US corporate profits surge in fourth quarter; tariff turbulence looms

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Corporate profits rebound strongly in fourth quarter

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Solid profit margins supporting labor market

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Fourth-quarter GDP growth revised up to 2.4% rate

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Weekly jobless claims slip 1,000 to 224,000

By Lucia Mutikani

WASHINGTON, - U.S. corporate profits increased sharply in the fourth quarter, but an uncertain economic outlook due to tariffs is creating a challenging environment for businesses that economists say could force companies to lay off workers to protect margins.

The report from the Commerce Department on Thursday also showed the economy grew at a slightly more solid clip last quarter than previously estimated amid pre-emptive buying of big-ticket items like motor vehicles ahead of import duties. President Donald Trump has announced a blizzard of tariff actions since taking office in January. On Wednesday, Trump unveiled a 25% levy on imported cars and light trucks starting next week. Economists say the manner in which the tariffs are being handled is not supportive of economic activity.

Business and consumer sentiment have sagged. The odds of a recession have risen, with the nation's trade partners also expected to retaliate through duties of their own.

"Profit margins are a leading recession indicator and, at least before the disruptions that will be caused by the tariff hikes, there was no reason to expect a recession in 2025," said Conrad DeQuadros, senior economic advisor at Brean Capital.

Profits from current production with inventory valuation and capital consumption adjustments increased $204.7 billion, or at a 5.4% rate, last quarter, the Commerce Department's Bureau of Economic Analysis said. Profits declined $15.0 billion, or at a 0.4% pace, in the July-September quarter.

Profits increased $281.3 billion in 2024 after rising by $229.8 billion in 2023. A measure that is conceptually most similar to S&P 500 profits increased at a 6.7% pace after declining at a 0.3% pace in the July-September period.

"Corporate profit margins remain solid, which is one reason that layoffs remain subdued," said Ryan Sweet, chief U.S. economist at Oxford Economics. "If corporate profit margins compress because of a sudden weakening in the economy or higher input costs because of tariffs and the inability to pass them onto consumers, it could lay the groundwork for layoffs."

RESILIENT LABOR MARKET

Labor market resilience was reinforced by a separate report from the Labor Department showing initial claims for state unemployment benefits fell 1,000 to a seasonally adjusted 224,000 for the week ended March 22, broadly in line with economists' expectations.

But companies are hesitant to hire more workers, resulting in those who have lost their jobs experiencing difficulties finding new ones.

Economists expect the Trump administration's aggressive trade policy and an ambitious campaign to drastically downsize the federal government through deep spending cuts and mass firings to shake labor market stability.

The number of people receiving benefits after an initial week of aid, a proxy for hiring, decreased 25,000 to a seasonally adjusted 1.856 million during the week ending March 15, the claims report showed.

U.S. stocks were trading higher. The dollar dipped against a basket of currencies. U.S. Treasury yields were mostly higher.

Consumers, eager to avoid higher prices from imports, front-loaded purchases of goods last quarter, driving spending and keeping the economic expansion on track.

Gross domestic product increased at an upwardly revised 2.4% annualized rate, the BEA said in its third estimate of fourth-quarter GDP. Growth was previously estimated at a 2.3% pace. The economy grew at a 3.1% rate in the third quarter.

Strong profits boosted an alternative measure of economic growth. Gross domestic income grew at a 4.5% rate after rising at a 1.4% pace in the July-September period.

GDP and GDI generally should be equal, but in practice they differ as they are estimated using different and largely independent source data. Annual benchmark revisions tend to close the gap between GDP and GDI.

The average of GDP and GDI, also referred to as gross domestic output and considered a better measure of economic activity, increased at a 3.5% rate. Gross domestic output grew at a 2.2% pace in the third quarter.

There are signs that GDP growth has significantly slowed in the first quarter because of snowstorms and unseasonably cold weather as well as trade policy uncertainty. Growth estimates for the January-March quarter are mostly below a 1.5% rate and the odds of a contraction are high. The Fed last week left interest rates unchanged, an acknowledgement of the uncertainty swirling around the economy.

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