Survey of Current Business

Survey of Current Business
Chronicling 100 Years of the U.S. Economy

March 2022
Volume 102, Number 3

Returns for Domestic Nonfinancial Business

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Once a year, the Bureau of Economic Analysis (BEA) reports on sector rates of return for domestic nonfinancial corporations, for nonfinancial industries, and for 14 major nonfinancial industry sectors, including mining, utilities, construction, manufacturing, wholesale trade, and retail trade. These broad measures of profitability, based on returns on produced assets, may be useful to economists and policymakers. Industry sector and corporate business rates of return are available through 2020; these rates of return reflect revised statistics from the 2021 annual updates of the National Income and Product Accounts (NIPAs) and of the Industry Economic Accounts (IEAs).1 Various Tobin's Q ratios, which compare the financial market value of assets with the replacement-cost value of produced assets, are also presented in this article.

The rates of return presented in this article are calculated as the ratio of the net operating surplus to the net stock of produced assets.2 The net operating surplus reflects the return to capital and is presented in table A. Produced assets are presented in table B. For nonfinancial corporations, the net operating surplus reflects statistics from the NIPAs and is defined as the sum of corporate profits from current production, net interest payments, and net business current transfer payments.3 The net operating surplus for nonfinancial industries reflects statistics from the IEAs and is a broader concept that includes proprietors’ income. For both nonfinancial corporations and nonfinancial industries, the statistics on net stock of produced assets are from BEA's fixed assets accounts. To calculate the Q ratios, additional statistics on financial market values are drawn from the Federal Reserve Board’s Financial Accounts of the United States.

 

 

Nonfinancial corporate rates of return decreased on a before- and after-tax basis in 2020. The after-tax rate of return was 7.1 percent in 2020, a decrease of 0.4 percentage point from 2019 (chart 1 and table C). The before-tax rate of return was 8.0 percent in 2020, a decrease of 0.5 percentage point. Since 1970, before-tax rates of return have ranged from 6.9 percent in both 1982 and 2001 to 10.1 percent in 2006. In the 1960s, average rates of return were higher, peaking at 13.6 percent in 1965 and 1966. Net operating surplus as a share of net value added increased on a before- and after-tax basis (table D) in 2020.

Other measures of profitability—such as BEA’s measure of corporate profits from current production—decreased in 2020. The measures presented in this article exclude the volatile financial sector and compare returns of nonfinancial corporations with their assets rather than with gross domestic product.

 

 

Rates of return can also be calculated for industry sectors using statistics from the IEAs, which provide annual statistics for 71 industries that together account for all U.S. economic activity. Similar to the method used to calculate the rates for nonfinancial corporations, the rates of return for industry sectors are calculated as the net operating surplus divided by the net stock of produced assets. For nonfinancial industries, net operating surplus as a share of net value added is calculated as net operating surplus divided by net value added. The balance for each published sector represents the share of net value added attributable to compensation of employees and taxes on production and imports less subsidies.

Similar to the net operating surplus of nonfinancial corporations, the net operating surplus of nonfinancial industries reflects corporate profits from current production, business transfer payments (net), and net interest payments. However, as noted, it also reflects proprietors’ income, which includes the income of sole proprietorships and partnerships. For this article, the housing component of the real estate sector, which includes owner-occupied housing, is excluded from the nonfinancial industry statistics to allow for a better comparison with the nonfinancial corporate returns data, which do not reflect home ownership.

Much of the difference between the sum of the nonfinancial industries rates of return and the corresponding corporate rates of return can be attributed to the inclusion of proprietors’ income in the industry net operating surplus. However, several statistical differences between the IEAs and the NIPAs also affect the estimates. Notably, all IEA statistics are presented on an establishment basis, whereas the NIPA measure of corporate nonfinancial net operating surplus is presented on a company basis. As a result, the nonfinancial industry measures reflect adjustments that (1) exclude the financial services-producing establishments of primarily nonfinancial corporations and (2) include the nonfinancial services-producing establishments of primarily financial corporations. In addition, the IEA net operating statistics also include a share of the NIPA statistical discrepancy. Despite the differences between the IEA nonfinancial industries aggregate rate of return and the NIPA nonfinancial corporate rate of return, the annual patterns of change of each are similar (chart 2).

The overall rate of return for nonfinancial industries in 2020 was 11.9 percent, a decrease of 0.6 percentage point from the 2019 rate (table C). Net operating surplus as a share of net value added decreased 1.3 percentage points to 19.5 percent, after a 0.9 percentage point increase in 2019 (table D).

This article presents a disaggregation of the rates of return for several industry groups—for example, manufacturing, transportation and warehousing, information, and professional and business services, among others (table C).

The statistics show a volatile year in 2020, as consumer and business activities were impacted by the onset of the COVID-19 global pandemic.4 During 2020, lower rates of return can be seen in 9 of the 14 industry groups compared to 2019, while 5 groups had higher rates of return. The largest decrease of 5.3 percentage points came in arts, entertainment, recreation, accommodation, and food services, while transportation and warehousing decreased by 4.4 percentage points, mining decreased by 4.1 percentage points, and professional and business services decreased by 2.7 percentage points. Returns for construction increased 12.5 percentage points, while agriculture, forestry, fishing, and hunting increased 3.8 percentage points, and retail trade increased 2.8 percentage points. Highlights include the following (chart 3):

  • After ranging between 13.2 and 15.1 percent since 2011, the rate of return for arts, entertainment, recreation, accommodation, and food services decreased to 8.3 percent in 2020, which is the lowest level and the largest decline since the beginning of the time series in 2001.
  • Similarly, the rate of return for transportation and warehousing fell to 3.9 percent after remaining relatively stable between 8.3 and 9.9 percent since 2010. The 2020 level is the lowest since 2002, and the decrease is the largest in the time series.
  • The mining industry, which includes oil and gas extraction, had negative rates of return from 2015 through 2017 of −2.0 percent, −2.7 percent, and −0.2 percent, respectively. The rate turned positive in 2018 at 1.7 percent, then decreased to just 0.2 percent in 2019, before declining to −3.9 percent in 2020, which is the lowest rate of return for any industry since the beginning of the time series.
  • Returns to nondurable-goods manufacturing, which includes petroleum refineries and pharmaceuticals manufacturers, decreased by 2 percentage points to 15.0 percent in 2020, which represents the largest decrease since 2008, when it fell 2.5 percentage points. The 2020 rate is a new low for the series.5
  • By comparison, the rate of return to durable-goods manufacturing was 9.6 percentage points, showing a smaller decline of 0.6 percentage point compared to 2019 after having been relatively unchanged in the last several years.
  • The rate of return for construction increased 12.5 percentage points to 76.0 percent in 2020, which was the largest increase since 2012, when it jumped 15.6 percentage points. The 2020 level is also the highest rate since 2007, when it was 82.3 percent.
  • Agriculture, forestry, fishing, and hunting showed a rate of return of 10.4 percent in 2020, the highest level since the 11.3 percent rate of 2014. The 2020 increase of 3.8 percentage points is the largest increase in the time series.
  • Returns to retail trade jumped to 10.2 percent in 2020 compared to 7.4 percent in 2019, the largest increase in the time series. This followed a span of consistent levels ranging from 7.1 to 8.0 percent since 2009.

Tobin's Q, or simply “Q,” is the ratio of financial-market valuation of corporate assets to the current-cost value of the assets. A Q ratio above 1 indicates that financial markets value corporate assets above their replacement cost; as a Q ratio rises above 1, companies may be more inclined to make direct investments in plant and equipment. A value of Q below 1 indicates that the financial markets value corporate assets below the replacement cost; as Q falls below 1, companies may be more inclined to buy other companies for their capacity rather than make direct investments.

The three Q-type ratios for domestic nonfinancial corporations presented here are defined as follows:

  • Q1 is calculated as the market value of outstanding equity divided by the net stock of produced assets.
  • Q2 adds the book value of outstanding corporate bonds to the numerator used in Q1. The inclusion of bonds makes Q2 a more complete measure of invested capital but including them at historical cost is clearly inconsistent with the underlying rationale for Q, which is to provide a comparison of market valuation with replacement cost.
  • Q3 adds an estimate of the market value of outstanding corporate bonds and net liquid assets to the numerator used in Q1.6
  • All three Q ratios increased in 2020 (chart 4 and table E) after increasing the year before, remaining above their decade lows reached in 2008, when they fell below 1, partly reflecting recession-related stock market declines.

 


  1. See Stephanie H. McCulla and Lisa S. Mataloni, “The 2021 Annual Update of the National Income and Product Accounts,” Survey of Current Business 101 (August 2021) and Lisa S. Mataloni and Connor Franks, “The 2021 Annual Update of the Industry Economic Accounts,” Survey 101 (October 2021).
  2. Produced assets refer to the net stock of capital plus inventories valued at current (replacement) cost.
  3. Corporate profits and net interest are based on tabulations of “company” data rather than “establishment” data. As a result, net operating surplus of nonfinancial corporations includes the income earned by the corporation's financial services-producing establishments, and it excludes income earned by the nonfinancial establishments of financial corporations.
  4. See “GDP and the Economy: Advance Estimates for the First Quarter of 2020,” Survey 100 (May 2020).
  5. The National Bureau of Economic Research (NBER) Business Cycle Dating Committee has determined the peak to trough of the last three business cycles: December 2007–June 2009, March 2001–November 2001, and July 1990–March 1991. The NBER business cycle reference dates are available on NBER's website.
  6. The market value of bonds outstanding is approximated by a procedure developed by James Tobin and Dan Sommers. In brief, the process begins with published book values of bonds outstanding and the assumption that a bond matures in 10 years and carries a coupon rate equal to the Baa rate that prevailed in the year the bond was issued. Net liquid assets are estimated as financial assets less liabilities other than municipal securities, corporate bonds, and mortgages. The data are from the Board of Governors of the Federal Reserve System, Flow of Funds Accounts of the United States, statistical release Z.1 and Moody's Seasoned Baa Corporate Bond Yield [BAA], retrieved from FRED, Federal Reserve Bank of St. Louis.