We live in times of crisis. The phrase may well explain the past fourteen years of economic history, but it has become more real than ever thanks to the pandemic. To the paralysis of the industry and the loss of millions of jobs during the first months of the health crisis, we must add today an unprecedented logistics and inflation crisis. A context, a priori, unflattering for companies to earn money. And yet they are declaring more profits than ever.
The data. They are offered by Bloomberg in two separate articles. On the one hand, the profit margin of large US companies has skyrocketed to levels never seen since 1950. Their earnings now represent 10% of the national GDP, a threshold that has never been exceeded until now. In aggregate terms, corporate profits increased by 37% compared to 2020, a percentage up to a logical point if we think about the extraordinary economic situation that the pandemic induced.
US corporate profit margins arise to highest level since 1950. https://t.co/sXTipXELNV pic.twitter.com/nnmJmb3jES
– Adam Tooze (@adam_tooze) December 5, 2021
The tendency. What has happened since then? On the one hand, that the economy has been reactivated. Many families contained their spending for most of the past year, multiplying the savings. When the economy recovered and jobs returned, the wheel of consumption reactivated with extraordinary intensity. In parallel, the Biden Administration incentivized spending by issuing generous social checks and supportive policies to both families and businesses.
A favorable context for employers to earn much more money than in previous years … But also for workers. Wage compensation has increased 12% from one year to the next. Something attributable to the return to the office of millions of employees and the raises they received upon their return.
The logistics crisis. To some extent, all this could explain the inflation that today threatens both the United States (at 6% and growing) and the European Union (2.43%). For companies, another factor could have played a fundamental role, such as explain here the economist Isabella M. Weber. Supply chain bottlenecks and shortages, as we have seen, have driven up the cost of raw materials. In an inelastic market, the rise in the prices of consumer goods has not been followed by a fall in demand.
We have bought as much or more as in previous years, only more expensive. For companies, the benefits have been much greater.
The future. A priori, good news for everyone. But only relative and temporary. As Bloomberg also explains here, wage compensation today represents around 45% of US GDP, below the historical average. And the inflationary dynamics augurs times of greater acquisitive depreciation. When margins are narrowed, the consumer will lose. We have a good example in gasoline: Big oil is reporting record profits in 2021 while filling the tank is more expensive than ever.
Last. If we look back, it is clear that 2021 represents a turning point in many historical dynamics. In the United States, during the last decades, the percentage of GDP attributable to the profits of non-financial companies had declined over time (while that of financial companies skyrocketed). The question, as always, is not how many benefits the economy will generate in a time of crisis and scarcity but how they will be redistributed in the short term.
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