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Record corporate profits stopped the recession, Mark Zandi says

Published

3 months ago

April 1, 2024

Corporate profits hit record highs in the fourth quarter of last year. But corporations aren’t the only ones riding high: The supercharged bottom lines of America’s biggest companies may have helped boost the entire country’s economy, keep people employed, and avert a recession.

Overall, the U.S. economy has been rounding the corner on some of its pandemic-era slumps. Inflation is coming down, 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 of its fourth quarter annualized GDP growth rate, bumping it up to 3.4% from 3.2%.

That strength has made its way to the corporate world too, where profits soared for America’s 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’s data. That means that corporate profits accounted for about 10% of the total quarterly GDP—slightly lower than in the first three quarters of the year where corporate profits accounted for between 10.3% to 10.5% of GDP.

Many consumer and worker advocates have taken these figures as a sign that corporate “greedflation” is contributing to Americans’ 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’s feelings about the economy, and even more so when the companies that make their food seem to be raking it in, as several reports have found. Over the past few years words like “greedflation” and “shrinkflation” have reappeared to denounce companies’ seemingly unstoppable march toward charging consumers more for smaller quantities.

But according to one top economist, that’s all backwards. Corporate profits allowed companies to avoid massive layoffs and keep the economy afloat, says Moody’s Analytics chief economist, Mark Zandi.

Fat profit margins meant that companies weren’t 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, 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.

“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,” Zandi wrote on X.

When companies expect to have healthy bottom lines they’re less likely to feel as though a change is warranted. A profitable company thinks to itself: “If it ain’t broke don’t fix it,” Zandi told Fortune in a phone interview. “Only when they lose money, or expect to, does the pressure intensify to make changes like layoffs.”

Zandi points out that layoffs are a prerequisite for a recession because they shake the confidence of all consumers. “It’s the layoffs that spook consumers and cause them to run into the bunker and stop spending,” he says.

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, Federal Reserve officials, and some of Wall Street’s major banks have all lowered the chances that the U.S. will fall into a recession. Much of the credit goes to the American consumer, who has remained resilient, and as Zandi would argue, employed.

That’s not to say that some companies haven’t laid off employees—they have. Many household names such as Citigroup and big tech companies like Meta, Alphabet, and Microsoft, 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 than its peers; and the tech companies “overdid it” when they “hired very aggressively during the teeth of the pandemic,” Zandi says.

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, which still beat estimates from Wall Street. And federal data that tracks applications for jobless aid indicates that, economy-wide, layoffs remain at very low levels.

Americans won’t stop spending

The ripple effects of American consumers’ hearty appetite for spending are felt across the economy, Zandi says. “It also helps explain the record stock market, and the resulting positive wealth effects and resilient consumer spending,” he wrote on X.

Consumer spending has had a solid start to the year. In February, consumer spending jumped 0.8%, 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. Especially worth watching are the spending habits of lower income households, Zandi says. Many of them didn’t see their overall wealth increase when stock prices and home values soared, simply because they didn’t own either, and if times start to get tough they’ll be the first to cut back. “If they pull back then that may be the first indication that consumers more broadly are pulling back,” Zandi said.

Despite their continued spending, consumers aren’t completely upbeat on the current economic moment. In February consumer optimism hit a two-year high, according to a report from McKinsey. Conversely, the same report found that 20% of consumers said they were pessimistic and felt pressure to save for a rainy day.

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% since December and grocery prices outpaced overall inflation, staying high even while other types of goods decline in price.

Zandi called out the seeming unfairness of companies asking consumers to pay higher prices while they themselves reaped hefty profits. “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. Policymakers should shine a bright light on businesses’ pricing practices and work to ensure markets are competitive.

President Joe Biden himself has regularly called attention to some of the practices of consumer goods companies that have simultaneously raised prices and reduced the size of their products. He even did a PSA before the Super Bowl where he was flanked by popular pantry staples like Oreos, Doritos, and Goldfish, urging companies to stop the practice. “It’s a rip off,” Biden said.

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Related Topics:inflation Labor layoffs recession U.S. economy unemployment

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‘We hope we don’t see a return to 1930s protectionism’

Published

6 hours ago

July 7, 2024

Jonathan Josephs

4 hours ago

By Jonathan Josephs, Business reporter, BBC News

Dr Ngozi Okonjo-Iweala says she is concerned about the growth of separate trade blocks

Getty Images Dr Ngozi Okonjo-Iweala — Dr Ngozi Okonjo-Iweala says she is concerned about the growth of separate trade blocks

Global trade “is not having the best of times at the moment”.

That is the admission of the director general of the World Trade Organization (WTO), Dr Ngozi Okonjo-Iweala. “We are seeing increasing protectionism, some undermining of the WTO rules, and some of this is leading to fragmentation,” she tells the BBC.

“Global trade is really part of the lifeblood for making countries resilient – and also for underpinning growth, so we are concerned about that.”

In recent weeks and months these fragmentations have come to the fore with the EU imposing provisional tariffs of up to 37.4% on imports of Chinese electric vehicles (EVs). It followed after the US in May introduced 100% tariffs on Chinese EVs.

Both Brussels and Washington accuse the Chinese government of unfairly subsidising its EV sector, allowing producers to export cars at unfairly low prices, and threatening jobs in the West.

President Biden has also increased import taxes on a range of other Chinese products that he said formed “the industries of the future”. These include EV batteries and the minerals they contain, the cells needed to make solar panels, and computer chips.

Meanwhile, the US has been pouring billions of dollars of government money into green technology, through its Inflation Reduction Act, which aims to reduce a reliance on Chinese imports.

EU trade commissioner Valdis Dombrovskis tells the BBC that Europe does not want to close the market for EVs. “We welcome imports, we welcome competition, but this competition must be fair,” she says.

Last year, the volume of global trade fell for just the third time in 30 years, according to the WTO. It says the 1.2% decline was linked to higher inflation and interest rates, and is forecasting a recovery this year.

However those factors have their roots in events that are continuing to fundamentally reshape the global economy, the International Monetary Fund’s (IMF’s) first deputy managing director Gita Gopinath explained in a recent speech.

“What we’ve seen in the last few years, I would say, especially when it comes to global trade relations, is nothing like we’ve seen since the end of the Cold War.”

“The last few years, you’ve had numerous shocks, including the pandemic. We had Russia’s invasion of Ukraine, and following these events, increasingly, countries around the world are guided by economic security, and national security concerns, in determining who they trade with and who they invest in,” she said.

That’s affecting countries as far apart as Peru, Ghana and Vietnam as they increasingly find themselves having to choose between strengthening economic ties with the western powers, or a China-Russia axis.

“We’re also concerned about the emerging fragmentation that we see in the trade data,” says the WTO’s Dr Okonjo-Iweala. “We’re seeing that trade between like-minded blocks is growing faster than trade across such blocks.”

She warns that “it will be costly for the world” to continue down this path. WTO research has estimated that price at 5% of the global economy, whilst the IMF has suggested it could be nearer to 7% or $7.4tn (£5.8tn) of lost output in the long run.

The West accuses Beijing of subsidising Chinese electric carmakers

Getty Images A BYD electric car on display at a motor show in China — The West accuses Beijing of subsidising Chinese electric carmakers

The EU’s introduction of tariffs on Chinese-made EVs follows a surge in their exports to Europe over the last few years. Exports jumped from $1.6bn in value in 2020 to $11.5bn last year, according to one study, which said they now made up 37% of all EV imports into the EU.

BYD, Geely and SAIC are some of the Chinese EV makers said to have benefitted from billions of dollars worth of government help.

After many years of support Chinese EV companies no longer need that help, says Jens Eskelund, president of the European Union Chamber of Commerce in China. “They are today simply very competitive on their own terms. I think the introduction of tariffs is a symptom that something is out of balance.”

When it comes to broader relationship, Mr Eskelund says it’s “mind boggling” that since 2017 the volume of goods that the EU has sold to China has fallen about a third, even though China’s economy has been growing steadily.

Citing Chinese restrictions around market access for overseas firms, and tough security regulations, he adds: “I think it’s fair to say that that Europe still remains a significantly more open market to Chinese companies, then the other way around. And that is obviously something that needs to change.”

The chamber’s recent survey showed that members have the lowest confidence on record for investing in China.

It comes as the EU is trying to lower its economic dependence on China. European Commission President Ursula von der Leyen last year described the need to “de-risk not de-couple” its relations with China.

Brussels’ concerns include Beijing using sensitive technology for military purposes, and its support for Russia as it continues its offensive in Ukraine.

Companies including Ikea, Nike and Apple are also trying to become less reliant on China.

Whilst the EU and China are set to hold talks about the potential EV tariffs, Chinese state media has reported that retaliatory measures are being considered on EU goods including pork, cognac and luxury cars.

Attacks by Houti rebels have forced cargo ships to avoid the Red Sea

Getty Images A Hapag-Lloyd cargo ship — Attacks by Houti rebels have forced cargo ships to avoid the Red Sea

However, there are other barriers for global trade to overcome, including in two of the most important arteries for moving goods around the world.

This year Panama Canal officials had to reduce the number of ships allowed to traverse the waterway. This is due to a lack of rainfall to fill the lake that feeds the canal.

Meanwhile, the Suez Canal is effectively cut off because of ongoing attacks on commercial ships by Houthi rebels in the Red Sea. Traffic through the canal is down 90%, according to logistics firm Kuehne+Nagel.

Rolf Habben Jansen, chief executive of the German shipping giant Hapag-Lloyd, says this disruption means that the rates his firm charges are up between 30% and 40%.

Whilst shipping costs are a small part of retail prices, Mr Habben Jansen says “these extra costs in the end get passed on” to consumers. That could end up pushing inflation up just as central banks are showing signs of getting it under control.

That would be “detrimental to consumers,” says the WTO’s Dr Okonjo-Iweala.

Despite all the tensions, she says trade has shown signs of resilience, and she adds that her organization can help countries solve their differences.

Meanwhile, Dr Okonjo-Iweala admits that some WTO rules will need to change to help meet the challenge of climate change. “I strongly believe that some of our [global trade] rules, we do need to look at them,” she says.

“When they were put in place, decades ago, we were not confronting the kind of climate change threats we confront today.”

Regarding the increased use of tariffs, she adds: “We hope we don’t have a repeat of what we saw in the 1930s. We had retaliatory tariffs, and it was downhill from there and everyone lost.

“So I do hope we will not enter into that kind of era again”.

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Business

Biden seeks boost in Pennsylvania as calls for him to step aside mount By Reuters

Published

7 hours ago

July 7, 2024

Reuters

By Andrea Shalal

HARRISBURG, Pennsylvania (Reuters) – An embattled U.S. President Joe Biden faced escalating pressure from fellow Democrats worried about his candidacy on Sunday, concerns he worked to ease with campaign stops in the battleground state of Pennsylvania.

Biden, 81, faces growing calls to end his reelection bid after a halting performance in a June 27 debate with Republican Donald Trump, 78, raised questions about his ability to do the job for another four years. He has vowed to stay in the race, dismissing calls for him to drop out as “nonsense” in a fundraising email on Saturday.

On Sunday, the Democratic president received a warm welcome at a Black church in Philadelphia and later traveled to the Pennsylvania state capital, Harrisburg, for an event with union members. Black voters are a critical part of Biden’s base of support and recent public opinion polling has shown their support for him softening.

On a leadership call on Sunday called by House Democratic Leader Hakeem Jeffries, some House Democrats said that Biden should step aside as presidential candidate, a source familiar with the discussions told Reuters.

Representatives Jerrold Nadler, Adam Smith, Mark Takano and Joe Morelle, senior House Democrats who sit on the Judiciary, Armed Services, Veterans Affairs and House Administration committees, were among those who called on Biden to step aside, according to media reports.

Democrats also suggested that Vice President Kamala Harris, seen as the likeliest candidate to replace Biden in the Nov. 5 election were he to bow out, could perform well.

The coming week is crucial, Democratic Senator Chris Murphy said on CNN’s “State of the Union.” He encouraged the president to hold a town hall or news conference to convince voters he is “the old Joe Biden.”

“The president needs to do more,” Murphy said. “I do think the clock is ticking.”

Democratic U.S. Representative Adam Schiff said on NBC’s “Meet the Press” that Biden needs to move swiftly to put concerns to rest.

He added that he believed Harris “could win overwhelmingly, but before we get into a decision about who else it should be, the president needs to make a decision about whether it’s him.”

Asked in Harrisburg whether the Democratic Party was behind him, Biden told reporters “yes.”

‘NEVER COUNT JOSEPH OUT’

In Philadelphia, churchgoers at the Mt Airy Church of God in Christ gave Biden a rousing welcome. Bishop Louis Felton praised him as “a man of vision and integrity.”

The bishop, referring to Biden’s Republican challenger without naming him, chided those who “make an issue of the president – that he is conditioned with stammering and not being able at certain times to bring forth words – while another person lies fluidly and you never challenge his lies.”

“Never count Joseph out,” Felton thundered. “Go, Joseph, you can make it.”

Biden addressed the congregation for a little more than six minutes, saying, “We must unite America again. That’s what I’m going to do.”

Carla Greene, a resident of Philadelphia, said she hoped Biden felt the support, adding, “we believe he is the man for the job.”

In a Friday interview with ABC News, Biden said only the “Lord Almighty” could persuade him to drop out, dismissing the prospect that Democratic leaders could join forces to try to talk him into standing down.

A Democratic National Committee member from Florida, Alan Clendenin, joined calls urging Biden to step aside on Sunday.

“Joe Biden will be remembered by historians as one of the finest presidents in American history, but this election is about the next four years, not the last three and a half,” Clendenin said.

The DNC has steadfastly supported Biden since his debate stumbles so any defections could suggest a deepening of the crisis. DNC Chair Jaime Harrison said on Sunday that Biden remains the party’s nominee. “The primary is over,” he said.

CRITICAL STATE

Biden stopped at a local campaign headquarters after church, telling supporters there, “Pennsylvania is a critically important state.”

Accompanying Biden, Democratic Senator John Fetterman bellowed, “There is only one person in the country that’s ever kicked Trump’s ass in an election and that is your president.”

Biden also met briefly with Pennsylvania’s Democratic Governor Josh Shapiro.

Pennsylvania is one of the half dozen or so states alongside Wisconsin and Michigan that can swing Democratic or Republican and are expected to determine the outcome of what has been a tight race.

Sunday’s trip – Biden’s 10th to Pennsylvania during the 2024 election campaign – is part of a July voter outreach blitz by the Democratic Party that includes a $50 million media campaign aimed at events, such as the Olympics, and travel by the president, the first lady, Harris and her husband to multiple battleground states.

Pressure from Congress is expected to ramp up in the coming days as lawmakers return to Washington from a holiday recess and donors mull their willingness to keep funding Biden’s campaign.

Biden is also preparing to host dozens of world leaders at a NATO summit in Washington this week and hold a rare solo news conference.

Five U.S. lawmakers have publicly called for Biden to end his reelection bid, including Representative Angie Craig of Minnesota, the first Democratic member of the House of Representatives from a battleground district, with others said to be poised to join in.

Two letters are circulating among House Democrats calling for Biden to step aside, House Democratic sources have said.

U.S. Senator Mark Warner of Virginia invited fellow senators to a meeting on Monday to discuss Biden’s campaign.

Senator Bernie Sanders, 82, who has run for the Democratic nomination for president in the past, stood firmly in Biden’s camp on Sunday, saying Democrats’ focus should be on policy.

“This is not a beauty contest,” he said on CBS’ “Face the Nation.”

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Leftwing surge thwarts far right in French election, polls suggest

Published

11 hours ago

July 7, 2024

Leila Abboud

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France’s anti far-right alliance is on track to halt the rise of Marine Le Pen’s Rassemblement National, in a snap parliamentary election that leaves the Eurozone’s second-largest economy in limbo over its next government.

Provisional estimates from four pollsters suggest the RN, which was hoping to secure an outright majority in the National Assembly, may have been pushed into second or third place by a surge in support for the left.

The projections suggest the leftwing alliance Nouveau Front Populaire (NFP) could become the largest parliamentary force with anywhere from 170 to 215 seats, according to Ipsos, Ifop, OpinionWay and Elabe.

But President Emmanuel Macron’s centrists were running close behind, with pollsters predicting ranges of 140 to 180 seats, a big drop from the roughly 250 they held in the outgoing National Assembly.

No single bloc has come close to securing an outright parliamentary majority, according to the estimates.

The projections come after the NFP was hastily formed between the far left La France Insoumise (LFI), the centrist Parti Socialiste (PS), the Communists and Greens a month ago, to help block the RN from power.

There were gasps of horror and tears at the RN electoral party as the first results estimates came in on Sunday.

A stunned silence replaced flag waving and chants that came after last week’s first round in the parliamentary election.

Jean-Luc Mélenchon, chief of the hard left LFI, has called on Macron to offer the NFP the opportunity to form a government. “The will of the people must be strictly respected . . . The defeat of the president and his coalition is confirmed,” he said.

The polls were met with elation at the PS election event in Belleville, Paris, with chants of “front populaire” and a round of La Marseillaise.

“It’s brilliant, of course it’s brilliant,” Nicolas Mayer-Rossignol, the PS mayor of Rouen and a leading figure in the party, told the Financial Times.

The projected results suggest that the co-ordinated anti-RN strategy, under which the left and centre tactically withdrew their candidates from run-off ballots, had paid off.

After the first round, Le Pen was confidently predicting that a governing majority was within the RN’s reach.

Marine Le Pen had high hopes for the results of the election © Yoan Valat/EPA-EFE/Shutterstock

If confirmed in final voting tallies, the projections suggest that none of the three main blocs will be able easily to command a governing majority, potentially leaving France in a period of political gridlock.

The uncertainty will have repercussions both for France and the EU, given Paris’ outsized role in influencing the bloc’s policy, together with Germany.

Financial markets had been jittery before the first round when the RN was polling strongly, but have since calmed as a hung parliament appeared more likely.

The NFP has proposed a heavy tax-and-spend economic programme, which would be a major break with Macron’s business friendly agenda and tax-cutting zeal.

In the French system, the president chooses the prime minister, who typically comes from the party with the biggest delegation in the National Assembly even if it does not have an outright majority.

Macron could seek to cobble together a coalition of MPs from different parties on the left, centre and right, but excluding the RN and the far-left LFI.

Such an arrangement would amount to a “cohabitation”, and forging this kind of deal might prove difficult given the parties’ wide policy differences.

Jordan Bardella, 28-year-old president of the RN © Benoit Tessier/Reuters

A last resort would be naming a technocratic government to be led by an experienced but non-partisan figure, although this is not at all in the French political tradition.

While the pollsters’ projections are far better than expected for Macron, his authority will still emerge weakened from the snap election.

Macron in June took a gamble in calling for the early vote after his centrist Ensemble alliance was trounced by Le Pen’s RN in European parliamentary elections.

The president defended the move, which stunned and angered many even in his own camp, as a necessary moment of “clarification”.

Bernard Sananes, head of Elabe, said: “It’s the victory of the Republican Front. Vote transfers have been excellent. Where the RN was in the second round, turnout increased.”

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