\n
![](\"https:\/\/fortune.com\/img-assets\/wp-content\/uploads\/2024\/04\/GettyImages-1252640018-e1712000462827.jpg?w=2048\")
<\/p>\n [ad_1]
\n<\/p>\n
Corporate profits hit record highs in the fourth quarter of last year. But corporations aren\u2019t the only ones riding high: The supercharged bottom lines of America\u2019s biggest companies may have helped boost<\/a> the entire country\u2019s economy, keep people employed<\/a>, and avert a recession<\/a>.\u00a0<\/p>\n Overall, the U.S. economy has been rounding the corner<\/a> on some of its pandemic-era slumps. Inflation is coming down<\/a>, certainly compared to the highs in summer 2022, unemployment remains below 4%, and the GDP is still growing at a healthy pace. In fact, the Commerce Department recently issued an upward revision<\/a> of its fourth quarter annualized GDP growth rate, bumping it up to 3.4% from 3.2%.\u00a0<\/p>\n That strength has made its way to the corporate world too, where profits soared<\/a> for America\u2019s biggest companies. The last quarter was the most profitable of the year, and one of the best ever for corporate America. In the final quarter of 2023 corporate profits after taxes stood at $2.8 trillion, a $105 billion increase from the previous quarter, per the Commerce Department\u2019s data. That means that corporate profits accounted for about 10% of the total quarterly GDP\u2014slightly lower than in the first three quarters of the year where corporate profits accounted for between 10.3% to 10.5% of GDP.<\/p>\n Many consumer and worker advocates have taken these figures as a sign that corporate \u201cgreedflation<\/a>\u201d is contributing<\/a> to Americans\u2019 economic malaise and (still) pushing up the cost of living. Frustrations about pricing at the grocery store and the gas pump have especially acute effects on people\u2019s feelings about the economy, and even more so when the companies that make their food seem to be raking it in<\/a>, as several reports have found. Over the past few years words like \u201cgreedflation<\/a>\u201d and \u201cshrinkflation<\/a>\u201d have reappeared to denounce companies\u2019 seemingly unstoppable march toward charging consumers more for smaller quantities.<\/p>\n But according to one top economist, that\u2019s all backwards. Corporate profits allowed companies to avoid massive layoffs and keep the economy afloat, says Moody\u2019s Analytics chief economist, Mark Zandi.<\/p>\n Fat profit margins meant that companies weren\u2019t under financial pressure and had the possibility to keep more of their workers on staff when lending conditions changed when the Fed started hiking interest rates<\/a>, Zandi says. The fact that people remained gainfully employed and not on unemployment kept the economy afloat at what was otherwise a very precious time.\u00a0<\/p>\n \u201cThe 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,\u201d Zandi wrote<\/a> on X<\/a>.\u00a0<\/p>\n When companies expect to have healthy bottom lines they\u2019re less likely to feel as though a change is warranted. A profitable company thinks to itself: \u201cIf it ain\u2019t broke don\u2019t fix it,\u201d Zandi told Fortune<\/em> in a phone interview. \u201cOnly when they lose money, or expect to, does the pressure intensify to make changes like layoffs.\u201d\u00a0<\/p>\n Zandi points out that layoffs are a prerequisite for a recession because they shake the confidence of all consumers. \u201cIt\u2019s the layoffs that spook consumers and cause them to run into the bunker and stop spending,\u201d he says.\u00a0<\/p>\n In the U.S., where consumer spending accounts for about two-thirds of the economy, keeping people feeling confident enough to spend is critical to keeping the economy chugging ahead. So far, it seems like that heavy spending has successfully staved off a recession. In recent months economists<\/a>, Federal Reserve officials<\/a>, and some of Wall Street\u2019s major banks<\/a> have all lowered the chances<\/a> that the U.S. will fall into a recession. Much of the credit<\/a> goes to the American consumer, who has remained resilient, and as Zandi would argue, employed.\u00a0<\/p>\n That\u2019s not to say that some companies haven\u2019t laid off employees\u2014they have. Many household names such as Citigroup<\/a> and big tech companies<\/a> like Meta, Alphabet<\/a>, and Microsoft<\/a>, cut thousands of workers at the start of this year. However, their layoffs said more about their own businesses than the broader economy, according to Zandi. Citi was far less profitable<\/a> than its peers; and the tech companies \u201coverdid it\u201d when they \u201chired very aggressively during the teeth of the pandemic,\u201d Zandi says.\u00a0<\/p>\n When well-known companies lay off workers, it can cause fears over the broader economy, despite the fact they represent a small portion of the overall workforce. In fact, the latest employment numbers show a continued growth in the number of people getting new jobs. Even though unemployment ticked up to 3.9% in February, the U.S. still added 275,000 new jobs<\/a>, which still beat estimates from Wall Street. And federal data<\/a> that tracks applications for jobless aid indicates that, economy-wide, layoffs remain at very low levels.<\/p>\n The ripple effects of American consumers\u2019 hearty appetite for spending are felt across the economy, Zandi says. \u201cIt also helps explain the record stock market, and the resulting positive wealth effects and resilient consumer spending,\u201d he wrote on X.\u00a0<\/p>\n Consumer spending has had a solid start to the year. In February, consumer spending jumped 0.8%<\/a>, the largest monthly increase in over a year. However, analysts and observers are still keeping a close eye on spending trends, given some softer than expected reports<\/a>. Especially worth watching are the spending habits of lower income households, Zandi says. Many of them didn\u2019t see their overall wealth increase when stock prices and home values soared, simply because they didn\u2019t own either, and if times start to get tough they\u2019ll be the first to cut back. \u201cIf they pull back then that may be the first indication that consumers more broadly are pulling back,\u201d Zandi said.\u00a0<\/p>\n Despite their continued spending, consumers aren\u2019t completely upbeat on the current economic moment. In February consumer optimism hit a two-year high, according to a report<\/a> from McKinsey<\/a>. Conversely, the same report found that 20% of consumers said they were pessimistic and felt pressure to save for a rainy day.\u00a0<\/p>\n Their confusion is understandable. Consumers are still in the strange position of paying higher prices for the most critical and conspicuous products they buy, despite all evidence that price hikes are slowing down. Gas prices are up 9%<\/a> since December and grocery prices outpaced overall inflation<\/a>, staying high even while other types of goods decline in price.\u00a0<\/p>\n Zandi called out the seeming unfairness of companies asking consumers to pay higher prices while they themselves reaped hefty profits. \u201cThe fat margins should weigh on inflation as competition heats up,\u201d Zandi said. \u201cBut the adage that \u2018prices rise like rockets and fall like feathers\u2019 holds true. Policymakers should shine a bright light on businesses\u2019 pricing practices and work to ensure markets are competitive.<\/p>\n President Joe Biden himself has regularly called attention<\/a> to some of the practices of consumer goods companies that have simultaneously raised prices<\/a> and reduced the size of their products. He even did a PSA<\/a> before the Super Bowl where he was flanked by popular pantry staples like Oreos, Doritos, and Goldfish, urging companies to stop the practice. \u201cIt\u2019s a rip off,\u201d Biden said.<\/p>\n<\/div>\n\nAmericans won\u2019t stop spending<\/strong><\/h2>\n
Subscribe to the CFO Daily newsletter to keep up with the trends, issues, and executives shaping corporate finance. Sign up<\/a> for free.<\/div>\n