Inflation doesn’t seem like a big deal? Increasing prices faster than costs can generate incredible profits. Companies think they can do it because there is strong demand.
Written by Wolf Richter of Wolf Street.
Corporate pretax earnings (excluding the Federal Reserve Bank) increased 3.4% from the second quarter in the third quarter and 5.5% year over year, reaching a record seasonally adjusted annual rate of $3.45 trillion. was recorded. We’ll get to the number of industries for which the Bureau of Economic Analysis released their numbers today.
BEA’s “corporate profits” measure broadly tracks profits. From current production This applies to all businesses required to file corporate tax returns, including LLCs and S corporations, as well as some organizations that do not file corporate tax returns. This is based on income tax data from the IRS and financial statement data filed with the SEC.
During the inflation spike in 2021 and 2022, profits soared as price increases outpaced cost increases by an unusual margin. There was a lull in the first and second quarters of this year, and now it’s starting again.
Aspects of inflation.
A sharp rise in profitability during periods of large inflation indicates that companies are taking advantage of inflation to their advantage, raising prices much faster than rising costs, thereby serving to fuel the momentum of inflation. I am. And they can do that because their customers are willing to pay any price.
Interestingly, rising labor costs have so far not affected the surge in profits. If companies can continue to raise prices faster than rising costs, including labor costs, there may be no impact. This is exactly what fueled and propagated inflation.
First, some definitions.
IVA: Due to “inventory valuation adjustment”, “profit” due to inventory cost fluctuations is deducted. Profits from inventory are more like capital gains. Profit from current production.
CCAdj: The “Capital Consumption Adjustment” adjusts the tax return measurement of depreciation expense (based on historical costing) to the consumption of fixed capital based on current costs using a consistent life and an empirically based depreciation schedule. Convert to measured value.
Excludes capital gains and dividends received do show business Profit from current productionrather than financial gain.
Profit by industry.
Financial domestic industry profit The third quarter increased 2.0% from the second quarter to a seasonally adjusted annual rate of $710 billion, the second-highest rate recorded in the first quarter and a 23% year-over-year increase.
These are domestic profits made by all financial companies except the Federal Reserve. Banks and bank holding companies, and other credit intermediation and related activities. Securities, commodity contracts, and other financial investments and related activities. Insurance companies and related activities. Funds, trusts and other financial instruments.
Customers are paying higher prices, fees, and insurance premiums in exchange for these benefits, which continues to contribute to high service inflation.
Durable goods manufacturing profits In the third quarter, sales increased 7.8% from the second quarter and 18.5% year-over-year, reaching a record $400 billion seasonally adjusted annual rate. This represents a 100% jump in his profits since just before the pandemic.
These industries produce computers, electronics, automobiles, trailers, machinery, fabricated metals, electrical equipment, appliances, components, and other durable goods.
Non-durable goods manufacturing profits After declining in the past two quarters, sales in the third quarter rose 1.1% from the second quarter to a seasonally adjusted annual rate of $344 billion. Compared to a year ago, profits were down 10%.
These industries produce food, beverages, and tobacco products. Petroleum products (including gasoline and diesel), coal products; chemical products. Other non-durable goods.
Retail profits (including profits) e-commerce, The third quarter was up 5.9% from the second quarter and 30.6% year over year for a seasonally adjusted annual rate of $374 billion.
Inflation produces great profits when demand is so strong and customers are confused about how they think about inflation that companies can raise prices much faster than costs can rise.
And the drunken sailors, as we jokingly and affectionately call them all year round, are armed with per capita disposable income that has significantly outpaced inflation this year, splurging and throwing money left and right. They play with it enthusiastically, dropping it and dropping it.
wholesale profits Third-quarter sales increased 2.3% from the second quarter to a seasonally adjusted annual rate of $233 billion, the first increase after three consecutive quarters of declines. Compared to a year ago, profits he decreased by 13%.
profit from information In the third quarter, sales increased 3.0% from the second quarter and 15.7% year-over-year, reaching a record seasonally adjusted annual rate of $193 billion. Retrenchments in the industry in 2022 and early 2023 likely reduced costs and increased profits.
The information industry is a relatively small sector with only about 3 million employees, so it generates very large profits relative to its small size. This includes web search portals, data processing, data transmission, information services, software publishing, film and sound recording, broadcasting, including the Internet, and telecommunications. Some technology and social media companies are moving into this space.
Transportation and warehousing profits In the third quarter, sales plunged 8.1% from the second quarter record to a seasonally adjusted annual rate of $117 billion. On a year-on-year basis, profit increased by 3.6%.
Profits from the huge category of “other non-financial” industries The third quarter increased 4.8% from the second quarter to a seasonally adjusted annual rate of $845 billion. Compared to the same period last year, profit increased by 1.0%. However, it is still below the record for the second quarter of 2022.
Includes mining. construction; real estate and rental and leasing; Professional, scientific, and technical services (for some technology and social media companies). Administration and waste management services. Educational services. Medical and social assistance. Arts, Entertainment and Recreation. Lodging and Meal Services. Agriculture, forestry, fishing, hunting. Other services excluding government.
This category accounts for inflation, such as medical care, concert tickets and other entertainment, lodging, dining out, and construction. Then, after a lull, it starts all over again.
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