The decline in business profitability: a disaggregated analysis

The rate of return earned by U.S. businesses has been relatively low for the past several years. The depressed profit rate partly reflects recession or near-recession conditions in the economy over much of the last decade. Some economists have argued, however, that the low profit rate of recent years also reflects a longer run downward trend related to conditions other than the business cycle. Determining the magnitude, duration, and causes of the decline of profitability is important for at least two reasons. First, if the decline is due primarily to cyclical factors, the profit rate could be expected to rebound as the economy recovers from the 1981-82 recession. However, to the extent that declining profit rates are a continuation of longer run trends, a substantial rise in profitability in the near future is much less certain. Second, the desirability and effectiveness of policies to raise the profit rate may depend on the causes and pervasiveness of the decline. One way to analyze the causes of the declining profit rate is to examine its components.