U.S. Corporate Profits Fall

In the first quarter of 2022, U.S. corporate profits fell by the most in almost two years, as inflation promised greater costs for companies while the economy took a step back. Adjusted pre-tax profits decreased by an annualized 2.3 percent from the prior quarter and were up 12.5 percent from a year earlier, Commerce Department data showed Thursday. At the same time, one measure of profit margins edged higher.

The report also showed that inflation-adjusted GDP decreased at a 1.5 percent annualized rate in the January-to-March period, compared with an initially reported 1.4 percent decline. Consumer spending, which accounts for the majority of the economy, grew an upwardly revised 3.1 percent.

Faced with rising costs for materials, shipping, and labor, many companies have sought to pass along those expenses to customers through higher product prices. However, input costs keep rising, and consumers are grappling with decades-high inflation.

In recent 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. Because of surging inflation, the current replacement costs are much higher.

Excluding that adjustment, as well as one for inventory valuation, after-tax profits increased 1.5 percent in the first quarter from the end of 2021 and were up 15.7 percent from a year earlier.

After-tax profits as a share of gross value added for nonfinancial corporations—a measure of aggregate profit margins—improved to 14 percent in the first quarter, from 13.8 percent in the previous three-month period. That marked the fourth-straight quarter in which margins were wider than in any other period since 1950.

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

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

Despite the decline in GDP, the first quarter figures belie a solid pace of consumption. The contraction largely reflected an import surge—tied to solid consumer demand.

Looking ahead, economists expect U.S. economic growth to rebound in the second quarter amid firm consumer spending and a smaller drag from the volatile trade category.

What Companies Are Saying…

“External conditions led us to raise prices across a broad set of items in multiple categories. But as you’ve clearly seen in recent quarters, overall costs have been rising much faster than retail prices.” —Brian Cornell, CEO of Target Corp., May 18

“During the quarter, particularly in the middle of the quarter, we weren’t able to fully address or pass along some of the cost increases that impacted profit more than expected. We’re now managing those costs and passing them along more effectively. The costs related to inventory and fuel prices in the U.S. will strike some into Q2.” —Brett Biggs, CFO of Walmart Inc., May 17

“Raising prices is no easy task for a company that has trained customers for decades to expect big discounts. And there has already been some pushback from guests 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 assistance from Ben Holland.

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