Corporate profits

Corporate profits are booming. This can leave some padding to absorb higher wages.

U.S. corporate profits have never been bigger – nor have they accounted for a larger share of economic growth, according to recent figures released by the U.S. Bureau of Economic Analysis.

Third-quarter after-tax profits were around 11% of GDP, a measure experts typically use to gauge the country’s economic health. This proportion was still close for almost a decade, according to BEA figures.

A reason? Companies were able to raise prices amid supply chain problems, leaving consumers pay more for everything from gasoline to food toys. Business spending has not grown as quickly, even as businesses struggle with labor shortages and higher wages. On average, profit margins increased nearly 13% in the third quarter, more than the five-year average, according to FactSet figures.

The pace of increases in profit margins is expected to slow slightly in the fourth quarter, as S&P 500 companies are expected to report profits up nearly 12% on average. Energy, industrials, materials and information technology groups are expected to lead the surge at the end of the year, FactSet said.

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All of this profitable padding can leave room for some companies to handle both inflation and wage demands without raising prices, economists from Oxford Economics said in a recent memo.

“Historically high profit margins”

“With the corporate sector enjoying historically high profit margins, we believe companies have some room to absorb further increases in wage growth without having to aggressively raise prices,” they wrote.

Millions of Americans have been slow to return to the workforce, with an estimated 4.7 million fewer people in the workforce than before the pandemic. This pushed up wages in November as employers tried to attract workers, the average hourly wage having increased by 4.8% compared to the previous year.

Businesses may continue to soften deals, Robert C. King, research director at the Jerome Levy Forecasting Center in Mount Kisco, New York, recently told Bloomberg. A survey of CFOs by the Federal Reserve Bank of Richmond found that companies remain optimistic about economic growth for 2021, but expect spending to continue rising until 2022.

“If profits are high, there is going to be a continued demand for workers, and in a tight labor market, there is going to be continued upward pressure on wages and salaries,” King said.