Gary Shilling, the financial analyst who correctly predicted the financial crisis of 2007-2009, said that there are at least three clear signs that a recession might hit the nation in the coming months.
Sign 1
"Leading indicators indexes burn down for months, and it's an invariable forerunner of recessions," Shilling told Newsweek. "An inverted yield curve—and it has been inverted for months—is also an unfailing indicator," he continued.
An inverted yield curve happens when long-term interest rates drop below short-term rates. This, in turn, suggests that investors expect a decline in longer-term interest rates—something that has reliably proven to be an indicator of a looming recession.
Read more: Average Savings Account Rates
Sign 2
"Also, if you look at what's happening with the Federal Reserve, the central bank is not showing any great zeal to ease credit, and that's becoming more and more obvious," Shilling said.
"You started off the year with the expectation of five or six rate cuts, and now we're down to two or maybe none. So there are a lot of things that suggest that the economy is not really in a rebound situation, as most people had hoped."
Sign 3
Another sign of this potential decline of the U.S. economy can be spotted in the weakening of the labor market, which has primarily been responsible for the country's resilience in the post-pandemic years. "If you look at wage increases and other indicators, labor markets are atrophying," he said.
Will America Have a Recession or a Soft Landing?
A recession was feared by most analysts in 2023, but was ultimately avoided. Now, a number of experts agree that the country might be headed towards a soft landing (a period when the economy slows down but does not enter a recession) or a mild recession in 2024. Bank of America is betting on a soft landing, with its experts saying that the Fed's rate hikes over the last year and a half "should ultimately weaken growth and lead to higher unemployment rates" but not cause a recession.
Asked if it is possible that he might be getting it wrong and the country will avoid a recession in the coming months, Shilling said, "There's always that chance."
"I think the conditions are such that, if we avoid a recession, we end up with a soft landing, maybe," he said. "But we've only had one of those in the entire post-World War Two period. That was in the mid-90s, a time when the Fed raised rates and then cut them with no recession to follow," he continued.
Read more: How the Federal Reserve Impacts Mortgage Rates
"And we don't know that the Fed has finished the process of tightening until they ease. Until the Fed eases, we won't really know for sure whether it is a soft landing or not," he added. "But I don't think that's going to be the case."
According to Shilling's analysis of the current situation, a recession could hit the U.S. "in the next six months or so."
Uncommon Knowledge
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Giulia Carbonaro is a Newsweek Reporter based in London, U.K. Her focus is on U.S. and European politics, global affairs ... Read more
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