Corporate profits

US corporate profits plummet | Cash and risks

In the first quarter of 2022, US corporate profits fell the most in nearly two years as inflation promised higher costs for businesses as the economy shrank. Adjusted pretax profits fell 2.3% annualized from the prior quarter and rose 12.5% ​​from a year earlier, Commerce Department data showed Thursday. At the same time, a measure of profit margins rose slightly.

The report also showed that inflation-adjusted GDP shrank at an annualized rate of 1.5% in the January-March period, compared to an originally reported 1.4% decline. Consumer spending, which accounts for the majority of the economy, rose an upwardly revised 3.1%.

Faced with rising costs for materials, shipping, and labor, many companies have sought to pass these expenses on to customers by raising product prices. However, input costs continue to rise and consumers have struggled with high inflation for decades.

Over the past few weeks, retailers like Target Corp. and Walmart Inc. cut their profit forecasts amid bloated inventories and price increases that failed to keep up with rising costs. While companies report individual profits based on historical costs, the government adjusts the figures to reflect the current cost of replacing capital stock such as equipment and structures. Due to soaring inflation, current replacement costs are much higher.

Excluding this adjustment, as well as that for inventory valuation, after-tax profits rose 1.5% in the first quarter compared to the end of 2021 and 15.7% compared to the previous year.

After-tax profits as a percentage of gross value added of non-financial corporations – a measure of overall profit margins – improved to 14% in the first quarter from 13.8% in the previous three-month period. It was the fourth consecutive quarter in which margins were wider than in any period since 1950.

Compensation of employees as a percentage of gross value added fell to 59.5%, the lowest since 2019.

While consumer spending was revised higher, the report showed downward revisions to inventories and residential investment.

Despite the drop in GDP, the first quarter figures belie a solid pace of consumption. The contraction largely reflects a surge in imports, tied to strong consumer demand.

Categories (SAAR, QoQ) 2nd east. 1st east.
Real GDP -1.5% -1.4%
Personal consumption 3.1% 2.7%
Non-residential investment 9.2% 9.2%
Residential investment 0.4% 2.1%
Exports -5.4% -5.9%
Imports 18.3% 17.7%
government spending -2.7% -2.7%

Looking ahead, economists expect US economic growth to rebound in the second quarter amid firm consumer spending and less of a slowdown in the volatile business category.

What companies are saying…

“External conditions have caused us to increase prices for a wide range of items across multiple categories. But as you have clearly seen over the past few quarters, overall costs have increased much faster than retail prices. —Brian Cornell, CEO of Target Corp., May 18

“During the quarter, particularly in the middle of the quarter, we were unable to fully address or pass on some of the cost increases that impacted earnings more than expected. We are now managing these costs and passing them on more effectively. Costs related to inventory and fuel prices in the United States will hit some in the second quarter. —Brett Biggs, CFO of Walmart Inc., May 17

“Raising prices is no easy task for a company that has trained its customers for decades to expect big discounts. And there have already been negative reactions from customers who are reluctant to pay our higher prices. —Selim Bassoul, CEO of Six Flags Entertainment Corp., May 12

The first estimate of second-quarter GDP will be released on July 28.

—With the help of Ben Holland.

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