Are Corporate Profits Hitting All-Time Highs Because Firms “Overcharge”? :: WRAL.com
A Democratic candidate for Congress from North Carolina says companies are making more money than they have in seven decades.
Former State Representative Erica Smith is campaigning to represent North Carolina’s newly drawn 2nd Congressional District. On December 30, she tweeted:
âCorporate profit margins are at their highest level in 70 years. Businesses are trying to attribute inflation to stimulus checks. Meanwhile, they overcharge us for gasoline, medicine and groceries, and pocket the difference. It’s a racket.
PolitiFact has written several fact-checks on inflation, wages, and whether the cost of goods relates to presidential politics. Smith’s comments take a different angle on high prices, and we wondered if she was right.
It turns out that after-tax corporate profits peaked in 70 years last year, according to the Federal Reserve Bank of St. Louis, citing data from the United States Bureau of Economic Analysis. But economists say Smith’s tweet gives a misleading impression about gasoline, grocery and drug prices.
The prices of various products soared as demand increased for a limited supply. Despite this, companies were able to maintain high profit margins by cutting costs and passing the higher costs on to consumers, Reuters reported in September.
The government figures, which are not adjusted for inflation, were updated on December 22. They show that corporate profits in the quarter ending September 30 totaled $ 2.7 trillion, the highest level since 1950. Corporate profits in the previous quarter also reached a high as a percentage of domestic product raw.
Smith’s campaign cited a Bloomberg News article on earnings, titled, “Biggest Profits Since 1950 Debunk Wage-Inflation Story of CEOs.” The âpocket the differenceâ line in Smith’s tweet comes from President Biden, who called out gas companies for keeping prices high at the pump even as wholesale gasoline prices started to decline.
Bloomberg created a chart showing the spread between wholesale gasoline and the price at the pump, on a five-day moving average. Bloomberg data showed the spread fell from $ 1.18 per gallon in early August to $ 1.42 in late November.
Yardeni Research, a financial analysis consulting firm, released a report in December on the profit margins of S&P 500 companies. The report shows that corporate profit margins are at their highest level since at least 1994.
Smith is certainly not the first Democrat to point the finger at business during the pandemic. Economists who spoke to PolitiFact NC said the first line of Smith’s tweet is generally accurate. However, some have said that his comments on companies “overcharging us for gasoline, drugs and groceries” need additional context.
The price of gasoline, groceries and drugs
Economists recently told the New York Times that it doesn’t make sense to blame companies for profit-seeking in recent months, given supply is low, demand is high, and the government has recently put more money into it. money in the pockets of Americans.
“I don’t necessarily agree with the claim that the current record high profit margin shows that companies are ‘overcharging us for gas, drugs and groceries, and pocketing the difference’,” he said. said Gary Burtless, economist at the Brookings Institution. .
Burtless said the Yardeni report shows that “the current high rate of return may offset the significantly lower rates of profit the same companies experienced in the months of 2020, when the pandemic drastically reduced the profitability of many companies’ operations. “.
Exxon Mobil Corp. Last year, Exxon Mobil Corp., for example, reported a profit margin of 9.4% in the third quarter. Although that figure is the company’s highest since 2017. Gas prices, which plunged in March and April 2020 as the pandemic took hold and fewer people commuted to work, are on average around 67 cents per gallon higher now than in January 2020. But prices are lower than they were in parts of 2012, 2013 and 2014, according to GasBuddy, a company that tracks gas prices in the United States.
When it comes to drugs, American consumers tend to pay more for prescriptions than those in other countries. Researchers at the University of Southern California and Brookings found that American consumers accounted for about 64-78% of total pharmaceutical benefits. While the prices of some prescription drugs are regulated, the AARP released a report in June that found the retail prices of 260 widely used prescription drugs increased in 2020 by 2.9% on average, more than double of the general inflation rate.
As for groceries, economists have balked at the idea of ââlocal grocers shaking customers up.
“Profit margins vary considerably not only by industry, but also by company,” said Scott Lincicome, senior researcher in economic studies at the Cato Libertarian Institute. Historically, groceries and gas stations have “notoriously low profit margins,” he said in a telephone interview.
Kroger, one of the largest grocery chains in the United States, reported a profit margin of 1.5% in the third quarter, down from the same period in 2019. The third quarter figure is only not historically high.
The cause of rising food prices is more a story of supply and demand than corporate greed, said Lincicome and Dean Baker, economist and co-founder of the Center for Economic Policy and Research.
âHigh prices are a pretty straightforward story that there is a big increase in demand and no corresponding increase in supply,â Baker told PolitiFact in an email.
âI don’t see any special conspiracy story there,â he said. “I expect prices to moderate as demand declines to some extent and supply increases.”
Smith said, âCorporate profit margins are at their highest level in 70 yearsâ¦ they are overcharging us for gas, drugs and groceries, and pocketing the difference.
Government data shows Smith is right about corporate profit margins in the United States, collectively speaking.
American consumers tend to pay more for drugs than consumers in other countries. Oil companies are also making more money lately. However, economists say it’s misleading for Smith to suggest that your neighborhood grocery store or gas station is running what she has described as “racketeering.”
The statement is partially correct but leaves out important details or takes things out of context. We rate it as half true.