Freaking Out, Chart by Chart, with the Bearish Economist Gary Shilling
Consumers are buying stuff and they seem optimistic enough about the future, so why is the S&P 500 jerking around as if real economic recovery is suddenly questionable? Consider the fears of economist Gary Shilling, excellent forecaster of past recessions and chief pooh-pooher of today’s market enthusiasm. Here’s an illustrated version of why he thinks consumers are in worse shape than they’re letting on.
Shilling forecasts a recession this year, a prediction that a falling unemployment rate and rising retail sales figures have done little to change. He recently offered point-by-point explanations of his opinion in a series of popular columns at Bloomberg View. While his general pessimism puts him very much at odds with the market for the first few months of the year, it looks like he’s gaining some followers.
Shilling is particularly skeptical of using consumer behavior as a reliable indicator of the general public’s actual situation. Consumers buying fun stuff like Apple (AAPL) iPads and Gap (GPS) clothing have ramped up retail sales figures this year and brought along stock prices in several sectors with them. But by many accounts, consumers have even less money than they did a year ago, because prices of goods have gone up. (And not just gasoline prices, which he considers of limited importance.) In the past year, earnings have not gone up at the pace of costs.
That means consumers are using more savings or borrowing to buy things. In the past year alone, debt has edged up, but the savings rate has dropped sharply.
Shilling sees this as an unsustainable situation that will lead to a drop in consumer confidence – another indicator showing happy times recently – before wages and employment increase. Yes, the overall employment rate has gone down, but he points out that a drop in claims for unemployment, or even a rise in job openings, isn’t the same as new hiring. Employers are being very picky, and a lot of today’s unemployed have been out of the workforce so long that their skills are rusty or unappreciated. Since recovery began, some unemployed have dropped out of the job search, and the length of time for unemployment has risen sharply.
Payroll numbers for the past couple of year don’t suggest a promising trend either.
Meanwhile, home mortgages that still exceed market values keep qualified workers from moving for better job opportunities. Shilling warns of a possible 20% additional drop in housing prices – a prediction that got more attention when January’s prices broke a steady decline and remained about flat. If this really is the restart of falling prices, those consumer confidence figures behind so much of the market’s happiness this year will surely tank.
Of course, Shilling’s reason for bearishness is a lot more complicated than our little summary here can show. We haven’t even touched on his cynicism about corporate earnings that beat forecasts, or his views that still-broke state and local governments can seriously hurt recovery, for example. Or, for that matter, on the reasons that multitudes think he’s way off base in his conclusions. But in coming months, when the S&P takes a dive on some worrisome consumer indicator, consider Shilling’s reasoning. It’ll be one more tool in understanding whether you’re looking at a buying opportunity or something else entirely.