The softer economic growth in the first quarter indicates the economy is slowing down, which is affecting corporate profits, according to the Commerce Department on Thursday.
Corporate profits fell by 0.6% in the first quarter after a 4.1% increase in the previous three months, marking the first decline in a year.
“A margin of slack capacity is opening up and consumers are feeling less flush. That showed up in a drop in corporate profits,” said Bill Adams, chief economist for Comerica Bank in Dallas.
“A cooler economy is limiting businesses’ ability to raise prices, which will help slow inflation in the second half of the year,” he added.
Gus Faucher, chief economist of The PNC Financial Services Group, said that the decline in profits is not alarming for corporate America.
He pointed out that profit growth is still up 7.2% compared to the same period last year.
During the pandemic, “businesses were able to take advantage of supply-chain issues and increase their margins. Now, with pressure on margins, we’re seeing slower profit growth, but still solid profit growth,” Faucher said.
To maintain earnings, some companies are reducing portion sizes and using cheaper ingredients, a practice known as “greedflation.”
The Groundwork Collaborative, a progressive think tank, argues that companies, particularly in highly concentrated sectors, have been exploiting consumers.
In February, Groundwork released a study showing that families are paying 25% more for groceries than before the pandemic, compared to 19% overall inflation.
Despite the decline in profits in the first quarter, the think tank believes companies should be held accountable by Congress.
“When the Trump tax law expires next year, we must ensure corporations pay back what they gained through profiteering by putting corporate tax increases firmly on the table,” said Bilal Baydoun, director of policy and research at Groundwork, in a statement following the release of corporate profit data.