As economic growth slows, U.S. corporate profits will also decline, says Fitch Ratings.

In a new report, the rating agency said that certain sectors, particularly those that are highly sensitive to prevailing economic conditions, are likely to suffer revenue and profit declines in 2023.

“The economic recovery following the pandemic-driven recession was supported by low interest rates, strong demand and pricing power that bolstered corporate revenue and margins,” Fitch said.

“However, monetary tightening and slower economic growth will negatively impact demand while easing inflation will reduce pricing power, leading to lower revenue growth and less ability to protect margins, absent cost cutting, for some U.S. companies.”

Its baseline forecast is for a recession to materialize in the third quarter, with real GDP growth for the year declining to 1.0% from 2.1% in 2022 and 5.9% in 2021.

“Corporate profits and economic growth are historically correlated,” the report said. “After-tax profits as a percentage of GDP declined by an average of 3% during the last 12 recessions.”

The report said that revenue growth, on a year-over-year basis, is expected to slow for almost all non-financial corporate sectors, although the severity of the slowdown may vary widely.

Aggregate revenues are expected to decline by 0.5% in 2023 after increasing by 7.3% in 2022.

At the same time, Fitch said that eight of 22 corporate sectors are expected to see margins narrow, while the other 14 sectors will enjoy margin improvement in 2023 due largely part easing supply chain and inflationary pressures.

In particular, margins are expected to come under pressure in cyclical categories, such as natural resources, chemicals and building materials.

The transportation sector is expected to enjoy the biggest margin expansion, with airlines benefiting from continued traffic improvements.