Does the decline in profits mean a recession is coming?

The 11.5% decline in corporate profits last year, which included a 7.8% decline in the fourth quarter alone, doesn’t necessarily mean that a recession is imminent. Admittedly, profits usually begin to decline in the latter stages of the economic cycle, but that in itself does not cause a recession. Instead, it is the corresponding pick-up in labour costs and price inflation that trigger a recession, because the Fed usually responds by hiking interest rates aggressively. Although we have begun to see labour costs rise more rapidly in the current cycle, the crucial difference from other cycles is that the Fed has barely begun to tighten policy at all. Accordingly, the risk of a recession this year remains low.