Counter point to the counter point How much have record corporate profits contributed to recent inflation? Corporate profits rose sharply early in the recovery but profit margins have since...
Corporate profits rose sharply early in the recovery but profit margins have since narrowed, which is a typical pattern in economic cycles.
The tight labor market has recently caused labor costs to play a larger role in inflation, with unit labor costs accounting for half of price increases.
As profit margins shrink and wage growth softens due to slowing demand, inflation is expected to moderate towards the Fed's 2% target by 2024.
While some point fingers at corporations for high inflation, the root cause is an economy with demand exceeding supply; as this imbalance corrects, inflation will follow suit.
...simply put, inflation is too much money chasing too few goods.
I mean those are really the same thing. The "corporate profits!!!" angle never actually made any sense. Companies don't just have a lever somewhere with "low margin" at the bottom and "high...
While some point fingers at corporations for high inflation, the root cause is an economy with demand exceeding supply; as this imbalance corrects, inflation will follow suit.
I mean those are really the same thing. The "corporate profits!!!" angle never actually made any sense. Companies don't just have a lever somewhere with "low margin" at the bottom and "high margins" at the top. They didn't raise prices before, because they would lose money if they did, or at least their own market research shows that they would. It's absolutely not because they felt generous or something.
And when they raise prices today, it's not because they're feeling any more greedy or malicious than yesterday. It's because they think that the market dynamics have shifted such that the new price at which they maximize profits has shifted upwards, because of higher demand.
Corporate margins increasing is a symptom of demand-pull inflation.
Also, there is a cool graph here Net worth gains in 2020 were the largest for the least wealthy... you can zoom out to see how the trends have changed over time...
This is an article aimed at a technical audience and I think we often gloss over the details without really understanding them. Maybe we should put more emphasis on just understanding the numbers...
This is an article aimed at a technical audience and I think we often gloss over the details without really understanding them. Maybe we should put more emphasis on just understanding the numbers we’re looking at? I don’t want to be giving anyone homework, but here are some questions I have:
In the article, there is a graph labeled “Corporate Profits.” There’s a label: “Pre-tax profits with IVA and CC adjustments, % Sectoral Growth Value Added.” Does anyone know what that means?
The Y-axis isn’t labeled. What are the units?
Do corporate profits subtract losses? If companies that were losing money stop losing money, does that affect the graph?
What if a company goes out of business? How does that affect the graph?
(These effects seem important because we just had a pandemic. Lots of businesses were losing money. Some went bankrupt.)
Some companies own substantial assets, like stock in other companies. How much do corporate profits reflect the stock market going up and down due to investor sentiment?
Companies own other assets, too. All financial assets lose value to some extent when interest rates go up, and companies often mark to market. How big is that effect?
Similarly with the other graphs. They’re often based on ratios (and sometimes, ratios of ratios), so the first thing I want to know what all the numerators and denominators are and how they’re measured.
But even if we learned all that, and it would likely be a fair amount of work, I expect that the insight we get from nationwide statistics are limited. I’m not going to do the work, so I feel like the practical thing to do is admit that I don’t know enough to understand this article.
The graph basically shows a slightly modified version of aggregated profits (and losses) divided by GDP (or at least a portion of GDP.) You get a similar story if you simply divide profits by GDP...
The graph basically shows a slightly modified version of aggregated profits (and losses) divided by GDP (or at least a portion of GDP.) You get a similar story if you simply divide profits by GDP or inflation, so the details are unimportant.
In the past you have suggested we all should defer to the opinion of experts. They kindly explain the meaning of the graph here:
Profit margins typically increase in the early stages of recoveries as forward-looking businesses raise prices in anticipation of rising costs. These actions serve to temporarily boost margins and prices. As cost pressures materialize, margins evaporate back to normal levels.
Prices (inflation) are forward looking. Profits, are backward looking. It is normal for forward looking prices to rise in anticipation of increased costs. Accounting standards say you match the profits to the related costs. Which means you are matching forward looking prices to costs incurred in the past. The profits show that you sold stuff for more than it cost in 2021 because you hiked prices up in anticipation of increased costs, but in 2022 when costs catch up, profits dip back down. That is what the graph is trying to show.
You don't need to know enough to understand the key point of a graph, when the authors spell it out for you.
That makes sense, thanks! You can often get the key points by skimming and I probably skim too much. Sometimes I skim so much I even miss key points. (Also, I wrote "we" a lot when I probably...
That makes sense, thanks!
You can often get the key points by skimming and I probably skim too much. Sometimes I skim so much I even miss key points. (Also, I wrote "we" a lot when I probably should have written "I".)
I've become somewhat dissatisfied with skimming macroeconomics papers for key points. I think there's more to having a real understanding than that. (For example, the graph shows correlation, but the author's explanation is about causation. How do we know how much a role anticipated costs play in why companies raise prices?) It would be good to be able to dive into the details more.
Yes, I do believe in paying attention to experts. To me, an ideal expert is someone who knows a lot and is happy to explain it in as much detail as you're willing to put up with. Sometimes if you ask someone who is an expert in something very specialized, they're very happy to explain because people are so seldom interested.
This doesn't mean they necessarily have the time or interest in doing that, though, and it doesn't mean you're necessarily willing to pay for that expertise when it's just casual curiosity; that's why it's an ideal.
Reading articles online isn't interactive and sometimes we're going to run across articles that assume context that we don't have, or just don't go into the level of detail we're interested in. That's not the author's fault, but it can be disappointing. (Some articles will have lots of footnotes, for extra detail that detracts from their key points.)
I haven't seen any deep analysis on this specific question over the last few years. But it is happening. Here is a simple graph that compares US profit growth to US wage growth...
How are companies recording record profits if most of the price increase is labor costs?
I haven't seen any deep analysis on this specific question over the last few years.
But it is happening. Here is a simple graph that compares US profit growth to US wage growth
Hard to give a concrete answer without specific companies to look at (US corporate profits are down almost $400B from last year), but some inputs to look at to explain where companies are today:...
Hard to give a concrete answer without specific companies to look at (US corporate profits are down almost $400B from last year), but some inputs to look at to explain where companies are today:
Lots of companies brutally reduced headcount over the last year.
Counter point to the counter point How much have record corporate profits contributed to recent inflation?
Corporate profits rose sharply early in the recovery but profit margins have since narrowed, which is a typical pattern in economic cycles.
The tight labor market has recently caused labor costs to play a larger role in inflation, with unit labor costs accounting for half of price increases.
As profit margins shrink and wage growth softens due to slowing demand, inflation is expected to moderate towards the Fed's 2% target by 2024.
While some point fingers at corporations for high inflation, the root cause is an economy with demand exceeding supply; as this imbalance corrects, inflation will follow suit.
...simply put, inflation is too much money chasing too few goods.
I mean those are really the same thing. The "corporate profits!!!" angle never actually made any sense. Companies don't just have a lever somewhere with "low margin" at the bottom and "high margins" at the top. They didn't raise prices before, because they would lose money if they did, or at least their own market research shows that they would. It's absolutely not because they felt generous or something.
And when they raise prices today, it's not because they're feeling any more greedy or malicious than yesterday. It's because they think that the market dynamics have shifted such that the new price at which they maximize profits has shifted upwards, because of higher demand.
Corporate margins increasing is a symptom of demand-pull inflation.
I remember folks calling out corporate greed on companies making a 3% profit margin. If any margin is a vice, then any loss must be a virtue.
Also, there is a cool graph here Net worth gains in 2020 were the largest for the least wealthy... you can zoom out to see how the trends have changed over time...
This is an article aimed at a technical audience and I think we often gloss over the details without really understanding them. Maybe we should put more emphasis on just understanding the numbers we’re looking at? I don’t want to be giving anyone homework, but here are some questions I have:
In the article, there is a graph labeled “Corporate Profits.” There’s a label: “Pre-tax profits with IVA and CC adjustments, % Sectoral Growth Value Added.” Does anyone know what that means?
The Y-axis isn’t labeled. What are the units?
Do corporate profits subtract losses? If companies that were losing money stop losing money, does that affect the graph?
What if a company goes out of business? How does that affect the graph?
(These effects seem important because we just had a pandemic. Lots of businesses were losing money. Some went bankrupt.)
Some companies own substantial assets, like stock in other companies. How much do corporate profits reflect the stock market going up and down due to investor sentiment?
Companies own other assets, too. All financial assets lose value to some extent when interest rates go up, and companies often mark to market. How big is that effect?
Similarly with the other graphs. They’re often based on ratios (and sometimes, ratios of ratios), so the first thing I want to know what all the numerators and denominators are and how they’re measured.
But even if we learned all that, and it would likely be a fair amount of work, I expect that the insight we get from nationwide statistics are limited. I’m not going to do the work, so I feel like the practical thing to do is admit that I don’t know enough to understand this article.
The graph basically shows a slightly modified version of aggregated profits (and losses) divided by GDP (or at least a portion of GDP.) You get a similar story if you simply divide profits by GDP or inflation, so the details are unimportant.
In the past you have suggested we all should defer to the opinion of experts. They kindly explain the meaning of the graph here:
Prices (inflation) are forward looking. Profits, are backward looking. It is normal for forward looking prices to rise in anticipation of increased costs. Accounting standards say you match the profits to the related costs. Which means you are matching forward looking prices to costs incurred in the past. The profits show that you sold stuff for more than it cost in 2021 because you hiked prices up in anticipation of increased costs, but in 2022 when costs catch up, profits dip back down. That is what the graph is trying to show.
You don't need to know enough to understand the key point of a graph, when the authors spell it out for you.
That makes sense, thanks!
You can often get the key points by skimming and I probably skim too much. Sometimes I skim so much I even miss key points. (Also, I wrote "we" a lot when I probably should have written "I".)
I've become somewhat dissatisfied with skimming macroeconomics papers for key points. I think there's more to having a real understanding than that. (For example, the graph shows correlation, but the author's explanation is about causation. How do we know how much a role anticipated costs play in why companies raise prices?) It would be good to be able to dive into the details more.
Yes, I do believe in paying attention to experts. To me, an ideal expert is someone who knows a lot and is happy to explain it in as much detail as you're willing to put up with. Sometimes if you ask someone who is an expert in something very specialized, they're very happy to explain because people are so seldom interested.
This doesn't mean they necessarily have the time or interest in doing that, though, and it doesn't mean you're necessarily willing to pay for that expertise when it's just casual curiosity; that's why it's an ideal.
Reading articles online isn't interactive and sometimes we're going to run across articles that assume context that we don't have, or just don't go into the level of detail we're interested in. That's not the author's fault, but it can be disappointing. (Some articles will have lots of footnotes, for extra detail that detracts from their key points.)
How are companies recording record profits if most of the price increase is labor costs?
I haven't seen any deep analysis on this specific question over the last few years.
But it is happening. Here is a simple graph that compares US profit growth to US wage growth
https://fred.stlouisfed.org/graph/fredgraph.png?g=16H0j
Over a longer time frame, profits have been driven by productivity gains, not just wage control.
Historically corporations have captured all productivity gains themselves, especially outside of the software industry.
https://www.epi.org/publication/understanding-the-historic-divergence-between-productivity-and-a-typical-workers-pay-why-it-matters-and-why-its-real/
https://www.epi.org/productivity-pay-gap/
Hard to give a concrete answer without specific companies to look at (US corporate profits are down almost $400B from last year), but some inputs to look at to explain where companies are today: