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Tags: robert shiller | economy | recession | investors

Yale's Shiller: Investor Thoughts May Cripple Markets

Yale's Shiller: Investor Thoughts May Cripple Markets
Yale University Economics Professor and Nobel Laureate Robert Shiller (AP)

By    |   Tuesday, 03 May 2016 09:10 AM EDT

Yale University Economics Professor and Nobel Laureate Robert Shiller warns that pessimistic investors quite possibly could think the economy into its next setback.

“Recessions aren’t caused merely by concrete changes in the markets. Beliefs and stories passed on by thousands of individuals are important factors, maybe even the main ones, in determining big shifts in the economy,” he wrote for the New York Times.

“Worries that a big downturn might be imminent seem to have abated, but they still abound,” he wrote.

“It is therefore worth asking what actually sets off a real global recession. Most discussions focus on leading indicators — statistics about economic variables that have preceded recessions. While these kinds of correlations can sometimes be useful in forecasting, they provide little understanding of why major changes are taking place. Leading indicators don’t usually address ultimate causes, nor do econometric models that try to predict events,” he wrote.

“No single narrative seems to have enough compelling force at the moment to engender a downturn as big as the last one. Many people have been borrowing from older narratives of risk and vulnerability while trying to understand the current economy,” he wrote.

With consumers and businesses turning cautious, the U.S. struggled to grow in the first three months of a presidential election year that is shining the spotlight on the economy's fitful recovery.

Gross domestic product, the broadest measure of economic health, expanded at a paltry annual rate of 0.5 percent in the January-March quarter, the Commerce Department reported Thursday. That is slower than the fourth quarter's 1.4 percent growth rate and marks the weakest performance in two years.

Growth this slow indicates the US economy may have “slipped into ‘stall speed, that is, growth so weak that the economy loses enough momentum and slides into recession,” according to economists at JPMorgan Chase.

And Shiller also sees another disturbing trend.

“Oil prices have been slumping, not soaring, but there are significant worries about outsourcing, downsizing and globalization, along with deep concerns about rising inequality, refugee and immigrant flows, and what has been called secular stagnation of the economy. Political candidates on both the left and the right have been spinning charged and sometimes disruptive narratives about these issues,” he wrote.

“We don’t know whether any specific event — say, an unexpected spike in oil prices or a decline in the stock market — will help transform any of the current social stories into a truly virulent economic disruption. We don’t know what is coming or when. But history does tell us that human imagination can spontaneously transform discrete events into world-shaking narratives of unexpected color and force,” he wrote.

Other experts warn that if the global slump deepens, or if jobs lose momentum, it could turn Election Day into a pivotal referendum on the economy, the AP reported.

Private economists said that given the severity of the 2007-2009 recession, the debate over the economy is certain to take center stage during campaign season. Democrats will point to a jobless rate at 5 percent — considered close to full employment — and expectations that job growth will continue at a solid monthly pace of at least 200,000 in the months leading up to the election, the AP reported.

Republicans note that annual GDP growth in this recovery has averaged just above 2 percent. That is the slowest pace in the post-war period. Many middle class families are struggling, especially those who lost jobs in the downturn and have had to take on work at lower salaries, the AP reported.

"How all of this will play out in an election is a big question," said Nariman Behravesh, chief economist at IHS Global Insight. "Why is it that voters are feeling so blue when we have an economy that is close to full employment? Part of the problem is a divide between people with college degrees who are doing fairly well and people with high school degrees who are not doing so well."

But Brian Bethune, an economics professor at Tufts University in Boston, said the rebound could still be derailed if there are not "more positive growth trends overseas."

Meanwhile, Robert Hughes, a senior research fellow at the American Institute for Economic Research, in a recent statement indicated the risks of a near-term recession remained "somewhat elevated" after the underwhelming GDP report.

"The labor market's been doing very well – around 200,000 jobs monthly for a good stretch now. Most of the jobs are coming from the services sector, and that's one big part of it. The labor market is really being driven by the services sector," Hughes explained to US News.

"When you look at the labor market, it really is one of the last standing foundations that is supporting this expansion. And I don't mean for that to sound overly negative. We have a business cycle model of what are essentially leading indicators. And our indicator is now down at 38. It's only the first month it's at 38. But historically, when it drops below 50, it's often a warning sign that a recession may be imminent."

(Newsmax wire services contributed to this report).

© 2023 Newsmax Finance. All rights reserved.

Yale University Economics Professor and Nobel Laureate Robert Shiller warns that pessimistic investors quite possibly could think the economy into its next setback.
robert shiller, economy, recession, investors
Tuesday, 03 May 2016 09:10 AM
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