What do declining corporate profits say about the economy?
On Thursday, we got more confirmation that the economy is slowing. In its second estimate, the Bureau of Economic Analysis said that the gross domestic product grew 1.3% in the first quarter of this year — down from 2.6% in the final quarter of last year.
Corporate profits also fell for the second quarter in a row. What does that tell us about what’s going on in this economy?
The Federal Reserve has been trying to slow the economy to bring inflation down for a while now. “At some point, one has to expect this to start working,” said Matthew Spiegel at the Yale School of Management.
We’re getting more signs lately that it is working, he said. “‘Slow down the economy,’ by definition, [means] businesses are not going to have profits as high as they had before.”
So is this good, then, that corporate profits are down? “Depends on who you are,” Spiegel said. “Everything in economics depends on who you are.”
If you’re a corporation, you probably don’t love that profits fell in the first quarter.
“But a 5.1% decline in profits is not all that big in the grand scheme of things,” said Brian Bethune, an economics professor at Boston College. “It could have been a lot worse.”
For what it’s worth, that seems to be how the stock market is taking it too, according to Bruce Sacerdote, an economics professor at Dartmouth.
“The stock market is already looking over this valley to the next hill. And so the stock market is not freaked out about this,” he said.
The rest of us shouldn’t be either, he added. If anything, there may be a silver lining here for many people.
“Maybe all the interest rate hikes that the Fed is putting us through are having in part the desired effect, and so therefore, maybe they’ll have to face less inflation at the grocery store and the gas pump, and that’s a good thing,” Sacerdote said.
Ultimately, this profit decline may also signal something of a return to pre-pandemic normal, per Brett House at Columbia Business School.
“I think it’s part of a broader rebalancing,” he said. “After some very high corporate profits, we’re seeing them come down.”
Overall, he said, the economy is still looking relatively resilient to the constraining effects of fast-rising rates.
“Whether you define a soft landing as a mild recession or very weak positive growth, we are getting close to what could be a soft landing,” House said.
But he added that if Congress and the White House fail to reach a deal to raise the debt ceiling, that soft landing will be out the window.