But profits are still huge after the pandemic free-money spike, except in auto manufacturing where losses pile up. Financial industry profits rose to a record.

By Wolf Richter for WOLF STREET.

The measure of corporate profits here are pre-tax profits “from current production” (more on what that means in a moment) by businesses of all sizes that have to file corporate tax returns, including LLCs and S corporations, plus some organizations that do not file corporate tax returns. The data are not based on surveys but on administrative data, such as corporate tax data from the IRS and from financial statements filed with the SEC. The by-category corporate profits for Q2 were released by the Bureau of Economic Analysis on Thursday with its third revision of Q2 GDP. All dollar figures here are seasonally adjusted annual rates (what profits would look like for an entire year at this quarterly pace).

And there were huge revisions of the Q1 data: Revised profits in Q1 of nonfinancial incorporated businesses plunged by $331 billion, or by 11.1%, from Q4. This means they were still massively profitable, with pretax profits at an annual rate of $2.64 trillion, but that was $331 billion less than in Q4.

This revision of Q1 produced the biggest quarter-to-quarter plunge in the data going back to 2001 in dollar terms. In percentage terms, it produced the third-biggest plunge behind Q4 2020 (when profits gave up some of the majestic free-money spike in Q3 2020), and in Q4 2008 during the Financial Crisis. Then in Q2, profits of nonfinancial businesses inched up by $9 billion annual rate from Q1 to an annual rate of $2.65 trillion, but that was down by $322 billion from Q4.

If profits in Q3 and Q4 remain at Q1 and Q2 levels, total profits for the whole year would be $327 billion below the Q4 pace. This is about the annual pace of the tariffs.

The plunge took place largely in manufacturing, wholesale trade, transportation and warehousing, and retail including ecommerce – the segments most exposed to tariffs.

But they had it so good for so long: From Q2 2020 through Q4 2024, profits in nonfinancial industries had spiked by 134%. Over the same period, the high-inflation years, CPI inflation surged by 22%. Corporate profits are where a big part of the inflation surge went.

So the plunge in profits this year comes off that spike during the high inflation years, and even after this plunge, pretax profits at nonfinancial firms from current production are still huge.

What are profits “from current production?” The BEA adjusts profits from IRS and SEC data in three ways to get “profits from current production”:

• “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.

Corporate profits by major industry.

Wholesale trade: Profits plunged by 18% in Q2 from Q1, and by 26% from Q4, and also by 26% year-over-year, to a seasonally adjusted annual rate of $218 billion.

But since Q2 2020, profits are still up by 38%.

Transportation & warehousing: Profits plunged by 8.5% in Q2 from Q1, by 25% from Q4, and by 26% year-over-year, to a seasonally adjusted annual rate of $93 billion.

But since Q2 2020, profits are still up by 313%! And from the prepandemic high in Q2 2017, profits are still up by 32%.

Manufacturing industries, durable goods: Profits rose by 3.8% in Q2 from Q1 after plunging in Q1. Since Q4, profits fell 12%, and year-over-year, they fell 11% to a seasonally adjusted annual rate of $338 billion.

Durable goods include motor vehicles and parts, aircraft, machinery, computers, electronic and electrical equipment, appliances, trailers, fabricated metals, components, etc.

For example, manufacturing of motor vehicles and parts, which is part of durable goods manufacturing. The sector booked losses “from production” in both Q1 (-$10 billion annual rate) and Q2 (-$18 billion annual rate) as these companies could not pass on the tariffs and had to eat them, because they had to cut prices and throw incentives at the market to maintain their sales volume.

The problem is the orgy of jacking up prices from 2020 to mid-2022, until those prices hit a ceiling, when consumers came out of their pay-whatever stupor and refused to pay more. Since then, companies had to offer deals to make sales happen. Tariffs cannot be passed on under these conditions. They all know it, they’ve all said it in their earnings announcements, and they’re busy shifting more production to the US. But that’s a slow process.

Manufacturing nondurable goods: Profits jumped by 17% in Q2 from Q1, to $311 billion annual rate, but had plunged in Q1, and are still down by 10% from Q4, and by 9% year-over-year.

The sector includes food (such as packaged food), beverages, tobacco products, supplies, petroleum products, chemical products, coal products; apparel, shoes, and accessories, etc.

Since Q2 2020, their profits are still up by 239%.

Retail trade, including Ecommerce: Profits rose by 3% in Q2 to $403 billion annual rate, but profits had declined in Q1, and are still down by 5% from Q4

Since Q2 2020, their profits have surged by 67%. And since Q1 2020, profits have spiked by 135%. That’s where part of the inflation in products that consumers buy at stores came from.

“Other nonfinancial” industries: This is the biggest nonfinancial category, with huge industries, mostly centered on services that are not heavily impacted by tariffs: 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; construction; mining and oil-and-gas drilling; administrative and waste management services; educational services; arts, entertainment, and recreation; agriculture, forestry, fishing, and hunting.

Profits were roughly unchanged in Q2 at $967 billion annual rate, and were down by 6% from Q4. Year-over-year, they were also down by 6%.

Since Q2 2020, profits have nearly doubled.

Information: Profits were unchanged in Q2, at $271 billion annual rate, and down 12% from Q4. Since Q2 2020, profits have spiked by 186%! From the prepandemic high in Q2 2016, profits have surged by 51%.

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.

But in the financial industry, profits rose by 2% to a record $901 billion seasonally adjusted annual rate in Q2, up by 1% from Q4 and up by 3% year-over-year.

Since Q2 2020, profits have more than doubled.

Includes: Insurance companies of all kinds, 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; funds, trusts, etc. But it does not include the 12 regional Federal Reserve Banks (FRBs).

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the mug to find out how:

WOLF STREET FEATURE: Daily Market Insights by Chris Vermeulen, Chief Investment Officer, TheTechnicalTraders.com.