Is US economy heading towards Recession? See what Nobel laureate Robert Shiller has to say

OK, you can complain that you have heard enough about a likely recession in the US. So, one more prediction does not make a real big difference. However, this time the prediction comes from no less a person that Nobel Laureate, Robert Shiller.

In fact, Shiller has gone to the extent of saying that there was a good chance that the US would experience recession for a few years starting from the year 2023. Shiller has also gone ahead and pegged the probability of such an eventuality at well above 50%, so it is a high likelihood.

Shiller is not the first such voice coming from the American intellectual circles. Some time back, even Larry Summers the former Treasury Secretary had warned that recession was very likely. According to Shiller, the current situation is that central banks are trying to fight inflation by hardening interest rates.

But that hardly works when the inflation is largely driven by the supply side. Also, when the entire exercise fails to control inflation, it would eventually translate into recession. Shiller has a similar line of argument.

However, Shiller offers a very different perspective. He believes that recession in the US this time around may become a “self-fulfilling prophecy”. What exactly does that mean. According to Shiller, the US is likely to face a situation wherein consumers, investors and companies would slow down their spending preparing for the worst in terms of an economic crisis.
 

Ironically, this very preparation for a financial crisis may look prudent at this point of time, but may eventually end up triggering a recession. Of course, only time will tell.

Shiller sums it up beautifully when he says, “The fear can lead to the actuality”. It is not just the academicians but even doyens of the American industry from Jamie Dimon of JP Morgan to star investor, Carl Icahn, have warned of an impending recession.

Obviously, this consistent doomsday forecasts from the doyens coupled with inflation at 42 year highs, has left many consumers feeling extremely pessimistic. Statistically, the consumer confidence fell to its lowest level in 10 years as more than 80% Americans expect a recession. 

Shiller points to the pernicious effect of inflation. He believes that rising consumer prices may be actually wreaking havoc on the minds and the sentiments of the average American consumer. Just consider this situation.

Every time a person goes to the store they get to see inflation first hand and they come back feeling deflated, pessimistic and angry. Remember, the recovery from the COVID lows has been uneven and that is also worsening the condition of the consumers who have not fully recovered in terms of jobs and income levels.

Shiller is of the view that among other things, the Federal Reserve’s aggressive plans to hike interest rates is a key factor in increasing the odds of a recession. It has raised rates by 75 bps already and plans to add another 200 bps by the end of December 2022.

That is a lot of hawkishness. Shiller feels that expecting a soft landing where inflation comes down but growth remains robust can be quite an ambitious target and may not necessarily pan out. 

Shiller is not the first American economist to predict a recession but his argument is surely interesting. His perception is borne out by history that the biggest recessions happen when consumers turn averse to spending.

In short, when demand suddenly vanishes is when the real downstream pain is visible. In the current scenario, Shiller things that is a high probability event. That is something the US government, the Fed and the world economies would be closely watching.