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.
