Bloomberg News reports that Nobel Laureate economist Robert Shiller is seeing that there is a good chance that the US might reel under a recession at least in part as a result of the “self-fulfilling prophecy“, as the companies, investors, and consumers are growing increasingly anxious about a possible downturn.
More on it
Shiller, who has authored the book “Narrative Economics: How Stories Go Viral and Drive Major Economic Events”, written in 2019, and a professor at Yale University, stated that the fear might lead to it happening in real.
There has been a mounting concern of contraction as there has been acceleration in inflation and the Federal Reserve’s efforts to combat it. The stock prices have dropped, and several corporate stalwarts have sounded alarm bells. More and more households are complaining that it is the wrong direction. This could lead to the companies and consumers being increasingly cautious, thereby triggering a downturn.
US consumer sentiment dropped to the lowest ever in a decade in the past month. And the preliminary reading for June is supposed to be out on Friday.
Gloomy scenario
Bloomberg News reports that Shiller says that the chances of a recession sometimes over the next few years are at 50%, which is way higher than usual.
A crucial part of the developing narrative includes the hike in interest rates by the Fed and working out a strategy for doing even more, said Shiller in a telephonic interview.
Jerome Powell, the Fed Chair, and his colleagues are anticipating widely raising rates by half a percentage point when they are scheduled to meet next week. An update will be issued on the interest rates and the economic projections.
According to Shiller, the prospect of a higher path for the interest rates might lead to a rush to buy houses since the buyers will try to avail of the lock mortgage rates before they swell again.
Shiller thinks it is more likely that the Americans will fall prey to a self-fulfilling prophecy related to a downturn since there is collective suffering in the country due to “post-traumatic stress disorder” caused by the pandemic. Covid-19 led to the loss of lives of more than 1 million Americans.
The polarization of the society, which is very stark with the political camps opposing each other and considering each other as evil, is one of the factors that can increase the risk of the prophecy becoming a reality.
Political strategists belonging to President Biden’s Democratic Party have been complaining that the gloomy economic scenario is overdone, seeing the job market’s strength, which according to some economists, is the most stringent ever. Shiller opines that the escalating inflation impacts Americans’ psyche rather than the state of the labor market.
