week Manhattan's First National City Bank released a tabulation of 2,531 companies, showing that their total profits after taxes fell 8% last year, to $31 billion. The percentage decline was smaller than in half of the previous postwar recession years, and it would have been even less without the strike at General Motors. The auto and parts industry suffered a 52% slump in earnings, and some supplier industries were also clobbered. Steel earnings were off 38% and rubber profits 27%. Alone among the 41 industry groupings, the airlines showed an actual loss--$35.6 million by the Citibank's reckoning. On the other side of the ledger, 15 industries increased profits last year, though most of the rises were moderate. The only spectacular gain was a 145% jump in earnings for 33 amusement companies, in fields like movies, racetracks and bowling. The gain largely reflected the fact that MGM had heavy writeoffs in 1969 but not in 1970.

In one important sense, last year's profits were the worst in a quarter century. Profit margins on sales were only 5%, down from 5.8% in 1969. They were the lowest margins in any Citibank survey since 1945--a year of war, price controls and excess-profits taxes. U.S. industry has been in a profit squeeze since late 1965 because inflation has raised its operating costs faster than its selling prices.

The squeeze has had pernicious effects for the entire nation. Last year alarmed managers undertook a long-overdue cost-slashing drive. Among the results: layoffs, severe clampdowns on hiring and even some cuts in research and development. These cost reductions have put business in a position to raise profits substantially this year: some experts forecast gains of 12% or more in 1971. But the ill effects of the squeeze will be felt for years to come. Because business has been hiring fewer people --notably young executives and technicians--it stands to lose many of the fresh, new ideas that make the economy grow and prosper. The paring of research will have consequences that can only be guessed at. The pressure on profits also aggravates inflation: the tighter the squeeze on earnings, the less room corporations have to absorb the increase in their costs without raising their prices.

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