Fragile Margins
The BEA’s Q3`24 NIPA suggest some fragility to gross profits.
- Industries with expanding “Volume Margins” seem to be experiencing contracting price margins (lower right quadrant)
- Also tend to have expanding Gross Profits
- Industries with expanding pricing margins have contracting volume margins (upper left quadrant)
- Also tend to have contracting Gross Profits
- Few industries are firing on both cylinders; i.e. profits being driven on prices AND volumes
- Education is a key exception
- Fortunately, not many are facing volume and pricing headwinds simultaneously
- Plastics is an unfortuante except
Background
The BEA’s NIPA have a wonderful decomposition of Gross Profits.
Revenue (aka Gross Output) is broken down into Volumes (aka Quantity) and Unit Prices (aka Price). COGS (aka Value of Gross Inputs) is similarly decomposed into prices and quantities.
In the calculations above, if have a very rough attribution analysis. Volume Margins is the differential in quantity of output growth and input growth quarter to quarter. Price Margins are computed analogously.
Note that the Qty and Price measures from the BEA are indexed values, so I don’t simply compute P*Q.
Also note that Price Margin expansion and Volume Margin expansion does not necessitate Gross Profit expansion in that quarter. You may have less contraction in volumes, for instance, but they are still contracting, which forces Gross Profit Growth.