Devil in the detail?
Surge in profits may portend jobs are on the line
The fattest profits in 70 years have helped sustain a pandemic hiring spree by U.S. business. Now, margins are shrinking — and that could signal harder times ahead in the jobs market.
As earnings season nears its end, corporate America’s two-year run of surging profits appears to be over. Fourth-quarter earnings for S&P 500 companies are still high by pre-pandemic standards, but they’re down 2.3% from the previous period — the first drop since 2020, according to Bloomberg Intelligence. Net income margins are poised to shrink for a second straight quarter.
When earnings decline it can be a sign that job cuts are in the pipeline, as companies seek to protect their margins by lowering labor costs.
But the strength of that connection is trickier-than-usual to figure out right now. Profit numbers — like so many pandemic data sets — are in more-or-less uncharted territory, still near multi-decade highs, and the jobs market has been behaving strangely, too.
Gina Martin Adams, chief equity strategist at Bloomberg Intelligence, expects the narrowing in corporate margins that’s now underway will lead to a wider retrenchment. The level of profits matters for employment, but “the trajectory matters more,” she says.
Adams points to technology companies that post higher margins than most of their peers, but have still been shedding staff. Tech firms, including industry giants like Amazon.com, Meta Platforms and Google’s parent Alphabet, have slashed more than 100,000 jobs since November.
Those cost-cutting efforts helped tech companies shore up their share prices, and now “you’re starting to see layoffs spread a little bit” to other industries, she says. “If their revenues continue to decline, and they don’t see a light at the end of the tunnel, they will react and cut costs.”
One thing that may deter them, though, is how hard it’s been to find workers.
With the expense of hiring back after the pandemic fresh in the minds of corporate bosses, some businesses are hoarding labor — keeping people on their books through an expected recession until the economy turns upward again.
The first jobs report of 2023 appeared to back up that notion. It showed employers were still hiring at a rapid clip, with more than half a million workers added in January, and the lowest unemployment rate in more than half a century. Initial jobless claims in early February also remained below the pre-pandemic 2019 average.
The construction industry may be an example. U.S. housing markets are getting squeezed by high mortgage costs, but Ken Simonson, chief economist for the Associated General Contractors of America, says more than twothirds of its member firms expect to increase head count this year.
“Many companies are probably positioning themselves for recovery,” he says. “The expectation generally seems to be that a recession will be mild and short — if there is one.”
The base case for economists is that there will be — though likely not a deep one. Unemployment is forecast to rise from 3.4% today to around 4.8% in a year’s time, as the Federal Reserve ratchets up interest rates to cool inflation.
Some analysts are optimistic that the U.S. can pull off a “soft landing” where inflation eases without a spike in unemployment. Goldman Sachs recently cut its recession odds over the coming year to 25%, and described corporate layoffs as “a ripple, not a wave.”