US corporations cut costs in the first quarter of the year as rising interest rates and a weakening economy worsened operating conditions.

The total operating expenses of companies rated investment grade by S&P Global Ratings fell 5.3% in the first quarter to $2.858 trillion, indicating companies reduced day-to-day running costs such as wages and business travel.

Cost cutting

Companies with weaker balance sheets also trimmed costs. Total operating expenses of non-investment-grade companies fell 3.8% from the fourth quarter of 2022 to $628.71 billion, according to the latest data from S&P Global Market Intelligence.

The energy and consumer discretionary sectors were particularly active in cutting costs with declines of over 13% and 10%, respectively, among the investment-grade tranches. Non-investment-grade companies in both sectors made similar cuts, at 13.4% and 8.6% reductions in operating costs from the previous quarter, respectively.

Ratios

The decline in expenses lowered the median ratio of operating expenses to total revenue for investment-grade-rated companies to 83.8% from 85.0% at the end of 2022.

By contrast, the cuts by lower-rated companies were not enough to lower the median ratio, which rose to 91.4% from 90.6% as revenues were hit harder. The most notable rises in the ratio were in real estate, communication services and information technology.

The energy sector reported the lowest median ratios at 70.6% for investment-grade companies and 71.7% for their lower-rated peers.