US corporate profits rise again with recession fear fading
US corporate profits are on the rise again following four straight quarters of declines, according to government data out on Wednesday (Aug 30).
After-tax profits for nonfinancial firms rose 4.5 per cent in the second quarter, a Bureau of Economic Analysis report on gross domestic product showed. Measured as a share of gross value added – a proxy for aggregate profit margins – they rose to 14.3 per cent from 13.8 per cent.
Forecasters track corporate profits because they are seen as a leading indicator of business investment and wider fluctuations in the economy. The decline in recent quarters from the record highs achieved during the pandemic was viewed by some as a harbinger of recession, and the rebound comes just as economists at the Federal Reserve and some Wall Street banks are rescinding their calls for an economic downturn.
“The thought coming into this year was that corporations were maybe going to get squeezed because their customers were going to stop accepting price increases at the same time that the cost structure was really going to continue to be challenging,” said Stephen Stanley, the chief economist at Santander Capital Markets US.
“In reality, companies saw a degree of relief on the cost side, and it seems to me – depending on what industry you’re in, obviously – the pricing power is holding up,” he said.
Government data are broader than figures compiled from quarterly earnings reports of publicly traded companies because they include results from private firms as well.
Still, large public companies may also be seeing a renewed upswing in profits. S&P 500 earnings, which declined from a year earlier in the second quarter, are expected to stabilise in the second half of this year and then start accelerating again, according to figures compiled by Bloomberg Intelligence. By the end of next year, they’re forecast to be growing at an annual pace of around 13 per cent.
Whether companies will be able to keep margins above pre-pandemic levels going forward depends in part on the outlook for labour, Stanley said, citing looming United Automobile Workers negotiations with General Motors, Ford Motor and Stellantis as one example.
“At this point, it feels like labour is spoiling for fight,” he said. “I don’t think that you can count on corporate profit margins staying high at the expense of labour.” BLOOMBERG
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