A Most Robust Rebound

What was good for General Motors last week really was good for the country. The auto giant reported first-quarter profits of $800 million, v. $59 million a year earlier--when the auto industry and the whole economy were floundering at the bottom of the nation's worst postwar recession. Although few if any companies matched that 1,200% leap, GM's dazzling performance highlights a happy trend: corporate profits have already rebounded from the slump to near-record levels. Most estimates are that the first-quarter profits of all the nation's companies rose a total 40% to 50% above the 1975 period. The leap, of course, was from profit levels that were sorely depressed, but it still indicates that the recovery is proceeding even more smoothly than had been predicted. The healthy earnings also promise that the economy's upturn will accelerate further in the months to come.

Why the surge? One reason is that many businessmen succeeded in maintaining or even increasing prices during the recession. Their total profits fell last year as sales dropped off, but their profit margin on each dollar of sales held up fairly well. Now, with sales rebounding, the margins translate into zooming total profits. In addition, output per man-hour in nonfarm industries is rising nearly as fast as labor costs. That may change as more workers are hired and wages rise, but for the moment it means fatter profits. Most important, consumers are now buying the autos, appliances, clothes and other products they passed by during the recession.

GM is not the only spectacular gainer. Chrysler rang up a first-quarter profit of $72.1 million, v. a loss of $94.1 million in the opening three months of 1975. Outside the auto industry, profits of electronic and electrical-equipment firms on average have more than doubled; some apparel and textile firms are showing increases of more than 300%; profits in the glass business (whose fortunes are closely tied to Detroit's) seem to be up 150% or so. Even railroads and some airlines are showing modest gains. Metals producers are lagging: U.S. Steel's profits fell 46.5% in the first quarter and Bethlehem's 64.6%, while Anaconda suffered a $4.7 million loss. But even they should do better later this year, when spending is expected to pick up.

Spending Money. At the start of 1976, most economists projected a 25% to 30% rise in corporate profits for the year as a whole. Now guesses range from 30% to 35%. The Wharton School of the University of Pennsylvania foresees pretax corporate profits running at a record annual rate of $168.4 billion in this year's last three months (see chart). If that happens, the recovery may gain even more steam. Higher profits give corporations the money to step up spending on new plant and equipment, which so far has been dragging.

Other indicators also are promising.

True, the index of leading indicators --those figures that foreshadow economic trends--fell .4% in March, but that appeared to be an aberration that probably was reversed in April. Some economists already believe that total national output in the current quarter, discounted for inflation, will match the unexpectedly strong 7.5% gain of the first three months.

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