- US corporations reported record profits in the 2nd quarter.
- At the same time, consumers have been faced with the rising prices.
Many US corporations are thriving as consumers continue to struggle with inflation — but there could be a bright side for the millions of Americans who value job security.
While companies have raised wages to attract workers and faced rising expenses, many have managed to pass these costs onto consumers with higher prices and protect their profits. In the second quarter of 2022, business profitability rose to 15.5% to roughly $2 trillion, the highest level since 1950, according to a Bloomberg analysis of a recent Commerce Department report.
But while wage growth has slowed in recent months while prices continue to rise, high corporate profits are not an entirely raw deal for Americans.
That's because they're likely translating to fewer layoffs, despite recession fears.
With profits continuing to roll in, many businesses have had little reason to cut costs and let workers go. Layoffs held flat at roughly 1.4 million in July, not far off from the two-decade low of 1.2 million in April. The unemployment rate ticked up slightly in August to 3.7% but remains near a 50 year-low. Initial jobless claims have risen slightly as well after reaching a 52-year low in March, but they've remained low relative to historic norms.
Many companies are still looking to bolster their workforces as well — evidenced by job openings that remain near record-highs. But this all could change quickly if the economic tides turn.
"There's obviously less urgency for businesses to enact cost-saving measures such as layoffs when they have a financial buffer of recent profitability," Aaron Terrazas, the chief economist at Glassdoor, told Insider via email. "But I suspect most CFOs are taking Wayne Gretzy's advice to skate where the puck is headed, not where it's been. They're looking at accumulated liabilities in terms of higher wages, and weaker consumer pricing power down the line."
Falling profits could lead to layoffs
Despite inflation easing slightly in July, high prices could be here to stay for a while.
"Prices are unlikely to come down quickly." Michael Hewson, chief market analyst at CMC Markets, told Insider in August, citing raw materials and energy as costs that are likely to remain "stickier than most people realize."
While profits may be strong right now, a slowing economy would inevitably bring some pain for corporations.
If this happens, Americans could find the script flipped — an economy with easing prices but uncomfortably high layoffs as business performance weakens and cost-cutting ensues.
While surging energy prices, supply chain constraints, and perhaps even some corporate price gouging have contributed to companies' high prices and profits, the strength of the American consumer — aided by their pandemic savings — has also worked to keep prices elevated.
But if inflation depletes these savings and spending falters, prices — and corporate profits — could fall, and Americans could lose some of the job security the labor shortage has provided them.
"Consumer empathy is wearing thin," said Terrazas. "So I suspect many companies are doubtful of their ability to continue passing along costs forward."
The best of both worlds
As American consumers receive wages that largely aren't keeping pace with inflation, many are likely wondering why they can't have the best of both worlds — an economy where unemployment remains low but prices return to more modest levels.
Well, this is exactly what the Federal Reserve — which strives for maximum employment and price stability — is trying to achieve. With inflation elevated, the Fed is raising interest rates in an effort to bring down high prices. It's hoping to achieve a soft — or "softish" landing — where slowing growth doesn't turn into a recession.
Sticking the landing is expected to be difficult, however, with many experts predicting some form of a recession in 2023.
"While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses," Federal Reserve Chair Jerome Powell said recently. "These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain."