Corporate profits

Smith says corporate profits are at an all-time high and blames ‘overcharging’

A Democratic candidate for Congress from North Carolina says companies are making more money than they have made in seven decades.

Former State Rep. Erica Smith is campaigning to represent North Carolina’s newly drawn 2nd congressional district. On December 30, she tweeted:

“Corporate profit margins are at their highest level in 70 years. Companies are trying to blame inflation on stimulus checks. Meanwhile, they are overcharging us for gas, medicine and groceries, and pocket the difference. It’s racketeering.”

PolitiFact has written several fact checks on inflation, wages, and whether the cost of goods is tied to presidential politics. Smith’s comments take a different angle on high prices, and we wondered if she was right.

It turns out that after taxes, corporate profits hit a 70 years high last year, according to the Federal Reserve Bank of St. Louis, citing data from the US Bureau of Economic Analysis. But economists say Smith’s tweet gives a misleading impression about the prices of gasoline, groceries and drugs.

company profit

The prices of various goods have risen as demand has increased for a limited supply. Despite this, companies have been able to maintain high profit margins by cutting costs and passing higher costs on to consumers, Reuters reported in September.

The government figures, which are not adjusted for inflation, were updated on December 22. They show that corporate earnings for the quarter ending September 30 totaled $2.7 trillion, the highest level since 1950. Corporate profits in the prior quarter also peaked as percentage of gross domestic product.

Smith’s campaign cited a Bloomberg news article on earnings, titled: “The Biggest Earnings Since 1950 Debunks the Story of CEO Pay Inflation.” The “pocket the difference” line in Smith’s tweet comes from President Biden, who called out oil companies that were keeping pump prices high even as wholesale gasoline prices began to fall.

Bloomberg has created a chart showing the spread between wholesale gasoline and the price at the pump, on a five-day moving average. Bloomberg data showed the spread narrowed from $1.18 a gallon in early August to $1.42 in late November.

Yardeni Research, a consultancy firm offering financial analysis, produced a profit margin report of S&P 500 companies. The report shows corporate profit margins are at their highest since at least 1994.

Smith is certainly not the first Democrat to point the finger at businesses during the pandemic. Economists who spoke to PolitiFact NC said the first line of Smith’s tweet is generally accurate. However, some said his comments about companies “charging us too much for gas, medicine and groceries” need additional context.

The price of gas, groceries and medicine

Economists recently told the New York Times that it makes no sense to blame corporations for their pursuit of profit in recent months, given that supply is low, demand is high and the government has recently put more money in the pockets of Americans .

“I don’t necessarily agree with the statement that the current record high profit margin shows that companies are ‘overcharging us for gas, drugs and groceries, and pocketing the difference,'” said Gary Burtless, an economist at the Brookings Institution. .

Burtless said the Yardeni report shows that “the current high rate of profitability may offset the sharply lower profit rates that the same companies experienced during the months of 2020, when the pandemic significantly reduced the profitability of many companies’ operations. “.

Exxon Mobil Corp. Last year, Exxon Mobil Corp., for example, reported a profit margin of 9.4% in the third quarter. This figure is that of the company highest since 2017. Meanwhile, gasoline prices, which plunged in March and April 2020, as the pandemic took hold and fewer people went to work, averaged about 67 cents per gallon more now than they were in January 2020. But prices are lower than they were in parts of 2012, 2013 and 2014, according to GasBuddya company that tracks gas prices in the United States.

When it comes to drugs, American consumers tend to pay more for prescriptions than those in other countries. Researchers from the University of Southern California and Brookings found that American consumers make up about 64% to 78% of total pharmaceutical benefits. Although the prices of some prescription drugs are regulated, AARP released a report in June that said retail prices for 260 widely used prescription drugs increased in 2020 by an average of 2.9%, more than double the general rate of inflation.

As for groceries, economists have balked at the idea of ​​local grocers shaking up customers.

“Profit margins vary widely not only by industry, but also by company,” said Scott Lincicome, senior fellow in economic studies at the libertarian Cato Institute. Historically, grocery stores and gas stations have “notoriously low profit margins,” he said in a phone interview.

Kroger, one of the largest grocery chains in the United States, reported a profit margin of 1.5% in the third quarter, down from the same period in 2019. The third quarter figure is not historically high.

The cause of rising grocery prices is more a story of supply and demand than corporate greed, said Lincicome and Dean Baker, an economist and co-founder of the Center for Economic Policy and Research.

“High prices are a pretty simple story that there is a big jump in demand and no corresponding increase in supply,” Baker told PolitiFact in an email.

“I don’t see any special conspiracy story there,” he said. “I expect prices to moderate as demand recedes to some extent and supply increases.”

Our decision

Smith said, “Corporate profit margins are at their highest level in 70 years…they’re overcharging us for gas, drugs and groceries, and pocketing the difference.”

Government data shows that Smith is right about corporate profit margins in the United States, collectively speaking.

Consumers in the United States tend to pay more for drugs than consumers in other countries. Oil companies are also making more money lately. However, economists say it’s misleading for Smith to suggest your grocery store or neighborhood gas station is running what she described as “a racket.”

The statement is partially accurate but omits important details or takes things out of context. We rate it half true.