Gary Shilling Sees Economic Growth Slump, Warns Treasurys Could Plunge

What You Need to Know

The 10-year Treasury yield could fall as low as 0.50% if the economy continues to grow at a lower-than-expected rate, says Shilling.
The recovery in consumer spending hasn't been as robust as many investors predicted.
Shilling says the delta variant threatens renewed lockdowns and, even without them, an economic slowdown.

The 10-year Treasury yield could fall as low as 0.50% if the economy continues to grow at a lower-than-expected rate, which is increasingly likely as the spread of COVID-19 infections grows, according to economist and investment advisor Gary Shilling.

The 10-year Treasury was yielding 1.23% in midday trading Friday, down 24 basis points from a month ago.

“The risks are on the downside,” Shilling, founder and president of A. Gary Shilling & Co., told ThinkAdvisor. ”There has been too much enthusiasm based on the idea that consumers would be spending heavily.”

But that hasn’t happened, said Shilling, citing the decline in consumer spending after each of three successive federal government aid packages; a weaker-than-expected second-quarter GDP report showing a 6.5% annual growth rate versus expectations of 8%-9%; and a decline in new home sales.

Stronger economic growth is even less likely to happen now with the resurgence of coronavirus infections due to the more contagious delta variant, according to Shilling,

The Impact of the Delta Variant

“Everyone sort of assumed vaccinations would be the end of it,” Shilling said, referring to the COVID-19 pandemic. Now, he writes in his latest Insights report, “renewed lockdowns are a threat” as the delta variant spreads and many remain unvaccinated. “Even without lockdowns I think there will be lot slower growth in the second half.”

Coronavirus infections averaged over 71,000 on July 29, up 151% over the past two weeks, due largely to the spread of the delta variant with infections concentrated in states and counties with low vaccination rates. To date, 60% of the U.S. population over 18 years old is fully vaccinated, or 50% of the total population.

At its latest monetary policy meeting, the Federal Reserve generally agreed with Shilling’s assessment of the U.S. economy.

“The path of the economy continues to depend on the course of the virus” and “progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy,” the Federal Open Market Committee noted in its statement.

Shilling’s Inflation Outlook

Shilling agrees with the Fed that price increases are transitory, “the result of bottlenecks in reopening the economy and supply-chain disruptions spawned by the pandemic,” according to his latest Insights report.

He noted that the price of lumber is down 65% from its May 7 high, copper prices have also been falling, and consumer spending on restaurants and other services, though rising with the reopening of the economy, has only “offset the weakness in goods purchases.”

Consumer spending rose 1% in June following a 0.1% decline in May, but many economists are are concerned that the latest number doesn’t reflect the impact of the spreading coronavirus.

Even if he’s wrong on his inflation outlook and inflation rises, Shilling still expects the economy will slow.

“Higher inflation and mortgage rates would devastate already-slipping single-family housing, squeeze borrowers who anticipate continuing low interest rates, wreck high tech stocks and decimate the meme and other speculations into which green retail investors have stampeded,” wrote Shilling.