Veteran economist and former Merrill Lynch strategist Gary Shilling has warned that the United States is likely headed for a recession by the end of 2026.
According to Shilling, the possibility of an economic downturn is likely to emanate from weakening economic fundamentals, slowing consumer activity, and elevated stock market valuations, he said in an interview with Business Insider.
Shilling argued that only major fiscal stimulus or unexpectedly strong consumer spending could prevent a recession, though he said both outcomes appear unlikely.
He pointed to signs of slowing economic momentum, including a stagnant housing market, weaker business investment, and growing financial pressure on households.
The economist noted that the housing sector remains largely frozen as high interest rates continue to hurt affordability and demand.
Existing home sales briefly improved when mortgage rates eased last year, but activity slowed again as borrowing costs rose.
He also highlighted a sharp slowdown in capital expenditures outside artificial intelligence-related spending. Broader private-sector investment grew just 3.9% at the end of last year, down significantly from pandemic-era growth above 24%.
Impact of consumer spending
Consumer spending, which accounts for roughly two-thirds of U.S. economic activity, has remained relatively stable, with real personal consumption expenditures growing at an annual rate of about 2% in March. However, Shilling warned demand could weaken as households face higher inflation and slower income growth.
“That’s really on very thin ice in terms of income, in terms of people’s willingness to spend,” Shilling said.
Energy prices climbed 12.5% year over year in March, following the oil price spike linked to the war in Iran, marking the steepest increase since 2022. Meanwhile, real disposable income growth slowed to 0.4%, its weakest pace in about three years, while the personal savings rate fell to 3.6%, the lowest level since 2022.
Beyond the economy, Shilling warned that stocks are increasingly vulnerable to a sharp correction, citing historically high valuation metrics, including the Shiller CAPE ratio, which is near levels last seen during the dot-com bubble.
He added that the S&P 500’s price-to-sales and price-to-book ratios are also at record highs, reinforcing concerns that the market is overvalued.
Shilling projected stocks could fall between 20% and 30% in a potential bear market by the end of 2026, though he said there is no single obvious catalyst for an imminent collapse.
