Industrial profits fall in March
Industrial profits dropped 3.5% y/y in March (NBS).
- This monthly print ends seven consecutive months of profit growth.
The drop in industrial profits wasn’t driven by rising costs.
- We estimate the cost of sales fell 0.8% y/y.
Instead, it was driven by falling prices, eroding profit margins.
- Factory gate prices have fallen for 18 consecutive months.
- Export prices are down about 10% y/y.
Wonky side note: Industrial profit data should be taken with a pinch of salt.
- Profits fluctuate widely month-to-month due to seasonality, business investments, and the accounting methodology used to record them. For example, March’s data shows that profits across chemical fiber manufacturing increased 310.2% y/y!
- The data also suffers from duplication, as company offices across different regions all answer the same survey data.
Industrial profits across the first quarter – which irons out some of the statistical white noise – are up 4.3% y/y.
- Although, this increase was partly driven by base effects – profits slumped 21.4% y/y in Q1 2023.
Get smart: As we said last month, unless Beijing puts a floor under deflationary pressures and engineers a rebound in domestic consumption, profit growth will remain tepid throughout the year.
Get speculative: Could the drop in industrial profits have resulted from firms ramping up production in anticipation of an increase in demand – driven by the equipment upgrading and consumer goods trade-in initiatives – that has so-far failed to materialize?
- If so, this is a textbook example of how weak policy implementation of high-level initiatives can generate unintended consequences.
- It could also mean that demand and profitability improve in the months ahead, if the upgrading and trade-in programs get more uptake.