Gary Shilling warns that the U.S. economy is still at risk of recession

Gary Shilling warns that the U.S. economy is still at risk of recession

Financial analyst Gary Shilling believes that although the U.S. economy has avoided a recession so far, the risk of a deeper economic downturn is still a concern. Small businesses, along with other indicators like the yield curve and leading indicators, often serve as harbingers of recessions. Shilling points out that small businesses are particularly sensitive to economic conditions due to limited capitalization, leading them to cut back on employment and other areas in response to uncertainties.

Despite potential challenges, the labor market has played a key role in preventing a recession thus far. Shilling notes that there has been more strength in employment than expected, likely due to companies hesitating to lay off staff after investing time and resources in hiring. This has helped maintain a stronger labor market and delayed the onset of a recession in 2023.

However, Shilling cautions that there are early signs of a weakening labor market, such as wage gains, quits, and service inflation. This service inflation poses a challenge for the Federal Reserve, especially with wages in the service sector rising significantly higher than the target 2% inflation rate set by the Fed. In response, the Federal Reserve plans to reduce interest rates at least three times in 2024 to combat inflation and support the economy.

Shilling emphasizes that the Fed is not in a rush to cut interest rates due to the overall strength of the economy. As long as employment remains robust, the Fed will take a cautious approach to ensure that inflation is managed effectively. Looking ahead, Shilling points to various indicators, including artificial intelligence, globalization, and the upcoming presidential election as factors that could impact the future of the U.S. economy.

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