Signs of a Potential Recession in the US
Renowned financial analyst Gary Shilling, who accurately predicted the financial crisis of 2007-2009, has identified three clear signs that suggest a recession might be on the horizon for the United States in the coming months.
Sign 1: Leading Indicators Indexes and the Inverted Yield Curve
Shilling points out that leading indicators indexes have been declining for months, which historically has been a reliable precursor to recessions. Additionally, he highlights the inverted yield curve as another significant indicator. An inverted yield curve occurs when long-term interest rates fall below short-term rates. This phenomenon suggests that investors anticipate a decline in longer-term interest rates, which has often foreshadowed an impending recession.
Sign 2: Federal Reserve’s Approach to Credit Easing
Shilling also draws attention to the Federal Reserve’s lack of enthusiasm in easing credit, which has become increasingly evident. Initially, there were expectations of five or six rate cuts at the beginning of the year, but now the outlook has diminished to two or possibly none. This hesitancy by the central bank to stimulate the economy suggests that the anticipated rebound may not materialize as hoped.
Sign 3: Weakening Labor Market
Another sign of potential economic decline in the US can be observed in the weakening labor market. The labor market has been a significant factor in the country’s resilience in the post-pandemic years. Shilling points to indicators such as stagnant wage increases and other labor market trends that suggest a decline in its overall health.
Will the US Experience a Recession or a Soft Landing?
In 2023, many analysts feared a recession, but it was ultimately avoided. Now, experts are divided between the possibility of a soft landing (a period of economic slowdown without entering a recession) or a mild recession in 2024. Bank of America predicts a soft landing, with their experts suggesting that the Federal Reserve’s rate hikes over the past year and a half will weaken growth and lead to higher unemployment rates, but not trigger a recession.
When asked about the possibility of being wrong and the US avoiding a recession, Shilling acknowledges that there is always a chance. However, he believes that the current conditions make it more likely that a recession or a soft landing is imminent. He points out that throughout the post-World War II period, there has only been one soft landing, which occurred in the mid-90s when the Federal Reserve raised and then cut rates without triggering a recession.
Shilling concludes that until the Federal Reserve eases monetary policy, it will be difficult to determine whether the US is heading for a soft landing or a recession. Based on his analysis, he suggests that a recession could hit the US within the next six months or so.
