- Many companies have posted record profits over the past year.
- It has led some economists and politicians to accuse companies of fueling inflation.
- These profits may not last, however, as many CEOs see signs of customers tightening their belts.
While tech companies like Twitter and Meta are struggling, many US companies in other industries have posted record profits over the past year.
It has led economists and politicians to accuse companies of raising prices and fueling the inflation that continues to hit American wallets.
“US profit margins have increased since the recession. This is normal,” said a note from Albert Edwards, global strategist at Societe Generale. “What has not been normal,” Edwards added, “is that margins have not experienced their usual cyclical decline during the 2020 recession.”
“Greedflation” — the idea that companies are using inflation as an excuse to raise prices and boost profits — could be part of the explanation.
“Firms have passed higher costs onto customers. But they’ve also taken advantage of the circumstances to expand profit margins,” said Paul Donovan, chief economist at UBS.
The chart below shows after-tax corporate profits as a share of US GDP. Profits have not only increased in recent decades, they have remained elevated since the start of the pandemic.
Rising prices, however, may not be enough to save businesses from the economic reckoning that may be on the horizon next year.
“The squeeze is about to kick in and the window to easily pass cost increases on to end consumers is running out,” Craig Erlam, senior market analyst at OANDA, previously told Insider.
While inflation has slowed recently, it remains high. The Federal Reserve appears poised to continue raising interest rates to contain them, albeit perhaps at a slower pace than the current rate-hiking cycle that began in the spring. As high interest rates sweep through the economy — and a possible recession looms next year — most global CEOs expect their businesses to take a hit.
CEO confidence fell to its lowest level since the Great Recession in the fourth quarter, according to a Conference Board survey. Only 5 percent of CEOs surveyed said they “expect economic conditions to improve in the next six months,” according to a press release.
It remains uncertain to what extent rising corporate profits are to blame for high inflation, but as inflation slows, negative CEO sentiment suggests that some companies’ profits are also set to decline.
Some politicians and economists say record profits are fueling inflation
Democratic lawmakers began pinning the blame on the corporations many months ago, but the calls haven’t gone away.
In early November, Senator Bernie Sanders wrote that “the economic crisis isn’t inflation, it’s corporate greed,” while President Joe Biden threatened to impose an earnings tax on energy companies whose profits were “so high, it’s hard to believe.” After the Democrats’ strong performance in the midterm elections, Sen. Elizabeth Warren said it was a sign that voters agreed that corporations were “spiking up inflation.”
“Candidates up and down the ticket shouted price cuts, from Big Oil to supermarket chains — and they won,” he said.
A House of Representatives Subcommittee on Economic and Consumer Policy report in November indicated “massive increases in profits between 2019 and 2021” and said that “some companies have begun to enjoy record profits and profit margins and continue to do it today”.
While some economists have dismissed the notion that lower corporate prices are fueling inflation, others have suggested it could play a role.
Even the Federal Reserve may start to take note.
In September, Federal Reserve Vice Chairman Lael Brainard said that retailers’ profit margins “have risen significantly more than the average hourly wage that retailers pay workers.”
Edwards’ memo to Societe Generale stated that while Brainard “would never use the words price gouging or inflation greed,” he suspected she was alluding to it.
“My translation is ‘We’ve noticed that inflated retail margins across the economy and especially are a source of rapid inflation and we’re about to squash that trend by killing demand.’ No wonder the US CEO’s confidence plummeted despite record margins.”
managing directors project clients will start withdrawing their expenses and this will reduce profits
During earnings calls over the past year, many CEOs have boasted about their ability to “raise prices even more than necessary to cover costs,” the House subcommittee report found. But their music is starting to change.
While many companies have posted strong gains in recent weeks, company executives have made their views on the future of the economy abundantly clear. The consistent theme: there are already signs of a slowdown in consumer spending, and it could slow further as inflation continues to bite.
At Target, where third-quarter earnings fell short of expectations, customer behavior was “increasingly impacted by inflation, rising interest rates and economic uncertainty,” said CEO Brian Cornell.
Walmart CEO Doug McMillon echoed a similar theme, saying that inflation “has a cumulative impact on our customers, especially those who are more budget conscious, so we focus on lowering our costs and prices as quickly as possible by item and category.”
Executives at Kohl’s, General Mills, 3M and Coca-Cola added to the refrain, noting the “challenging and highly volatile” business environment, “weak” spending and “changes in consumer behavior.”
Just as rising prices coupled with rising profits can hurt consumers, however, falling profits, if they plummet enough, could potentially lead to layoffs. For now, despite high-profile tech layoffs at companies like Meta and Twitter, jobless claims remain close to historic lows. However, Federal Reserve projections suggest this won’t last forever.