Covid and Profit

This graph shows corporate profits in red, and in blue the same blue data we saw yesterday, the interest rate that the Fed uses to fight inflation. Last time the graph started in 2019. This time it starts in 2012:

This Graph at FRED: https://fred.stlouisfed.org/graph/?g=1uOsu

Corporate profits ran pretty flat between 2012 and Covid -- the right-side scale shows profit running between 2000 and 2500 billion. Immediately after the Covid recession, profits jumped to almost 3000 billion. But not quite as immediately as the graph makes it seem. 

The Covid recession (gray bar) lasted through February and March 2020. It was over by April Fools' day. The red line -- corporate profit -- reaches a low at that point, which appears to be the first of April. But the data at that low point is for the second quarter of 2020, which includes April, May, and June. The total profit over those three months was low, and no doubt they knew it would be low, but they did not have that number until the end of June. 

The data is plotted at the start of April. There is a three-month lag that we do not see. (By the way, you can check dates and values by hovering over the graph at FRED.)

After that second-quarter low, corporate profit shot up to almost 3000 billion in the third quarter of 2020. It dropped just a little in the last three months of the year. And then it shot up again for six months, reaching almost 3500 billion dollars in the second quarter of 2021.

Now, back up. Come halfway down that last increase, to the dot on the high side of 3000 billion. This dot represents the data for the first quarter of 2021. The first quarter of 2021 ended with March. That March was the month when Jerome Powell warned us that inflation was on the way. At that point, near the end of the first quarter of 2021, we had not yet been hit by that inflation. This means that the profit increase from April 1, 2020 to mid-March, 2021 -- an increase of almost 1000 billion dollars -- was not caused by the inflation, surprising as that may be.

Apparently, it was mostly caused by the Covid shock putting people out of work. Compensation of employees fell by over 700 billion dollars in the second quarter of 2020 alone.

When I first noticed that profits increased in the Covid years, I figured it was because of the inflation. But profits shot up before inflation took off. When Covid lockdowns put people out of work, labor costs fell, so profit went up. Today, of course, the employment level is as high as it was before Covid, and more or less back to normal. A lot of people are working again -- and presumably getting paid -- but corporate profit did not go back down. How can that be?

The inflation, maybe? Inflation did not cause the sharp increase in profit in the first Covid year. But inflation did sustain high profits and boost them in the later Covid years. The data appears to support this view.

Thus the argument can be made that "corporate greed" was in part responsible for the inflation. Yes, the Q-of-M increased like crazy, and by keeping interest rates at zero the Fed put up no resistance to inflation. But the money had to go somewhere. Before Powell's inflation warning, the money went to profits instead of to employee compensation. When people started going back to work, the money to sustain high profits started coming from price increases. From the inflation.

This Graph at FRED: https://fred.stlouisfed.org/graph/?g=1v73y

The red line is faint on this graph, but it still shows corporate profit (using the same data as the first graph). The blue line again shows the interest rate the Federal Reserve uses to fight inflation. The black line on this graph is new. It shows inflation as measured by the Consumer Price Index (CPI).

The gray circle on the black line, the faint blue circle below it (on the blue line), and the faint gray vertical line through those two circles all identify the location of March 2021 on the graph. As the gray circle shows, until March 2021 inflation was still low, still close to the Fed's 2 percent inflation target. But, as you can see, corporate profit was shooting up like crazy.

After March 2021, inflation and rising prices sustained high profit and drove it higher. Unemployment was nearing 6 percent and more or less back to normal. Labor costs were up because more people were working. It was no longer the labor-cost savings that boosted corporate profits. It was inflation. That sounds like corporate greed to me. Corporate decency would have been better.

Hm, I wonder if the high cost of interest (at 4 percent and above, say) induced corporations to keep raising their prices. Now that the blue line is starting to come down, maybe we will see profit level off. And maybe the rate of inflation will drop back down, closer to that 2 percent target. Something to keep an eye on.