(Bloomberg) –Warren Buffett, whose economic understanding is essential to the deep connection of Berkshire Hathaway Inc. with the American economy, made a gloomy forecast for his business: the good times may come to an end.
The billionaire investor expects profits from most of Berkshire’s operations to fall this year as a long-forecast downturn slows economic activity. He made his comments at the conglomerate’s annual general meeting in Omaha, Nebraska, after Berkshire reported a nearly 13% rise in operating profit to $8.07 billion in the first quarter.
“Most of our businesses will report lower earnings this year than they did last year,” Buffett, 92, told a crowd of thousands at an event on Saturday. For the past six months or so, an “incredible period” for the US economy has been coming to an end, he said.
Berkshire is often seen as an indicator of economic health due to the vast nature of its business, ranging from railroads to electric power to retail. Buffett himself has said that Berkshire owes its success to the incredible growth of the US economy for decades, but his prediction that the growth of his firms will slow comes as turmoil in regional banks threatens to cut credit as inflation and higher rates continue to bite.
Buffett’s longtime business partner, Charlie Munger, 99, who joined him on stage, said the tougher economic environment would also make life harder for value investors, who typically buy stocks that look cheap compared to the intrinsic value of the business.
“Get in the habit of earning less,” Munger said.
However, Buffett said he expects less business-related insurance revenue to increase this year. Berkshire has already reported higher earnings for these businesses, including auto insurer Geico, which turned profitable after six quarters of losses.
Geico reported a profit of $703 million as higher average premiums and lower ad spend helped boost profits even as claims frequency declined, Berkshire said in an earnings announcement on Saturday. This resurgence followed a difficult period for the underwriting business as inflation took its toll on material and labor costs.
Geico faced particular pressure from competitors, including Progressive Corp., which Buffett called “well-managed,” and Allstate Corp., which had long used telematics programs to track drivers and reward better behavior before Geico submitted its proposal. Geico’s earnings also helped Berkshire’s insurance companies make $911 million in profits, up from $167 million a year earlier.
Berkshire previously said it expects Geico to return to operating profitability in 2023 after raising premium rates. However, Geico remains a challenge for Berkshire, with revenue growth of less than 1% for the quarter, “significantly behind its peers,” said CFRA analyst Cathy Seifert.
“I suspect that rate hikes to offset claims cost inflation are accompanied by policy cancellations,” she said. “While losing loss-making policies isn’t always a bad thing, it’s usually not the policies – and the insurers – that go away.”
Other parts of the conglomerate have been hit, with Berkshire Hathaway Energy’s after-tax profit slumping 46.3% year-over-year amid “declining revenues for U.S.-regulated utilities, other energy businesses and real estate brokerages.” According to Edward Jones analyst Jim Shanahan, railroads also came in weaker-than-expected due to lower freight volumes and higher operating costs.
But at one of Berkshire’s best-known businesses, Brooks Running Co., chief executive officer Jim Weber was skeptical of the sharp decline in consumer demand.
“With the unemployment rate so low, it’s hard to believe we’re about to fall off a cliff into a recession at the consumer level,” Weber said in an interview Friday ahead of the meeting. “I wonder if this will be an asset value recession.”
Berkshire bought back $4.4 billion worth of shares, more than in the same period last year, as the investor’s sprawling firm faced turbulent markets that offered fewer of the blockbusters he is known for. Berkshire turned to buybacks more frequently as public market valuations made it harder for Buffett to spot promising acquisitions.
Berkshire also added to its cash pile, ending the quarter with roughly $130.6 billion, after finishing with $128.6 billion in cash last year. The company was a net seller of shares in the quarter, earning $10.4 billion from share sales after deducting purchases.
As the Federal Reserve raised interest rates to fight inflation, Berkshire’s investment earnings rose, helping boost total earnings to $35.5 billion for the quarter. Berkshire often advises investors to pay attention to past investment returns, which are subject to accounting rules and can be misleading to investors.
“Our investment income this year will be much higher than last year, and it’s built in,” Buffett said at the annual meeting.