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.
Become a client to read more
This is premium content that requires an active Capital Economics subscription to view.
Already have an account?
You may already have access to this premium content as part of a paid subscription.
Sign in to read the content in full or get details of how you can access it
Register for free
Sign up for a free account to:
- Unlock additional content
- Register for Capital Economics events
- Receive email updates and economist-curated newsletters
- Request a free trial of our services