- U.S. companies rated investment grade cut operating expenses 5.3% during the first quarter to $2.86 trillion amid forecasts of recession and the Federal Reserve’s most aggressive series of rate hikes in four decades, according to S&P Global Market Intelligence.
- Companies trimmed day-to-day operating costs such as wages and business travel as both private- and public-sector economists — including those at the Conference Board and Fed — predicted a downturn would begin during 2023. Through their austerity, investment-grade companies reduced the median ratio of operating expenses to total revenue to 83.8% during the first quarter from 85% at the end of 2022, S&P said.
- “The year started with several macroeconomic challenges,” Datasite CFO Tom Donnelly said. “Interest rates were still rising alongside continuing supply shortages and increases in energy costs.”
Companies reduced costs as economic growth during the first quarter exceeded forecasts.
Gross domestic product increased 2% during Q1, the Commerce Department said last month, a revision from an estimate of 1.1% published in April. Consumer spending, the main driver of economic growth, rose 4.2% during the period, a revision from 3.7%.
Companies prepared for several headwinds during the period, Jay Jung, managing partner at Embarc Advisors, said in an email response to questions.
“Rising interest rates, inflation and the general economic outlook pointed toward slower growth,” he said. “Many companies over-hired during 2020-2021, when money was free flowing.”
Investment grade companies benefited the most from the two-year period of easy money beginning March 2020, when the Fed held the federal funds rate at near zero, Jung said. “So it is not a surprise that these were the most bloated,” he said.
Many companies took advantage of the bleaker outlook during the first quarter to trim headcount, he said. “Even companies that did not need to make layoffs from a cash perspective — it was used as a convenient backdrop for large companies to cull the lowest performers.”
Non-investment-grade companies during Q1 reduced costs 3.8%, significantly less than companies with investment grade status and access to lower-cost capital, S&P said. Still, they suffered a tougher hit to revenue during the period and their median ratio of operating expenses to total revenue rose to 91.4% from 90.6% during Q4 2022.
“Non-investment-grade companies generally run a tighter ship” and have fewer opportunities for austerity, Jung said.
Energy and consumer discretionary companies were especially aggressive in cutting costs, trimming operating expenses by 13% and 10%, respectively, S&P said.
“Consumer discretionary saw a boom during the pandemic — everything from exercise machines to home appliances and renovations,” Jung said. With liquidity drying up, the companies “need to right size for the back-to-normal environment.”
In recent weeks, economists at Goldman Sachs and other financial institutions have reduced the projected odds of a downturn.
Still, “finance leaders must remain nimble and strategic, focusing on where the business risks and opportunities lie, while also keeping an eye on investments in capabilities that enhance their resilience,” Donnelly said in an email response to questions.