The huge spike in profits during the high-inflation years backtracked in some industries but got even hotter in others.
ByWolf RichterforWOLF STREET.
Corporate pre-tax profits in non-financial domestic industries fell by 1.4% in Q1 from Q4, to seasonally adjusted annual rate of $2.66 trillion, according to the by-industry data on corporate profits released today by the Bureau of Economic Analysis.
Year-over-year, profits were still up by nearly 10%, despite the drop in Q1, as profits had surged in the prior three quarters. Since Q2 2020, profits have doubled! This is why some have termed this episode of inflation “greedflation.” But that’s what big inflation is all about: Companies raising prices far faster than their costs went up, and their customers being willing to pay whatever. It’s the Fed’s job to knock some sense back into these economic players by making the cost of capital painfully high.
The drop in profits may be another sign that consumers and businesses have discovered that they hate, hate, hate price increases (inflation), and that they’re no longer willing to pay whatever, and that some resistance has built up, well, selectively as we’ll see in a moment.
Corporate profits in financial domestic Industries:Above we saw the profits of nonfinancial businesses. Here are the profits in the financial sector.
Profits in the financial sector spiked by 11.7% in Q1 from Q4, to a seasonally adjusted annual rate of $758 billion, more than undoing the profit declines in the prior three quarters.
Year-over-year, profits rose by 5.7%. Over the two years since Q1 2022, profits spiked by 58%!
The financial industry includes banks and bank holding companies, plus firms engaged in other credit intermediation and related activities; firms engaged in securities, commodity contracts, and other financial investments and related activities; insurance carriers; funds, trusts, and other financial vehicles.
We have removed the 12 Federal Reserve Banks (FRBs) from this tally.The Fed has booked $114 billion in operating losses in 2023, spread across the 12 FRBs. But those losses are irrelevant for corporate profits since they’re the direct result of theFed’s paying interest on reserves and ON RRPs.
How are these corporate profits figured?
The BEA obtains this information from IRS income tax data and from financial statements filed with the SEC. These are pre-tax profits“from current production”by all businesses that have to file corporate tax returns, including LLCs and S corporations, plus some organizations that do not file corporate tax returns. Here are some definitions:
- IVA (“inventory valuation adjustment”): Removes profits derived from inventory cost changes, which are more like capital gains rather thanprofits “from current production.”
- CCAdj (“capital consumption adjustment”): Converts the tax-return measures of depreciation to measures of consumption of fixed capital, based on current cost with consistent service lives and with empirically based depreciation schedules.
- Capital gains & dividends: Excludedto show profits “from current production,” rather than financial gains.
Profits by major nonfinancial industry category.
“Other nonfinancial” industries: The biggest category in the BEA data because it includes so many huge industries, such as construction; professional, scientific, and technical services (where some of the tech and social media companies are); health care and social assistance; real estate and rental and leasing; accommodation and food services; mining and oil-and-gas drilling; administrative and waste management services; educational services; arts, entertainment, and recreation; agriculture, forestry, fishing, and hunting.
Profits spiked by 4.2% in Q1 from Q4 and by 16.5% year-over-year, to a record seasonally adjusted annual rate of $938 billion. Since Q1 2020, profits have doubled, as companies raised prices far faster than their costs had gone up, and their customers, befuddled by the inflationary mindset that had kicked in, went along with it.
It’s this kind of thing – already big profits doubling in the span of four years as companies raised prices far faster than their costs rose – that has caused people to call this bout of inflation, “greedflation.”
Nondurable-goods manufacturing: Profitsplunged by 15.3% in Q1 from Q3, and by nearly 20% year-over-year, to a seasonally adjusted annual rate of $301 billion.
These industries produce food, beverages, household supplies, petroleum products (including gasoline and diesel), coal products; chemical products; and other nondurable goods.
Sign of the unwinding of greedflation?
Durable-goods manufacturing:Profits fell by 7.4% in Q1 from Q4, to a seasonally adjusted annual rate of $393 billion, which was still up by 8.4% from a year ago. Over the three years since Q1 2021, profits have spiked by 57%.
These companies produce computer equipment and electronics products, electrical equipment, appliances, motor vehicles and trailers, machinery, fabricated metals, components, and other durable goods.
Retail trade, including Ecommerce:Profits dipped by 1.9% in Q1 from Q4, to a seasonally adjusted annual rate of $386 billion, but were still up 22.6% year-over-year. They more than doubled since Q1 2020:
Wholesale trade:Profits fell by 7.6% in Q1 from Q4, to a seasonally adjusted annual rate of $232 billion. Year-over-year, profits were flat.
Information:Profits spiked by 8.8% in Q1 from Q4, and by 26.6% year-over-year, to a seasonally adjusted annual rate of $218 billion. All those layoffs in the sector must have helped.
The sector includes web search portals, data processing, data transmission, information services, software publishing, motion picture and sound recording, broadcasting including over the Internet, and telecommunications.
Transportation & warehousing:Profits rebounded for the second quarter in a row to a new record, spiking by 8.8% in Q1 from Q4, and by 21.2% year-over-year, to a seasonally adjusted annual rate of $134.8 billion.
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