How Slowing Inflation Can Hit Corporate Profits

livemint.com:

When inflation goes up, it can do wonders for companies’ profits. But when it starts to cool, the wonder goes away. The Commerce Department last week reported that after-tax U.S.

corporate profits were down 9.4% in the second quarter from a year earlier—a more severe drop than the 2.9% decline in earnings per share registered by companies in the S&P 500, as estimated by Refinitiv. Some of this difference is a matter of composition: The S&P 500 contains only large, public companies, many of which have operations outside the U.S., while the Commerce Department figures include Federal Reserve banks, which have been losing money as a result of high rates and the Fed’s portfolio reductions. S&P 500 companies have also reduced their share counts, through buybacks and the like, boosting earnings per share.

Indeed, S&P 500 net income was down notably more in the second quarter than earnings per share, falling 5.5%. No matter how you look at it, though, the stellar growth that companies began experiencing shortly after the pandemic hit has come and gone. In the second quarter of last year, U.S.

after-tax profits were up 7.7% from a year earlier, while S&P earnings per share were up 8.4%. And in the second quarter of 2021, they were up 55% and 96%, respectively. Slower economic growth and, in the case of S&P 500 companies especially, a shift in consumer spending back away from goods and toward services, have played a role.

But cooling inflation has also cut into earnings, and if it continues, profits could remain under pressure. Some of this is simply because after a period of prices going up faster than labor costs, lately labor costs have been rising faster—in the second quarter, U.S. employment costs were up 4.5% from a year