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Economic Report: U.S. corporate profits jump 25% in 2021 to record high as economy rebounds from pandemic

The numbers: U.S. corporate profits rose again in the fourth quarter and hit a record high, capping off a huge increase in 2021 despite widespread supply and labor shortages that raised costs and contributed to high inflation during the pandemic.

Adjusted pretax profits rose 0.7% to an annualized $2.94 trillion in the final three months of last year from $2.92 trillion in the third quarter, the government said Wednesday.

For the full year, adjusted profits leaped 25% — the largest gain since 1976.

Earnings fell in 2020 after the onset of the pandemic, marking the first decline in five years.

The profit figures were released as part of the third and final regular update to gross domestic product for the fourth quarter. GDP rose a revised 6.9% in the fourth quarter, down a tick from the prior estimate of 7%.

Big picture: The U.S. economy’s rapid recovery from the pandemic has padded the profits of most businesses, especially large ones that were better shielded from the effects of the virus.

Although companies are paying higher costs, they’ve still managed to increase profits. Aa result, they have more money to invest and can afford to pay workers more. Wages are rising at the fastest pace in four decades.

The government is getting in on the action, too. Federal tax receipts soared to a record in fiscal 2021 and are on track this year to set a fresh all-time high, based on early tax data.

U.S. growth and profits are expected to slow in 2021, however. The Federal Reserve is raising interest rates, Washington has dialed back pandemic spending and high inflation is eating away at household wealth.

Key details: Consumer spending rose a revised 2.5% in the fourth quarter, updated GDP figures show. Previously the increase was reported as 3.1%.

Business investment and the increase in inventories were somewhat stronger than previously reported, offsetting the revision to spending.

Most other figures in the GDP report were little changed.

The economy grew at a 5.7% pace in 2021, recovering from a steep 3.4% drop in 2020.

Looking ahead: “Our baseline remains that the economy will continue to expand

this year, but the pace will moderate,” wrote chief U.S. economist Rubeela Farooqi of High Frequency Economics in a note to clients. “We see downside risks

from geopolitical events and China lockdowns.”

Market reaction: The Dow Jones Industrial Average DJIA, +0.09% and S&P 500 SPX, -0.20% were set to open lower in Wednesday trades. Stocks have rallied in the past week after slumping in the early days of the Russian invasion of Ukraine.

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