Corporate profits in the non-financial sector hit a record high of $2.08 trillion in the third quarter, even as inflation, at a 40-year high, continues to weigh on US consumers.
Inventory and capital consumption-adjusted profits rose $6.1 billion between the fiscal second and third quarters, the Commerce Department reported Wednesday, continuing a meteoric recovery from the blitzkrieg slump caused by the pandemic shutdowns. .
After a two-quarter decline in 2020, quarterly profits have jumped more than 80% over the past two years, from around $1.2 trillion to over $2 trillion, adding weight to arguments that the private sector drives inflation by exploiting consumer expectations to keep prices high.
The “Fed should make clear that rising profit margins are driving inflation,” Paul Donovan, UBS’s chief economist for global wealth management, wrote in the Financial Times in November, asking the Fed Chairman, Jerome Powell, to elucidate this point as he headed the US central bank. raise interest rates and slow economic activity.
“Companies passed on the higher costs to customers. But they also took advantage of the circumstances to increase their profit margins. The widening of inflation beyond commodity prices is more an expansion of profit margins than wage cost pressures,” he wrote, adding that “the resilience of demand has given businesses the confidence to raise prices faster than costs”.
Companies from a wide variety of industries openly express this confidence in earnings calls with investors,
“I’m optimistic that over time the market – and we’ve proven, I think, over the years that markets will return to equilibrium, but it’s a function of time. I think in the short term everyone will do what they can,” Exxon Mobil CEO Darren Woods said during his company’s third-quarter earnings call, as transcribed by financial media company The Motley Fool.
Pepsi Co. Chief Financial Officer Hugh Johnston said on his own company’s third-quarter earnings call that his company “is capable of taking any price we need.”
Corporate profits are under scrutiny by Congress.
During a September hearing of the House Oversight and Reform Committee’s Economic and Consumer Policy Subcommittee, subcommittee Chairman Raja Krishnamoorthi (D-Ill.) said the dynamics of the Supply and demand simply doesn’t explain why corporate profits are so high.
“Since the start of 2021, Americans have been suffering from rising prices caused by global supply chain disruptions and changing demand patterns due to the pandemic. However, even combined with traditional supply and demand factors, these elements are insufficient to fully explain why inflation remains high,” he said.
“There are other factors contributing to inflation that have not received enough attention. One of these factors is extreme price escalation – in other words, companies raise their prices far more than necessary to compensate for rising costs, even taking into account changes in supply and demand. which translates into the highest profit margins we’ve seen in the last 70 years,” he added.
Economic advocacy organizations have sounded the alarm over the effect of exorbitant profit margins on American consumers.
“Today’s record corporate profits reflect what we’ve heard in earnings call after earnings call: Companies are happily reporting that their strategy to burden families with unnecessary price hikes is working,” said Rakeen Mabud, an economist at the Groundwork Collaborative, in a statement released Wednesday. .
“Powerful companies in concentrated industries will keep prices high until lawmakers bring them under control,” she added.
Some economists have pointed out that if the rise in corporate profit margins occurs alongside inflation, it is more of a by-product and ancillary cause than the primary driver.
“I’m personally quite skeptical of the ‘greed’ narrative,” said Harvard’s Ph.D. in economics. Student Gabriel Unger, co-author of an influential paper on rising private sector profit margins over the past 40 years, wrote in an email to The Hill in July.
“It’s true that markups (and market concentration) have risen sharply since about 1980. But for most of that time, until the pandemic, inflation was historically very low,” he writes. “So for most of the last 40 years, we’ve had an economy with high and growing profit margins and very low inflation. It’s possible that in the absence of the former, inflation would have been slightly lower, but I still think that suggests that high margins alone are unlikely to cause inflation to explode.
—Updated 5:11 p.m.
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