Prepared for Brookings Workshop on Economic Measurement: Two Topics in Finance

Alternative Measures of Corporate Profits

The Sydney (Australia) Morning Herald for Tuesday, February 12, 2002 (Business Section, page 21) contained a short note on the measurement of corporate profits.

"On the adults-only hot, hot, hot topic of…accounting, [a] study…compares earnings reports from companies listed on the New York Stock Exchange with statistics from the U.S. Bureau of Economic Analysis…our spies tell us that the report concludes that U.S. profits in 2001 have been overstated by $130 billion or 27%."

Others have made similar comparisons. William Nordhaus (2002) observed that Standard & Poor's earnings grew 15% per year over the 1992-2000 interval, nearly twice as fast as the 8% per year for corporate profits in the national accounts. Paul Krugman wrote in his New York Times column (Friday, October 11, 2002, page A31): "In the last three years of the bubble reported profits soared, but the overall measure of profits calculated by the [BEA]...grew hardly at all." And in an August 7, 2002, National Association for Business Economics (NABE) teleconference on alternative measures of corporate earnings, Richard Berner, past president of NABE, reported the "sentiment in Wall Street that, because they are based on tax records, the national accounts based earnings measures may be conservative and therefore the best gauge of corporate profits" (taken from a recording of the conference—NABE, 2002).

I. Alternative Measures of Accounting Profits

For an economist, getting an aggregate measure of accounting profits has become more complicated. In "as reported" earnings (the traditional S&P profits measure), profits are stated according to generally accepted accounting principles (GAAP). Blitzer et al. (2002) note that "operating earnings" is a popular alternative but that it lacks a consistent definition. Partly in response to concerns about reported profits, and partly because operating earnings lacks an agreed-on definition, Standard & Poor's introduced a "core earnings" measure of operating profits that was offered as a new reporting standard.