- Companies have been criticized for price gouging and underpaying their workers in a tough economy.
- Windfall profits helped stave off massive layoffs and a recession, said Mark Zandi of Moody’s Analytics.
- Flush businesses retained employees, which supported consumer spending, the economist said.
Critics of corporate America have accused the companies of fueling inflation by raising prices excessively and exploiting workers by paying them peanuts when they have to spend more on necessities and interest each month .
Businesses have certainly taken over. After-tax profits hit a record $2.8 trillion in the fourth quarter, according to the Commerce Department.
Yet these so-called profits supported national employment and helped avert disaster, according to Moody’s. Analytic chief economist Mark Zandi said in a recent X thread.
“The dramatic increase in profits partly explains why companies have been able and willing to stay the course on layoffs, which was key to avoiding recession,” he said.
“It also helps explain the record high in the stock market, as well as the resulting positive wealth effects and resilience in consumer spending.”
According to Zandi, employers, in part by raising prices, have strengthened their bottom lines – and those profits have given them the confidence to maintain their workforces even as financial conditions tighten.
This has helped keep unemployment at a historic low, below 4%, meaning relatively few households have lost income. High employment levels supported strong consumer spending, which supported economic growth.
As for stocks, they are generally valued at a multiple of company profits and have therefore also reached record levels. This made shareholders feel richer and spend more comfortably, Zandi said.
The windfall in corporate profits may partly explain why gross domestic product (GDP) rose 4.3% last quarter and consumer spending rose 0.8% in February – its biggest gain in 13 months .
The economy’s resilience has surprised many given the threats it faced not so long ago. Inflation hit a 40-year high of over 9% in the summer of 2022, prompting the Federal Reserve to raise interest rates from virtually zero to over 5% in less than 18 months.
American households have been hit hard by soaring prices for essentials like food, fuel and rent, and higher monthly payments on credit cards, auto loans, mortgages and other debts.
Still, inflation has slowed to around 3% in recent months — not far from the Fed’s 2% target rate — and the economy has been growing steadily instead of falling into a recession .
Fed officials have planned three rate cuts this year as they see inflation fading and want to boost the economy by easing pressure on households and vulnerable sectors like regional banks and commercial real estate.
Outsized corporate profits could attract more competition, thereby dampening the pace of price growth, Zandi wrote. And while “greed” does support growth and jobs, businesses should not be allowed to gouge their customers, he said.
“Large margins are expected to weigh on inflation as competition intensifies,” Zandi said.
“But the adage that ‘prices rise like rockets and fall like feathers’ remains true,” he continued. “Policymakers should shine a light on companies’ pricing practices and ensure that markets are competitive.”
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