AP

Trimming the fat: inflation finally hitting profit margins

Nov 17, 2022, 6:10 AM | Updated: 7:04 am

NEW YORK (AP) — Corporate profits have withstood raging inflation over much of the last year, but those good times may be ending.

Profits stayed fat even as companies’ costs rose thanks to one simple trick: Businesses boosted the prices they charged customers by more than their own costs rose.

Now, though, more companies are seeing their costs rise faster than their revenues. In the parlance of finance executives, their margins are getting squeezed, and that’s acting as a drag on their profits.

To be sure, corporate profits are still near record highs. Companies in the S&P 500 are in the midst of reporting overall growth of roughly 2% for the summer from a year earlier. Many companies also say they still have the power to hold the line on prices for their products, if not raise them further. But some signs of stress are beginning to show, and analysts say even faster margin declines may be on the way given how fragile the economy is.

Consider LyondellBasell, an international chemical company. Its chief financial officer recently said the company saw margins get squeezed last quarter “across all segments due to rising costs and weaker global demand.”

Coffee giant Starbucks, meanwhile, was one of the many companies that successfully pushed through price increases over the last year with no drop-off in customer loyalty or transactions because of them. But when executives earlier this month discussed their latest results, interim CEO Howard Schultz said, “We’re certainly not going to try and raise prices during this time.”

Profit margins for S&P 500 companies during the summer look like they dipped to 11.9%, according to FactSet. That essentially means they kept $119 of every $1,000 in sales as profit. That’s down from $122 three months earlier and from $129 a year earlier, but still above the average of $113 over the last five years.

One of the biggest reasons for the fall in margins is the recent rise in pay that workers have won recently. Total compensation for workers in the private industry rose 5.2% in the summer from a year earlier. Once workers get such increases, companies find it difficult to take them away.

“The combination of sticky wage costs and slowing end market/consumer pricing has been evident in recent macro data and loudly signals margin pressure,” strategists at Morgan Stanley wrote in a recent report.

They’re more pessimistic about trends for profit margins than most of Wall Street, forecasting a drop of 1.5% percentage points in 2023. That’s why they see a fall of 11% for profits at S&P 500 companies next year.

Copyright © The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

AP

deadly heat wave last summer...

Associated Press

After a deadly heat wave last summer, metro Phoenix is changing tactics

Fresh memories of the deadly heat wave last summer have led Arizona authorities to launch new tactics ahead of summer 2024.

2 days ago

A Yuma man has been arrested for allegedly starting a wildfire in a national wildlife preserve near...

Associated Press

Man accused of starting wildfire in national wildlife preserve in Yuma

A Yuma man has been arrested for allegedly starting a wildfire in a national wildlife preserve near the California border.

3 days ago

Colorado River settlement center of new Navajo Nation push...

Associated Press

Tribes say their future is at stake as they push for Congress to consider Colorado River settlement

Navajo officials are celebrating the signing of legislation outlining a proposed Colorado River settlement that would ensure water rights.

5 days ago

Arizona doctors California abortions...

Associated Press

Arizona doctors can come to California to perform abortions under new law signed by Gov. Newsom

Arizona doctors can temporarily come to California to perform abortions for their patients under a new law signed by Gov. Gavin Newsom.

6 days ago

Father convicted of first-degree murder in northern Arizona...

Associated Press

Arizona man convicted of first-degree murder in starvation death of 6-year-old son

A northern Arizona father was convicted of first-degree murder Thursday in the 2020 starvation death of his 6-year-old son.

6 days ago

Former President Donald Trump sits in a courtroom next to his lawyer Todd Blanche before the start ...

Associated Press

Trump hush money trial enters new phase after defense rests without testimony from former president

Donald Trump's hush money trial is now closer to the moment when the jury will begin deciding the former president's fate.

8 days ago

Sponsored Articles

...

Condor Airlines

Condor Airlines can get you smoothly from Phoenix to Frankfurt on new A330-900neo airplane

Adventure Awaits! And there's no better way to experience the vacation of your dreams than traveling with Condor Airlines.

...

DESERT INSTITUTE FOR SPINE CARE

Desert Institute for Spine Care is the place for weekend warriors to fix their back pain

Spring has sprung and nothing is better than March in Arizona. The temperatures are perfect and with the beautiful weather, Arizona has become a hotbed for hikers, runners, golfers, pickleball players and all types of weekend warriors.

...

DISC Desert Institute for Spine Care

Sciatica pain is treatable but surgery may be required

Sciatica pain is one of the most common ailments a person can face, and if not taken seriously, it could become one of the most harmful.

Trimming the fat: inflation finally hitting profit margins