InvestorQ : Is it true that the US is likely to dip into a recession and why so?
ishika Banerjee made post

Is it true that the US is likely to dip into a recession and why so?

4 weeks ago

In the last few months, the likes of Larry Summers have already warned of a likely recession as they see the rate hikes hitting the other way. Now, the recession prediction comes from Nobel Laureate, Robert Shiller. According to Shiller, there was a more than 50% probability that the US would experience recession for a few years starting 2023. Shiller believes that targeting inflation by hardening interest rates rarely works when it is supply side driven. The problem, according to Shiller is that when inflation is not controlled by rate hikes.

The real reason why Shiller expects a recession is what he calls a “self-fulfilling prophecy”. Shiller expects the US to face a piquant situation wherein consumers, investors and companies would slow down their spending. This normally happens when almost everybody on the street is preparing for the worst in economic terms. What appears to be prudence actually degenerates into full-fledged unwillingness to spending, triggering a recession due to lack of spending. That is the situation that Shiller is apprehensive about.

In other words, fear can lead to actuality and that is what people like Shiller are really worried about. Remember, even the industry doyens like Jamie Dimon of JP Morgan and legendary investor Carl Icahn have warned of an impending recession. When the big guns are calling a recession and when inflation is uncomfortably high, it is likely to leave most of the consumers feeling pessimistic. Consumer confidence has fallen to its lowest level in 10 years with more than 80% Americans expect a recession. All are fearing the worst.

Shiller has a very interesting take on inflation. Interestingly, inflation has an economic and psychological effect. Here is how. Each time a person goes to the store they get to see inflation first hand. As a result, then come back feeling deflated, pessimistic and angry. Already, the recovery from the COVID lows has been uneven and that is only worsening the condition of consumers yet to see an even recovery. Inflation is a household problem and it has struck the US consumers at a time when they would have least wanted it to.

Now comes the aggressive Fed adding to the problems. According to Shiller, the aggressive plans of the Fed to hike interest rates is adding to the odds of a recession. Fed has already hiked raised rates by 75 bps and plans to add another 200 bps by end of December 2022. He feels that the Fed is actually being unrealistic. It would be naïve to expect a soft landing wherein inflation comes down but growth remains robust. That is hardly practical. In short, his thinking gels with the view that biggest recessions are about aversion to spending.