Corporate profit margins in the United States have reached a new high of 15.5%.
Key details
US profit margins have reached a 72-year high. Economists are reacting to Thursday’s report from the Bureau of Economic Analysis which suggests that profit margins are outpacing inflationary increases.
Commerce Department statistics show second-quarter profits increasing from 14% to 15.5% from the first quarter. This continues a growth trend from 2020 through 2021, with labor costs growing 7% in that time while profits increased to 14%.
“The data show that companies overall have comfortably been able to pass on their rising cost of materials and labor to consumers. With household budgets squeezed by the rising cost of living, some firms have been able to offset any slip in demand by charging more to the customers they’ve retained,” says Fortune.
Why it’s news
The profit margin does raise concerns about price gouging and the role corporations play in inflation, as Fortune notes. As we previously reported, corporations tend to pass price and tax increases onto their customers, which has a knock-on effect of increasing inflation further. Economists are generally skeptical of this notion, as raising prices is a natural response to fluctuations in supply and demand.
The market itself may correct the increase in the near term though. Consumers are expected to spend less in the coming months as confidence weakens. Some economists though are expecting corporations to intentionally decrease their margins in response to market pressures.
“Persistent price pressure amid our expectations for a more pronounced pullback in demand in the second half of the year will dent businesses’ ability to continue to pass costs on,” says Wells Fargo economists Jay Bryson and Shannon Seery.
Backing up a bit
President Joe Biden in particular singled out the oil industry this spring over claims of price gouging oil prices, demanding companies lower their own prices. He also accused oil companies of hoarding profits and refusing to invest in more oil drilling. Senator Ron Wyden similarly suggested imposing a tax on “excessive” profits.
“I’ve heard plenty of explanations from companies and economists about why it normally takes time for these price reductions to reach the consumer… My message is simple. To the companies running gas stations and setting those prices at the pump… Bring down the price you are charging at the pump to reflect the cost you are paying for the product,” says Biden.
ExxonMobil pushed back against Biden’s claims, saying they “have been in regular contact with the administration, informing them of our planned investments to increase production and expand refining capacity in the United States.”
Amazon CEO Jeff Bezos similarly contested Biden’s economic claims as “either straight ahead misdirection or a deep misunderstanding of basic market dynamics.”
