After-tax corporate profits in this year’s second quarter were 9.4 percent below those of a year earlier, the U.S. Commerce Department reported in late August, although companies listed in the Standard & Poor’s 500 index showed only a 2.9-percent decline in earnings per share, data service Refinitiv said. 

Earnings per share were salvaged by companies buying back their own stock. Net earnings, however, fell 5.5 percent.

In contrast, in 2022’s second quarter, U.S. profits after taxes grew by 7.7 percent and earnings per share by 8.4 percent. In the second quarter of 2021, the gains were 55 percent and 96 percent, respectively.

Two key factors have been key in causing profits and earnings to rise and fall with inflation.

First, the cost of materials rose faster than workers’ pay. That allowed businesses to raise prices without necessarily incurring a proportionate increase in labor cost.

However, in this year’s second quarter, worker pay grew at a 4.5-percent annual rate, while consumer prices moved up 4.1 percent. The slight extra margin left by workers’ lagging compensation disappeared.

Second, as inflation climbed, companies raised the price of existing inventory that was made when costs were lower. That created a new source of pure profit. 

Those lower-cost inventories are gone now and goods produced since bear not only the full cost of materials but also of workers’ fatter paychecks.

Once those items are factored out, second-quarter profits after taxes were 11.5 percent greater than during the second quarter of 2019, the commerce department calculated. Without the adjustments, profits would have been 33 percent.

While stock markets celebrate falling inflation, they also must realize that profits, too, are falling back to more realistic levels.

TRENDPOST: The “artificial economy” of rock-bottom interest rates, shrinkflation, tangled supply chains, workers bearing the burden of rising prices, and the Fed as a customer for junk bonds, is disappearing. Economic realities are reasserting themselves, to the extent that structural distortions will allow.