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Profits Are Booming—and That’s Shielding the Economy

Job growth took a step down in April, as reported in Friday’s employment numbers. But there is a world of difference between a slightly weaker labor report and the types of job losses that could push the economy into a recession.

With corporate profits on an upswing, a major downturn in the economy could be far away.

The bulk of U.S. companies have now reported first-quarter results, and they show profit growth is picking up. Earnings per share for companies in the S&P 500 now look to be up 5.2% from a year earlier, according to FactSet, better than the 3.4% analysts expected at the end of March, and marking the strongest growth in nearly two years.

Company results coming in ahead of the estimates is a regular occurrence. More unusually, analysts also spent last month lifting their current-quarter estimates. They now expect second-quarter earnings per share to gain 9.8%, compared with 9% at the end of March. The last time analysts spent the first month of a quarter raising rather than lowering earnings estimates was during the fourth quarter of 2021, according to FactSet earnings analyst John Butters.

Corporate profits are important because they show the U.S. economic engine continues to purr. While some other economic indicators, such as consumer-sentiment readings, have been downbeat, and inflation has ticked up, a strong U.S. profit performance typically points toward continued expansion.

The drift higher in earnings estimates might be because companies, instead of feeling a need to temper analysts’ optimism and nudge estimates lower, are upbeat themselves. Among companies in the S&P 500, the term “recession” showed up in just 100 transcripts of earnings calls, investor events and conferences recorded in the first quarter, according to FactSet. That was down from 302 in the first quarter of 2023, and the fewest in two years.

Survey-based measures of corporate sentiment have picked up. The Business Roundtable’s index of chief executive officers’ economic outlook rose to the highest level in the first quarter since the second quarter of 2022. Indexes of CEOs’ hiring and capital-spending expectations have gained ground. A survey of chief financial officers conducted by Duke University’s Fuqua School of Business with the Federal Reserve banks of Atlanta and Richmond showed a similar increase in optimism.

“There is not a reason if profits are good to retrench,” said the Duke economist John Graham, who directs the CFO survey. Moreover, many CFOs say their companies are still struggling to attract workers.

For now, Graham thinks companies are in the mode of adding workers when the profit outlook is good, and holding employment steady if the outlook becomes shaky, rather than shedding the employees they put so much effort into hiring. So even if earnings do falter, companies might be slow to turn to layoffs.

Indeed, while there were high-profile layoff announcements from companies including Tesla and Amazon.com last month, overall layoff activity remains low. The Labor Department reported that the total number of workers laid off from their jobs in March came to a seasonally adjusted 1.526 million. That was the fewest since December 2022. In prepandemic 2019 (a good year for the job market) the monthly layoff count averaged 1.818 million. Initial claims for unemployment insurance—a leading indicator of layoff activity—have remained low.

The economy isn’t a perpetual-motion machine, where profit growth leads to employment growth, employment growth leads to consumer-spending growth, and spending growth leads to profit growth in a never-ending virtuous circle. The Fed has raised interest rates sharply in its bid to cool inflation, and the danger remains that its rate increases will eventually push the economy into a recession. Experience shows that the economy can go from good to bad in a hurry.

But so far, people have kept shopping, with consumer spending growing at an inflation-adjusted 2.5% annual rate in the first quarter, according to the Commerce Department. Year-over-year wage gains have cooled, but have outpaced inflation since last May, providing workers with the wherewithal to spend. Productivity gains have allowed businesses to maintain profit margins despite wage increases.

When profits start faltering, it will be a good time to worry about jobs. But they aren’t faltering yet.

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