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Affluent Christian Investor | July 23, 2021

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Weird Recovery, Part 2: Where Are The Profits?

(Photo courtesy of vpsi) (CC BY) (Resized/Cropped)

We’ve seen that the recent recession and current recovery are different from anything we’ve seen in most of our lifetimes, and we’ve seen that the nature of this recession and recovery cycle has been that business did not slow down as much as would be expected given the normal pattern. (Read This Data Shows How Weird This Recession Was.)

Business didn’t cut back its production as much as consumers cut back their consumption. Business was left with a lot of goods in the pipeline of inventory, waiting for customers. This means that the strong GDP bounce back we see at the far right in this chart…

…has not been matched by the relatively-meager increase in profits seen in the far right of this chart:

Why? Because although goods and services must be produced before they are consumed, the profit does not occur until they are sold. Production is a necessary precondition of profit, but not a sufficient condition on its own. Business must both build and sell things to be profitable. And until the legal (and emotional) suppression of demand goes away, from both mandatory lockdowns and extra caution by spenders, business will not be able to fully realize the profit which is current locked down in inventory or unused capacity.

But if this analysis is right, most of this amounts to deferral, not a destruction of profit. That probably is not the case in all businesses. We’re not all going to get twice as many haircuts after the vaccine as we used to get. The lost haircuts of last year are lost forever. Ditto for mani-pedis and probably a lot of restaurant visits. Business can count on two date nights per week instead of one. But for the big parts of the economy like building, durable goods, houses, and cars it is likely that the demand will be made up and the profit will bounce back. Typically profit leads recoveries, but this time around, it looks like the recovery might be leading the profit.

 

 

Originally published on Townhall Finance.

 

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