Gary Shilling, the money manager who predicted the housing bubble that led to the 2008 Great Recession and the global inventory overhang that preceded the 1973-1974 recession, is no longer saying the U.S. economy is in a recession, but he hasn’t abandoned those concerns.
While other economists and market strategists “believe that a recession has been averted and are relieved that the first phase of the trade deal with China is at hand … we remain cautious,” writes Shilling in his latest Insight report. “Enthusiasm may not have reached the high level that virtually guarantees a bear market in equities, but it’s moving in that direction … A 2020 recession is a strong possibility.”
In previous 2019 Insights, Shilling said the U.S. economy was already in recession.
Recessions are becoming increasingly difficult to predict in what Shilling describes as an “atypical economy.” The excesses that usually build up in the economy, in the housing market, manufacturing and even wages, which prompt reaction from the Federal Reserve to slow things down, are lacking, according to Shilling.
In the housing sector, lending conditions are tight and demand from young people, who traditionally lead the market for new homes, is soft, writes Shilling. Business inventories now are better controlled and traditionally a big issue for manufacturing, which accounts for a smaller share of the U.S. economy. Wages are rising but at a slower rate than previously due to globalization.
Given these differences from past expansions, Shilling doesn’t expect that the current business expansion will end as others have before, with the Fed “worried about economic overheating” and hiking interest rates to slow the economy. Nor does he believe that the shocks that inspired more recent recessions such as the dot-com implosion, which led to the 2001 recession, or the subprime mortgage market collapse, which ended with the 2007-2009 Great Recession, will be repeated.