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Bumper corporate profits helped prevent mass layoffs and a recession, says leading economist

Theron Mohamed   

Bumper corporate profits helped prevent mass layoffs and a recession, says leading economist
  • Companies have come under fire for price gouging and underpaying workers in a tough economy.
  • Bumper profits helped prevent mass layoffs and a recession, said Mark Zandi of Moody's Analytics.

Critics of Corporate America have accused companies of fueling inflation by excessively raising prices, and exploiting workers by paying them peanuts when they're having to spend more on essentials and interest every month.

Corporations have certainly come out ahead. After-tax profits hit a record high of $2.8 trillion in the fourth quarter, per the Commerce Department.

Yet the supposed profiteering has shored up national employment and helped to stave off disaster, Moody's Analytics chief economist Mark Zandi said in a recent X thread.

"The gangbuster gain in profits helps explain why businesses have been able and willing to hold the line on layoffs, which was key to avoiding recession," he said.

"It also helps explain the record stock market, and the resulting positive wealth effects and resilient consumer spending."

Zandi's view is that employers, partly by raising prices, have bolstered their bottom lines — and those earnings have given them the confidence to maintain headcount even as financial conditions tightened.

That's helped keep unemployment at historic lows of under 4%, meaning relatively few households have lost incomes. High employment levels have underpinned solid consumer spending, which has supported economic growth.

As for stocks, they're generally valued at a multiple to company profits so they've hit record highs too. That has made stockholders feel wealthier and more comfortable spending, Zandi said.

The corporate profit bonanza may help explain why gross domestic product (GDP) increased by a healthy 4.3% last quarter, and consumer spending climbed by 0.8% in February — its biggest jump in 13 months.

The economy's resilience has surprised many given the threats it faced not too long ago. Inflation spiked to a 40-year high of more than 9% in the summer of 2022, spurring the Federal Reserve to hike interest rates from virtually zero to north of 5% in under 18 months.

American households were hit by a double-whammy of soaring prices for essentials like food, fuel, and rent, and steeper monthly payments on their credit cards, car loans, mortgages, and other debts.

Yet inflation has cooled to about 3% in recent months — not far off the Fed's target rate of 2% — and the economy has grown at a steady clip instead of sinking into a recession.

Fed officials have penciled in three rate cuts this year, as they see inflation fading and want to stimulate the economy by easing pressure on households and vulnerable sectors like regional banks and commercial real estate.

Companies' outsized profits could attract more competition, curbing the pace of price growth going forward, Zandi wrote. And even if "greedflation" does support growth and employment, companies shouldn't be allowed to gouge their customers, he said.

"The fat margins should weigh on inflation as competition heats up," Zandi said.

"But the adage that 'prices rise like rockets and fall like feathers' holds true," he continued. "Policymakers should shine a bright light on businesses' pricing practices and work to ensure markets are competitive."

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