In some industries, profits surged. In others, profits sagged. By major industry.
By Wolf Richter for WOLF STREET.
The explosion of corporate profits during the high-inflation years stalled in Q1, according to data from the Bureau of Economic Analysis today. That explosion of profits was quite something. From Q1 2020 through Q4 2024, over those five years, pretax profits of incorporated businesses of all sizes in nonfinancial industries had spiked by 122%, and in financial industries by 97%. Over the same period, CPI inflation rose by 23%. But in Q1, corporate profits remained essentially flat.
In nonfinancial domestic industries, pretax profits of incorporated businesses of all sizes edged up by just 0.1% in Q1, to a seasonally adjusted annual rate of $2.95 trillion. Year-over-year, profits were still up by 7.9%, due to the surge last year.
This category includes all businesses except financial firms. More on the individual categories of nonfinancial firms in a moment.
In financial domestic industries, pretax profits edged up by just 0.2%, to a seasonally adjusted annual rate of $872 billion.
The category includes banks and bank holding companies, firms engaged in other credit intermediation and related activities; firms engaged in securities, commodity contracts, and other financial investments and related activities; insurance carriers; funds, trusts, etc. But it does not include the 12 regional Federal Reserve Banks (FRBs).
These are pre-tax profits “from current production” by all businesses that have to file corporate tax returns, including LLCs and S corporations, plus some organizations that do not file corporate tax returns. The BEA obtains this information from IRS income tax data and from financial statements filed with the SEC.
The profit explosion fueled the high-inflation period. High inflation by definition means companies can and do raise their prices by a lot without losing sales. This kind of sudden “pricing power,” when it occurs, spreads like wildfire because it immediately inflates profits.
During the high-inflation years, companies could raise prices willy-nilly because consumers were willing to pay whatever, loaded up as they were with free money from stimulus funds, PPP loans, mortgage and student-loan forbearance, eviction bans, all kinds of tax credits, etc.
Faced with higher prices, workers in turn clamored for higher wages, and they started massively changing jobs to get those higher wages. Companies, having discovered their pricing power, were then willing to pay higher wages to keep and attract talent.
The phenomenon that consumers were suddenly willing to pay whatever, starting in late 2020, caused companies to jack up their selling prices while they were also willing to pay somewhat higher prices to their suppliers and somewhat higher wages to their employees. And on the difference, pretax profits blew out.
But recently, at least some price resistance has set in, to where raising prices entails the risk of losing sales.
Q1 was still before the new tariffs were paid. The tariff payments by importers to the government started to surge in April and spiked further in May, which will hit Q2 profits of the companies that import tariffed goods. We discussed the monthly cash flow from tariffs here.
Companies have not yet been able to pass the tariffs on to consumers, as of the May inflation data. In Q2 so far through May, tariffs were paid out of corporate profits, not by consumers. We don’t know yet about June’s inflation data. But companies overall have lots of room to eat the tariffs, given the gigantic profits they obtained by jacking up prices since 2020.
Corporate profits by major industry.
“Other nonfinancial” industries: This is the biggest category by profits, with huge industries: construction; professional, scientific, and technical services (includes some tech and social media companies); healthcare and social assistance; real estate and rental and leasing; accommodation and food services; mining and oil-and-gas drilling; administrative and waste management services; educational services; arts, entertainment, and recreation; agriculture, forestry, fishing, and hunting.
Profits jumped by 3.1% quarter over quarter and by 7.3% year-over-year, to a seasonally adjusted annual rate of $1.07 trillion.
Manufacturing industries: Profits fell by 6.5% in Q1 from Q4, to a seasonally adjusted annual rate of $675 billion, but year-over-year, were still up by 4.8%.
This includes manufacturing of durable goods (computers, electronics, electrical equipment, appliances, motor vehicles, trailers, machinery, fabricated metals, components, etc.) and nondurable goods (food, beverages, supplies, petroleum products, chemical products, coal products; etc.).
Since 2019, profits in the manufacturing industries have doubled.
Retail trade, including Ecommerce: Profits rose by 1.0% in Q1 from Q4 and by 10.5% year-over-year, to a seasonally adjusted annual rate of $409 billion, up 138% since Q1 2020:
Information: Profits jumped by 3.9% in Q1 and by 27.6% year-over-year, to a seasonally adjusted annual rate of $308 billion. Since Q1 2020, profits have spiked by 150%.
The category includes businesses engaged in web search portals, data processing, data transmission, information services, software publishing, motion picture and sound recording, broadcasting including over the Internet, and telecommunications.
This is a small industry in terms of employees, but with outsized profits.
Wholesale trade: Profits rose by 0.8% in Q1, and by 2.3% year-over-year, to a seasonally adjusted annual rate of $291 billion. Since Q1 2020, profits have surged by 80%.
Transportation & warehousing: Profits rose by 1.4% Q1, and by 3.0% year-over-year, to a seasonally adjusted annual rate of $133 billion. Since Q1 2020, which was the low point after a long decline, profits quadrupled (+304%). From the average levels in 2016, profits doubled.
On a technical note, these pre-tax profits “from current production” have been adjusted in three ways:
- “Inventory valuation adjustment” (IVA) removes profits derived from inventory cost changes, which are more like capital gains rather than profits “from current production.”
- “Capital consumption adjustment” (CCAdj) converts the tax-return measures of depreciation to measures of consumption of fixed capital, based on current cost with consistent service lives and with empirically based depreciation schedules.
- Capital gains & dividends earned are excluded to show profits “from current production,” rather than financial gains.
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Government deficit spending is sure awesome for corporations and their owners. And their politicians…… Until it doesn’t. When?
True enough.
In a sort of latent way, Wolf’s important post here is about short-sightedness, in varied manifestations.
Mass death and money printing are not commonly thought of societal/economic “winners” and yet the “conventional” metrics…
Seeing the dichotomy between the markets and the real economic lives of people around me in the middle class is quite striking.
We can’t even cut 1.4M you know who off Medicaid. The helicopter spending is well established & not going anywhere.
The CFO survey from Richmond Fed yesterday, definitely backs up the premise of profit declines mixed with passing on costs to consumers — who saw that happening?
The second quarter results suggest that CFOs expect heightened price and unit cost growth in 2025 and 2026. They also expect lower revenue growth than they did last quarter.
“The 40 percent of firms that cited tariffs as a pressing concern were more likely than their unconcerned peers to report reducing capital expenditures, passing through cost increases, and moving up purchases. Manufacturers were more likely than non-manufacturers to take action in response to tariffs.”
Two of my grocery staples have risen by 3% & 8% at Walmart in the last 30 days. ALDI is the only grocery chain in my area dropping prices.
Truly eye opening. Profits tripling in 3-5 years is something that should never happen.
Plenty of room for the tariffs to work on behalf of the American people. A bit of a profit squeeze should be music to the ears of all of the socialist types out there but, not so much if you’ve been afflicted by TDS.
That’s why the outcry against tariffs was so strong from the media.
You had a combination of people with TDS and the corporate owned media shilling for the stock market. A perfect storm.
Socialists aren’t anti profit. China isn’t anti profit. You are a moron.
If the plan was to better slow inflation, tariffs aren’t it.
I want my home insurance & property taxes to be squeezed.
“Profits tripling in 3-5 years is something that should never happen.”
Better hope nobody mentions the housing industry during the ZIRP years…
But I get your point.
One *small* ameliorating factor…once a company is even slightly above breakeven, even smallish profit increases lead to explosive gains in profits/profit margins (not *revenues*) – it is simply a function of how ratios are calculated.
And those fixed costs of production are…pretty fixed, at least for awhile.
That said, the Pandemic “Jubilee” did, rather nauseatingly, act as a gift to corporate interests that had already been “winning” the pie slicing contest for 40-50 years.
Yet it wasn’t enough for our drunk asset holders. They want more fuel to the fire with lower rates. They’ve grown addicted to ballooning asset prices at the expense of non-asset holders.
Yep another bubble inflation cherry on top seems baked into the cake when our “glorious leader” gets his way and cans Powell for another yes-man who will start another rate lowering campaign.
The Fed controls short-term rates. If the rate cuts come when inflation is increasing, they will cause long-term rates to spike. We saw this last year: 100 basis points in rate cuts, as inflation was re-accelerating, triggered long-term yields (10-year Treasury yield, 30-year mortgage rates) to spike by over 100 basis points — a massive surprise that the spooked bond market served up. That is why the Fed stopped cutting and started talking hawkish: to halt the spike in long-term rates. They succeeded. But a future dovish Fed, if inflation accelerates, could wreak havoc on long-term yields.
So. In other words, the FED is not all powerful when it comes to interest rates. They might control short term rates, but Mister Markets holds sway over the resale rates of long term bonds ?
For as long as they can keep trading these assets at higher and higher valuations amongst themselves. The old snake eating it’s tail comes to mind.
House Republican holdouts threaten revolt over spending bill…
Setback as Senate referee disqualifies key provisions…
Maybe, but there was plenty of “ain’t gonna pass” Kabuki in the House immediately before the Bloviating Bill of Baloney…passed.
The true DC vibe is that the BBB (honest rating, CCC, heh) is essentially the top Administration priority.
(See also, first Trump Administration…)
DOGE and tariffs get a lotta ink, but watch what the Gnomes on the Hill *really* put their back into.
Rep. Sellout (Uniparty) ain’t skipping golf to get DOGE cuts across finish line…but the BBB?
If BBB doesn’t pass, what is the alternative ?
The debt ceiling has to be raised. If presented as a single bill, it will be loaded up with pork or worse and require 60 votes to pass rather than 51.
If the Trump Tax Rates are not extended, it will be a big tax increase. What are the odds of the extension passing outside the reconciliation process ?
Border enforcement ? Ditto.
What BBB really demonstrates is just how weak the GOP and Administration are. Trumps political clout is only surface deep. The Never Trumpers and others are deeply opposed to any change or reform regardless of what it looks like
Why exactly is it that anything meaningful now requires 60 votes to be passed ? Is it anywhere in the “sacred” constitution or is it simply an invented mechanism for preserving the status quo.
Certainly there is some constraining good in 60 vote regime, but a crisis can always be manufactured to pass bad legislation – which then becomes impossible to repeal. And the DEMS are usually more disciplined as you would expect from collectivists.
Investors on Edge About a Potential Shadow Fed Chair…
Battered Dollar Takes Another Beating…
GDP revised lower on tepid consumer spending…
What is the point about posting this stuff? Spammy
As usual, great information with a lot data to unpack. Just wanted to pass along some observations:
– One thing is for certain from the charts/graphs is that the impact of the Great Recession (2007 – 2009) and the Great Inflation/Stimulus (2021 – 2023) is clearly evident. Can you imagine the charts/graphs if the FED’s balance sheet didn’t more than double from 2020 through mid-2022 and the federal debt didn’t increase from $23 trillion in 2019 to $36 trillion in 2024? Talk about a case study in excessive monetary and fiscal stimulus.
– I completed some cowboy math (rough estimates) and calculated that the magnificent seven companies annual pre-tax income amounted to approximately $600 billion over the same period (Tesla being the dog as teh other six tech companies have blow out results). Compare this to roughly $3 trillion of pre-tax income (referenced in the article) and the ratio is 20%. Seven companies produce 20% of the pre-tax income. Wow, talk about concentration risk. It would be interesting to extract the pre-tax earnings from these companies and analyze the results.
– The charts/graphs presents only pre-tax earnings which take into consideration all expenses other than income taxes. Seeing that interest rates have been increasing for the past 2+ years, with the effect of interest rate increases probably becoming more visible over the past year (as lower cost debt is rolled over and variable debt rates adjust), it would be interesting to evaluate the impact on rising interest rates on the non-financial business sector of the economy.
– Interestingly enough, the CAGR of net pre-tax income from 2007 through 2025 amounts to roughly 5.37% for the non-financial business sector. This compares to a CAGR of approximately 8% in the S&P 500 for the same period. Over almost 18 years, the 5.37% average annual return appears reasonable but again, the bump in this figure over the last four years (from 2021 through 2024) has been huge. If you look at the data from 2007 through 2020, the pre-tax income figures barely budged (from $1.15 million to $1.25 million, hardly impressive).
– Last comment. I see no proof what so ever that using monetary (QE, ZIRP, etc.) and/or fiscal (tax cuts, grants/credits, etc.) policies stimulate the economy enough to help reduce the annual deficit and federal debt levels (via increasing tax receipts). From 2007 to 2025, the total federal debt has increased from approximately $9 trillion to $36 trillion, while the nominal annual USA GDP has increased from roughly $14 trillion to almost $30 trillion. That’s a pretty crappy ratio, $27 trillion increase in federal debt compared to $16 trillion of nominal GDP growth, a ratio of 1.69 to 1.00. During this period, pre-tax corporate profits from all companies have increased from roughly $1.5 trillion to approximately $3.8 trillion (eyeballing WR’s figures). I don’t have the figures for personal taxable wages but its safe to say that combining this increase along with the increase in companies earnings and then applying the marginal tax rates is not nearly sufficient to address the federal debt and annual deficits. My point is, every politician tells the same lie. Our tax cuts and stimulus policies will pay for themselves through increased business activity, earnings, and wage growth, driving higher income tax receipts. Yep, the oldest lie in the profession and complete BS.
There are some interesting patterns in when profits spiked in each category vs when inflation increased (and important to note that profits increased far more than inflation did).
For example, retail profits were the first to spike, nearly doubling by mid-2020, well before inflation started to increase. Next came transportation in late 2020 to early 2021. Then manufacturing in mid to late 2021, then trade in early 2022, and information and financial later in 2022. Inflation didn’t increase until mid-2021 and didn’t peak until mid-2022.
There’s an interesting story to be told about those relative timings.
Good observation!
Yep, there is a lag or hysteresis. Looking forward to PCE’s report today (27 June 2025).
Could be closely linked to who could stay open, and even get covid money from the government? Effectively the tax payer backing the corporations against their own interest, with the help of the duopoly(politicians).
On your last point:
What matters is the growth in the tax base relative to the cost of the debt. So my cowboy math is:
27 trillion in debt at an average cost of 5% (its lower in actuality) is an increase in debt costs of 1.4 trillion.
16 trillion in GDP growth which should net about 18% of it in taxes (the size of the federal government revenues relative to GDP) which nets 2.9 trillion in tax revenue.
So the yearly balance sheet of the federal government has improved even while debt has piled up.
There are many ways to look at this issue of the debt. The way that is the most meaningful to me in financial terms is the ratio of interest payments to tax receipts: what portion of the tax receipts are used to make the interest payments. I track this quarterly. Here is the latest with data through Q1:
https://wolfstreet.com/2025/05/29/us-government-interest-payments-to-tax-receipts-average-interest-rate-on-the-debt-and-debt-to-gdp-ratio-in-q1-2025/
Thank you, Wolf. People should know this.
China’s Xiaomi undercuts Tesla with yet another cheaper car
BEIJING — Chinese smartphone company Xiaomi is taking aim straight at rival Tesla
with a new electric SUV.
Xiaomi’s luxury YU7 SUV will start at 253,500 yuan ($35,322), CEO Lei Jun said Thursday, pointing out that the vehicle is 10,000 yuan cheaper than Tesla’s Model Y, which starts at 263,500 yuan in China.
Prior to the official price announcement, a Citi report had listed expectations that the YU7 SUV would be priced around 250,000 yuan to 320,000 yuan ($34,800 to $44,590), forecasting monthly sales of about 30,000 units. Once the pace picks up, Citi predicts annual sales of 300,000 to 360,000 units.
Xiaomi’s company’s SU7 sedan launched last year was also priced below Tesla’s Model 3.
Stocks just made the round trip from Liberation day. We will see how stocks respond to Q2 earnings in few weeks. If the trend in Wolf’s article holds true then I am wondering how companies will beat their earnings estimate.
How will it be hard to beat their estimates? The estimates are set intentionally below what the company whispers to analysts they will actually produce, so they can almost always be “beat.”
It’s a shell game.
On Apr 15, Wolf wrote a column “NVDA makes a mess after-hours”.
https://wolfstreet.com/2025/04/15/nvidia-makes-mess-afterhours-discloses-5-5-billion-in-charges-due-to-us-export-restrictions-on-its-h20-chip-for-china/
It had hit a low a week or so previously at 92, around the time of the Deep Seek news. Many folks commented in that column that it was downhill from here and a good short opportunity.
Right now it has come all the way back and is at it’s ATH @ $158.30. I hope the people who did put their money where their mouth was, were able to cover without too much pain. :-)
I just saw the adjusted GDP numbers for the first quarter 2025.
This is no surprise as the economy was cooling off the last 3 years as the Federal Funds rate increased around 0.25% to 5.5%.
Even though we wouldn’t know given today’s closing for the S&P 500 :-/
Lots of real estate agents having to work Uber, Door Dash, online surveys, and other gigs to help make ends meet.
And because of the employment stats, economists decided to not call a recession in 2023.
I’ve seen a noticeable decline in “bed tax” for 2025 for Bay County / Panama City Beach; but still I see 2 hour lines of tourists waiting to eat at Sharkeys and Dat Cajun Place.
And I read news reports that Hawaii’s tourism economy has soured a lot, which has a much different tourism demographic than Panama City Beach.
ROLL TIDE, Wolfman
What turned Q1 GDP negative was the record spike in imports, which are a negative in the GDP calculation. But spiking imports are not a sign of weak demand. So far in Q2 imports have plunged, so Q2 is going to look a lot better.
In terms of US private sector demand, excluding imports, exports, and government spending, called “Real Final Sales to Private Domestic Purchasers” — which is also part of the GDP release (3rd estimate) that you’re referring to — showed a growth rate of 1.9%. That’s a good measure of demand in the economy. +1.9% is not exactly red hot growth, but it’s not nothing either:
Tourism is a bad way to measure economic activity
As the tide turns…
Don’t worry, the corporations OWN congress, they will continue to direct the fruits of your labor to themselves (owners and board members), especially the military industrial corporations. Thank you lucky stars that you have a plantation to live on… Feudalism 2.0 folks, hedge accordingly.
Just a reminder.
1990-2000. Inflation averaged 2.8%/annually, 32% over the decade.
Federal funds rate ranged from 3% to 8.1%.
Home prices increased by 50%, nominal.
Truth Bomb. Is SoCal idiot paying attention? Even if you got the Fed’s rate of return on your savings, you were still losing, bigly.
Hedge accordingly
Inflation creeps higher in May and dims chances of the Fed cutting interest rates soon
Spending on airfares, restaurant meals, and hotels all fell last month — and I assume, profits will fall, especially as tariff data begins to unfold.
Personal income also just fell and continuing claims rising into GDP decline. Not too bullish for extremely overvalued equities.
Global belt tightening and reduced consumption will take profits lower, as P/Es remain lost in space.
Q2 GDP growth is going to be positive, no matter what, because of the plunge in imports (Q1 was negative due to the spike in imports).
Personal Income Data Skewed by Social Security ‘Catch-Up’ Payments
Veronica Dagher hedcut
By
Veronica Dagher
,
Reporter
A drop in personal income in May data released Friday is largely attributable to an anomaly in Social Security payments, according to Troy Ludtka, senior U.S. economist at SMBC Nikko Securities Americas.
Personal income decreased 0.4% from the prior month in May, according to estimates released today by the U.S. Bureau of Economic Analysis. While this was a miss compared with many analysts’ estimates of a 0.3% increase, the data isn’t concerning to Ludtka, he said in a note.
Federal policy changes raised benefits for some government retirees, and “catch-up payments” boosted April’s income data. Now, May’s data shows a reversal, with Social Security payments falling 7.3% in May from a month earlier.
“Basically, it was just a data quirk,” Ludtka said in an email
The tariff payments in May were $24bn, which is $15bn above the average historical monthly run-rate of $9bn. That’s $180bn annually, which is 6.1% of total annual non-financial profits of $2.95 trillion.
So, companies could keep paying these tariffs, not pass on any price increases and their profits would decline a touch over 6%.
This is at the economy-wide level though.
Retail profits at $400bn and wholesale profits at $290bn presumably will be most impacted. If we assume 50% of the increased tariffs impact these firms, that’d be a 13% profit impact [(180*50%)/($400+$290)].
One could argue if 50% is right, just like one could quibble with a one month extrapolation for a newly implemented tariff.
No worries, TACO is artfully extended — implying that uncertainty and chaos worries are no longer relevant.
“ Scott Bessent admitted Friday morning that Donald Trump’s trade negotiations will likely continue into September”
Let us hope.
Great to see Him going after the drug cartels & money launderers to the south.
To our North they have announced a digital sales tax.
USMCA agreement will be a redo with separate agreements.