The economy may appear to be improving, but it may just be the calm before a storm that could become a recession.
According to renowned economist Gary Shilling, it is too early to celebrate a soft landing. In fact, there are quite a few economic signs indicating that the United States may still be heading toward a recession. As an economist, Shilling has a track record of accurate forecasts dating back to the 1960s, including the 2008 housing crash.
This time, despite an unusual economic backdrop in which the Fed was able to rein in inflation without causing the unemployment rate to rise, Shilling says the very American tendency to believe in a rosy future is overshadowing some clear warning signs. “A lot of people are hoping it will be a soft landing, but we Americans tend to be eternal optimists,” Schilling said in an interview Retirement Lifestyle Advocates broadcast.
Shilling did not predict a recession. However, he pointed to the current trajectory of the labor market and the fact that historically rising interest rates have led to recessions as evidence of its likelihood.
A soft landing has also not yet occurred, Schilling notes. In order to there was a soft landingthe Fed will need to raise interest rates and successfully lower them without plunging the US into recession. only time this happened in 1990s. At this point, he said, rates have risen nearly a dozen times since the Fed started to lift them in March 2022. But the Fed has not yet started cutting them, meaning the process that will lead to a soft landing is still not complete.
“It’s only when they really move from tension to ease that they’ve had a soft landing,” Schilling said.
The economy is still waiting for rate hikes
Rising interest rates especially can be a reliable indicator of a possible recession, Schilling says. He is far from alone in this theory. Many economists have recently noted that on average, it takes just over two years—about 26 months—from the time the Federal Reserve begins raising interest rates for the country to plunge into recession. “Well, it’s been 24 months since they started raising rates,” Schilling said.
Top Wall Street economists at banks such as Morgan Stanley and Piper Sandler share Schilling’s view. Morgan Stanley’s chief US economist said the hard landing was a “hard landing”.guarantee” While Piper Sandler’s chief economist Nancy Lazar also warned that the country is only now entering a period when a recession can be expected. All of these calls for a wait-and-see attitude are consistent with the position of the famous economist Milton Friedman. concept belonging to “long and variable lagIt states that the effects of monetary policy decisions often take long periods of time to manifest in the economy.
Meanwhile, sentiment about soft landing hopes was dampened by Fed Chairman Jerome Powell shelving talk of cutting interest rates. This would signal to the public that the Fed believes inflation is under control. Few analysts believed Powell could do so as early as March. When Powell shot down the idea, it shook their confidence. “Wow, that caused a short-term dip in optimism,” Schilling said.
Many companies that predicted a rate cut in March, such as Goldman Sachs, revised their forecasts last month. Even if the Fed doesn’t cut rates in March, it still plans three cuts throughout the year. Although Powell has made it clear that before doing so, he is waiting for signs that inflation remains low. “We want to see more evidence that inflation is falling sustainably to 2%,” Powell said 60 minutes in February.
Shilling was not surprised by the Fed’s delay. “The Fed is going to take its time cutting rates,” he said. “They want to make sure inflation is back to the 2% target.”
Weakening but still tight labor market
The unemployment rate is closely related to inflation. Conventional wisdom has always suggested that to reduce inflation, the unemployment rate must be raised. Currently, inflation has decreased from 2022 highsto a much more manageable 3.1% in January, without leading to a surge in unemployment.
Currently, the job market is still strong, although not as frothy as it was at the height of the Great Recession. Instead, workers are choosing to stay in their jobs more often than in recent years, when they felt they could get a new job. best salary relatively easy. Schilling believes that the labor market will have to soften before the Fed starts cutting rates, which will again be the moment when the country can definitively know whether the economy will survive a soft landing.
At some point in January 2023, a stunning 96% of people said they had been looking for work for a year, according to a survey conducted by job site Monster.com. Although this trend has begun to reverse, or at least revert to the mean, with job change I no longer earn almost guaranteed income Salary increase by 8.5% they started working in 2022.
At the same time, according to Schilling, business is also causing tension in the labor market. Many firms are reluctant to let people go after they have fought so hard to recruit them in a historically competitive job market, he said.
Because “job markets have been so tight in the past, the whole hiring process has created a mindset where businesses don’t want to turn around and lay people off, even if their sales and profits are low,” Schilling said. “It takes time to change gears 180 degrees, especially after they had to go through so much pain, expense and trouble hiring people. So it’s prolonging the situation.”
All this uncertainty, both in the labor market and throughout the economy, means that consumers are slowly cutting back on spending. This also indicates reversal of a long-standing trend this has puzzled economists. American consumerwhose spending accounts for about 70% of the US economy, has proven to be extremely stable. now this I’m starting to change also, Schilling notes, which also heralds changes in the American economy. “If consumers move from enthusiasm to caution, it will lead to huge [impact on] the entire economy,” says Schilling.