Robert Shiller: Trump Is a Wall against Recession


Oct. 22 2019, Updated 6:03 p.m. ET

During an October 20 interview with CNBC, Yale economist Robert Shiller expressed confidence in President Trump’s leadership to spark further growth. Referring to Trump’s impeachment inquiry, the Nobel prize-winning economist noted, “If he survives that, he might contribute for some time in boosting the market.” Shiller believed that Trump had influenced Americans by being a “motivational speaker president who models luxurious living.” 

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Shiller on consumer confidence

According to Shiller, Trump’s pro-business approach has a positive impact on US consumers. He said, “Consumers are hanging in there. You might wonder why that would be at this time so late into the cycle.” He added, “But lingering on this long needs an explanation.”

As the US is a consumer-driven economy, strong consumer spending could delay or even stop a recession. Both President Trump and Fed Chair Jerome Powell have highlighted that strong consumer purchasing power is the backbone of the US economy.

After the dot-com bubble, the PCE (personal consumption expenditures) share of the GDP has never fallen below 60%. In Q2 2019, the PCE constituted around 68% of the GDP. In Q3 2011, this figure was at an all-time high of 68.7%.

Notably, lower oil prices have also reduced consumer expenditures on gasoline and motor fuel. In an interview with CNBC, RBC Capital’s Helima Croft said that Trump is behind the fall in oil prices. Please read Will President Trump Stop Oil’s Upside? to understand oil prices’ impact on US consumers.

Recent headwinds

According to the Conference Board, the US consumer confidence index was 125.1 in September. A month ago, this figure was 134.2. The report said, “Consumers were less positive in their assessment of current conditions and their expectations regarding the short-term outlook also weakened.”

The uncertainty around the president’s global trade policy might have impacted consumer sentiment. Any weakness in the US consumer sector might impact Apple (AAPL) and Amazon’s (AMZN) share prices. So far in 2019, AAPL and AMZN stocks have risen 52.5% and 18.9%, respectively, based on yesterday’s closing prices.

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Stimulus could boost consumer confidence

In our view, it is more likely that Trump might announce another round of fiscal stimulus before the 2020 presidential election. Moody Analytics has predicted an easy win for Trump. However, the report highlighted that the current pace of economic expansion should sustain until 2020. In Q3 2019, the annualized quarterly growth rate of the GDP is expected to contract by 90 basis points over Q3 2018.

Moreover, the USMCA (United States–Mexico–Canada Agreement) bill might be delayed due to the chaos surrounding Trump’s impeachment inquiry. These factors could impact the Trump administration’s efforts to accelerate growth. These factors could also diminish Trump’s reelection chances. A fiscal stimulus might be the only option to push consumer confidence to a new high while reducing the chances of a recession.

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Shiller’s views on the inverted yield curve

In May, the yield on the 10-year Treasury fell below the three-month Treasury—a condition known as an inverted yield curve. During the same month, the yield curve became inverted the first time since August 2007. In the last three decades, when this yield difference turned negative, a recession occurred in the next 12 months. This trend is based on a report cited in the economy blog of the Federal Reserve Bank of St. Louis. This year’s inversion of the yield curve sparked recession fears.

Other notable issues like the trade war and rising geopolitical tensions have increased investors’ concerns. Now off-course, Britain’s scheduled exit from the European Union has also increased uncertainty.

Shiller expressed concern about the inverted yield curve. He added that although yield curve had inverted, “nothing dramatic has happened.” He added, “We’re still in the Trump era.”

However, the problem starts when this yield curve starts to re-steepen. Re-steepening means that the yield’s difference falls again into positive territory. Experts believe that it indicates a recession is very near. On October 11, after almost five months, the yield on the 10-year Treasury moved above the three-month Treasury. After October 11, this spread widened into positive territory.


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