2021 has been the most profitable year for American Corporations since 1950, as per data published by the Commerce Department on Wednesday.
Profit surged by 35 % last year, driven by high household consumer demand underwritten by the government’s cash transfers during the pandemic. The overall gain was above 13 % in all the four quarters last year while only one quarter was reached in 70 years.
Non-financial corporate business profit margins after Tax
Last year was solid for shareholders, but it was suitable for employees too. The employee compensation increased by 11 %. The labor share of national income was back to the pre-pandemic levels. These levels undermined the argument that soaring labor costs drove the surge in inflation.
The non-financial average profit margins came down to 13.9 % in the last quarter after peaking above the 15% levels in the second quarter. The higher numbers have triggered a debate whether the weather prices hike by corporates were primarily responsible for inflation last year, an argument put forward firmly by the Biden Government.
The way the market has behaved, investors anticipate a good time in 2022. After a bit of pullback at the start of the year, the S&P index has climbed back to nearly 4%, set on January 3.
Household demands show no signs of abating even after the Federal Reserve withdraws the stimulus. The latest Federal data suggests since 2019, Americans have accumulated extra savings of $4.2 trillion.
2022 will shift from direct government support for profits to the private sector sources. Workers will benefit, too, as more profits for firms will lead to more hiring. Though there is not much labor supply in the current scenario, there are prospects for solid growth in wages.
The raising of the benchmark interest rates by the Federal Reserve for the first time in March since slashing it two years back to almost zero is now signaling more hikes to come. The War has also increased the prices of commodities like food, metals, and energy. This will affect household budgets and corporate profitability as inflations will remain elevated.
As inflations picked up in 2021, Fed Chair Powell insisted that price pressure was temporary and driven by the pandemic. The massive shift to consumer spending on goods rather than services will end as the covid crisis subsides.
Now the Fed is changing its story. The consumer prices are up by 7.9% from the year ago, while the average hourly earnings were up by 6.6% for the nonsupervisory and production workers who comprise 80% of the U.S workforce.
Bespoke Investment Group global macro strategist George Pearkes says that laborers’ share of income is not rising and is inconsistent with the price spiral.
