Financial analyst Gary Shilling warns that while the U.S. economy has managed to avoid a recession so far, the risk of a deeper economic downturn remains a concern. Small businesses, along with other indicators like the yield curve and leading indicators, often serve as warning signs of recessions. Shilling highlights that small businesses are particularly sensitive to economic conditions due to their limited capitalization, which makes them cut back on employment and other areas in response to uncertainties.
Despite potential challenges, the labor market has played a crucial 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 like artificial intelligence, globalization, and the upcoming presidential election as factors that could impact
