The U.S. economy has so far avoided a recession, but the risk of a deeper economic slowdown remains, according to financial analyst Gary Shilling.
Think of America’s small businesses as one of the “normal warning signs of recessions, (like) the yield curve and leading indicators,” Shilling said.
“Small businesses are very sensitive to economic conditions because they are generally not very capitalized,” Shilling told CNBC. “They are cutting back on employment and other areas.”
However, the job market as a whole is one of the main reasons the United States has so far avoided a recession.
“We’ve had more strength in employment than is probably commensurate with where business is,” Shilling said.
During the labor shortage, companies that were hiring had to compete for workers.
Now, these companies are hesitant to lay off workers after spending so much time and energy hiring new employees, which Shilling says has helped keep the job market stronger than expected.
“You haven’t experienced that weakness in labor markets that I think you normally would have experienced that would have caused a recession (in 2023),” Shilling said. “That doesn’t mean we won’t have one, but it does mean that whatever it is, it’s delayed.”
However, Shilling is watching for signs of a slowdown in the job market.
“There are a lot of early signs of weakness in the labor market,” he said, pointing to wage hikes, departures and service inflation.
“It’s services inflation that’s really a problem for the Fed, and if you look at wages in the services sector, they’re increasing 5 to 6 percent year-over-year,” Shilling said. “This hardly compares to the Fed’s 2% inflation target.”
The Federal Reserve has indicated that it plans to cut interest rates at least three times in 2024.
“The Fed is going to cut interest rates, but they want to make sure that inflation is killed and killed to death because I think the Fed is in no hurry. And why should they do it,” he said. Shilling said. “There is no clear evidence that the economy is collapsing. As long as employment remains as strong as it is, the Fed is in no rush to cut interest rates.”
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