Corporate profits just put up one of the strongest quarters in years. Domestic profits grew at roughly a 37 percent annual pace in the second quarter, and profits as a share of the overall economy sit at about 12.4 percent. That is not a typo. While the headlines fill with war, inflation, and consumer anxiety, American companies are, in aggregate, making more money per dollar of output than they have in a very long time.

At the same time, gasoline is running around four dollars and ten cents a gallon. Two shipping lanes, the Straits of Hormuz and the Bab al-Mandab strait, are effectively closed to normal traffic. Energy prices in the second quarter rose at an annualized rate that would embarrass any peacetime forecast. Consumer sentiment sits at 49.5, which is a deeply pessimistic reading by any historical standard.

Both of those things are true simultaneously. That is the story worth sitting with this week.

Two economies sharing the same zip code

Here is how the math works out the way it does. Nominal output, meaning the economy measured in actual dollars before you strip out inflation, grew at nearly eight percent in the second quarter. Corporate-sector output grew even faster, at about ten and a half percent. Meanwhile, compensation, what companies paid workers, grew at only 3.7 percent. When output grows much faster than the wage bill, the gap flows directly to profits. That is the arithmetic of how a profit boom happens even when workers feel squeezed.

This is not a comfortable fact. Compensation’s share of the overall economy has slipped to about 50 percent, a level that outside of recessions is historically unusual. Workers are producing a lot of value right now. A smaller slice of that value is going back to them in the form of wages. Some of that reflects structural shifts, more gig work, more equity-based pay that does not show up in standard compensation counts. But the trend is real.

Meanwhile, proprietors’ income, the category that captures what self-employed people and small-business owners earn, is growing at a healthy clip. If you run your own business, this part of the picture is more encouraging than the aggregate wage data suggests.

On the inflation side, there are actually two inflation readings worth keeping separate. The measure the Federal Reserve officially targets, called the PCE, shows headline consumer prices up about 3.7 percent over the past year and core prices, which strip out energy and food, up about 3.3 percent. But the monthly pace for June tells a more interesting story. Headline PCE ran at a negative 1.3 percent annual pace for that single month, meaning energy prices were pulling the headline number down hard in June. Core was running at about 1.6 percent annualized for the same month. One month proves nothing, and we will not call it a trend from a single reading. But it is worth knowing that the underlying price pressure, away from energy, looks softer than the yearly number implies.

The separate consumer price index data for July reinforces part of that picture. Core CPI, which measures a somewhat different basket of goods and services, sits at 2.79 percent year over year. Shelter costs are still running at 3.4 percent. Services broadly are at 3.37 percent. Commodities outside food and energy are up less than one percent. So the stickiness is in services and housing, not in goods.