In a 2 part series on Bloomberg Gary Shilling has built his case for recession in 2012 (read part 1 here and part 2 here).   He says the consumer is weaker than many presume and that headwinds are building the will lead to declines in corporate profits and employment.   The key points in this recession argument via Shilling:

  • Consumers Are the Linchpin: The U.S. economy is being fueled these days by strong consumer spending, which increased in February by 0.8 percent, its best showing in seven months, after rising 0.4 percent in January. Retail sales rose 1.1 percent in February — the fastest pace in five months — while same-store sales advanced 4.7 percent. These numbers correlate with recent gains in consumer confidence and sentiment.  I don’t see this pace continuing.
  • Spending, Saving and Debt: The support that consumer spending has received from less saving and more debt appears temporary. Household debt — including mortgages,student loans, and auto and credit-card loans — has fallen relative to disposable personal income, though. In my analysis, this is largely because of write-offs of troubled mortgages. Nevertheless, revolving consumer credit, mostly on credit cards, is no longer being liquidated.
  • Housing activity remains depressed, with the only signs of life coming from the multifamily component, which is being driven by the appetite for rental apartments as homeownership declines. Homeowners are losing their abodes to foreclosures; many can’t meet stringent mortgage-lending standards; some worry about homeownership responsibilities in the face of job uncertainty; and many have no desire to buy an asset that continues to fall in price.
  • What Oil Threat?: Recently, there has been great concern about $4 per gallon gasoline and whether, as in 2008, those high prices will act as a tax on consumer incomes and force drastic cutbacks in other purchases.
  • Job openings: The U.S. has a lot of job openings, but having endured huge layoffs in recent years, employers are being very picky in new hiring. Contrary to Federal Reserve Board Chairman Ben S. Bernanke’s assertion that high unemployment is mainly a cyclical concern that will be solved by economic growth, I believe that a big part of the problem is structural.
  • Business Cost-Cutting: During the sluggish business recovery that began in mid-2009, sales-volume increases for U.S. business have been tiny, and the ability to raise prices was very limited even as commodity and other input prices climbed until about a year ago. As a result, profit margins were threatened. Meanwhile, foreign competition has been fierce.
  • Corporate earnings implications: More jobs are about the only spur to household incomes, and consumer spending is the only source of strength in the economy this year. If new employees spend their paychecks freely, they could create more consumer demand, additional corporate revenues and profits, more jobs, and so on, in a self-feeding cycle. But, as I discussed in Part 1, new and old employees are more likely to retrench and precipitate a recession.



Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

More Posts - Website

Follow Me:


  1. Once again, thanks for continuing these posts. Very helpful.

    Productivity-driven beats are being exhausted from fewer oppotunities and the inevitable reversal of extreme productivity.

    The consumer certainly seems to be under pressure. Personal care/consumer goods volumes are declining again this year, and faster than last year. That should not happen.

    On the flip side, there is finally some real investment happening from the private sector in America. I think 2H12 will show that benefit.

  2. CR writes: “Contrary to Federal Reserve Board Chairman Ben S. Bernanke’s assertion that high unemployment is mainly a cyclical concern that will be solved by economic growth, I believe that a big part of the problem is structural.”

    I’ve read several econoblog posts (Dean Baker, Krugman(?)) on that topic, and my main memory is that if a big part of the U.S. current unemployment problem is structural rather than cyclical, then there should be visible evidence of rising wages &/or unmet hiring demand in certain sectors or geographies. And that there does not appear to be any of that evidence, leading one to conclude that at the present, most unemployment is cyclical, not structural.

    CR – why do you think that a big part of the unemployment problem is structural?

  3. What was the catalyst that led to U.S. consumers spending even more than their income over the past 6 months? I other words, the U.S. consumer was increasing their debts by taking on new auto loans, and other loans, and by spending down their savings. U.S. real income per capita has been flat for the past 12 months.
    Once the pent-up demand for autos has been satisfied, the U.S. economy should slow down again.

  4. Repost with your own comments to each point would be greatly appreciated!

    We all know you do not believe in recession this year because of the size of the budget deficit which you think will affect above issues poistively (which ones and how much?). This is though a bit abstract (what are the actual effects?) for a layman such as me and it would be very nice if you could in some way connect your thesis with the above.

    Love the site!

  5. When I look at inbound containers in the Los Angeles & Long Beach area then the US is already in recession. Some compensation is provided by the rise in the amount of outbound containers (=exports). In this regard the US consumer is already retrenching. Frankly, I am not surprised the consumer is retrenching because 2013 will bring a lot of new taxes/taxhikes for both consumers and companies.
    In that regard austerity is imposed on the US consumer as well.