New York, NY – Renowned economist Gary Shilling is forecasting a looming U.S. recession and a sharp decline in the stock market by the end of 2023. Shilling, a former Merrill Lynch economist, shared his grim outlook in a recent interview with Business Insider, pointing to multiple economic vulnerabilities and overvalued stock markets as key factors in the potential downturn.
A Recession is “Almost Inevitable”
Shilling’s analysis suggests that the U.S. economy is on the brink of a recession. He cited several key economic indicators, including sluggish consumer spending, a weakened housing market, and a sharp decline in business investment, as signs that a downturn is near. “This is almost inevitable,” he said. “The economy is facing too many headwinds for it to avoid a recession at this point.”
The economist noted that unless there is a substantial fiscal stimulus or a sudden surge in consumer strength, a recession is nearly certain. However, he expressed doubts about both possibilities, particularly given the current economic pressures.
Stock Market to Tumble by 30%
Shilling is also bearish on the stock market, predicting that the S&P 500 could drop by as much as 30% by the end of the year. He believes that inflated valuations are unsustainable, and a market correction is looming.
“Stocks are very expensive, and there probably is a major correction coming somewhere in the relatively near future,” Shilling warned. He pointed to key metrics such as the Shiller CAPE ratio, price-to-sales, and price-to-book ratios, all of which are at historic highs, signaling that stocks are overvalued.
Shilling’s predictions suggest that the 20-30% drop, while significant, is not unusual by historical standards. He emphasized that market corrections are often driven by excesses, although he doesn’t believe the current AI boom qualifies as an example of such excess.
Key Economic Indicators Point to Weakness
Several economic trends support Shilling’s recession forecast. For one, the housing market has remained frozen as high interest rates dampen buyer activity, despite a brief surge in home sales earlier in the year. Additionally, capital expenditures by businesses have plummeted, with investment growth slowing significantly since the pandemic’s peak.
Consumer spending, which constitutes about two-thirds of U.S. economic growth, has also started to show signs of strain. While real personal consumption expenditures held steady at a 2% yearly pace in March, Shilling expects consumer spending to decline in the coming months due to inflationary pressures, including the impact of the ongoing Iran war and rising energy prices.
The latest inflation data from the Bureau of Labor Statistics shows a 12.5% year-over-year increase in energy prices in March, the largest increase since 2022. Real disposable income growth has slowed to just 0.4% annually, marking the lowest pace in three years. Furthermore, the personal savings rate has fallen to 3.6%, its lowest point since 2022.
Shilling warned that the economy is “on very thin ice” when it comes to consumer spending and income growth. “People’s willingness to spend is weakening,” he said.
The Role of Valuations and Market Sentiment
Shilling has long been a vocal critic of inflated stock market valuations, and his concerns continue to be centered on these high levels. He believes that inflated stock prices, combined with the broader economic weaknesses, will trigger a major correction soon.
While Shilling acknowledged that it’s unclear exactly what might trigger such a decline, he said that market excesses—often driven by speculative booms—have historically led to major market sell-offs.
Although the AI boom has generated massive investor enthusiasm, Shilling doesn’t believe it currently represents the kind of “extreme speculation” that could trigger a market crash, as he noted that the hype around AI and crypto in particular contributed to the 2022 market downturn.
Shilling’s Track Record and Caution for Investors
Shilling, known for his consistently bearish market outlook, has long warned of a potential recession and stock market decline. In past years, he has cautioned investors about the risks of speculative bubbles and overvalued markets. While his warnings have often been met with skepticism, Shilling’s track record of accurately predicting downturns has earned him credibility in the eyes of many investors.
As the economy and stock markets remain under pressure, Shilling’s forecast serves as a reminder for investors to be cautious and prepared for possible volatility ahead. With mounting economic challenges and inflated asset prices, Shilling’s recession and market correction predictions are gaining attention as 2023 progresses.
