U.S. consumer warning signs point to recession risk, Gary Shilling says

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Recession risk warning by Shilling

Highlights

Gary Shilling estimates a 60% to 70% probability of a U.S. recession in the next year, with potential stagflation risk if inflation remains elevated.
U.S. retail sales dropped 0.6% in July, consumer credit liabilities hit a record $5.1 trillion in Q1, and bankruptcy filings rose 12% in the 12 months through June.
Walmart shares have fallen 20% since May as comparable sales growth slowed, while Dollar Tree, Dollar General, and Five Below saw quarterly comps rise 3.7%, 3.5%, and 14.1% respectively.

Consumer data behind the recession call

As reported by Business Insider, Shilling says there is a 60% to 70% chance that the U.S. enters a recession in the next year, with a risk that stagflation also emerges if inflation stays high while growth slows.

In a note this week, he identifies the U.S. consumer as the clearest area of concern. Consumer spending accounts for about two-thirds of U.S. GDP, making any pullback by households a significant warning sign for broader economic activity.

Among the indicators he highlights, revised Census data show retail sales falling 0.6% in July, the sharpest monthly decline in nearly a year. Shilling says fading federal tax refund support and higher spending on essentials such as gasoline and groceries are weighing on discretionary purchases.

He also points to weaker household confidence. The University of Michigan's consumer sentiment index falls in August for the first time in three months, while year-ahead inflation expectations rise to about 4% from 3.4% in February, before the start of the Iran war.

Debt strain and discount-shopping shift

Shilling says debt pressures are also building across households. Federal Reserve data show consumer credit liabilities among households and nonprofit organizations reaching a record $5.1 trillion at the end of the first quarter, while 32% of middle-income Americans say their credit card debt grows over the last quarter, according to Primerica.

Bankruptcy filings are rising as well, with filings up 12% in the 12 months through the end of June, according to Shilling. At the same time, the personal savings rate falls to 3% of disposable personal income in July, down from more than 9% in July 2021, based on BEA data.

Retail trends are also showing pressure on mainstream spending. Shilling points to Walmart, whose stock is down 20% from its May peak after second-quarter results show comparable sales growing at their slowest pace in six years and average spending per transaction slowing to 1.1% from 3.1% a year earlier.

By contrast, discount chains are benefiting as shoppers trade down. Comparable sales rise 3.7% at Dollar Tree, 3.5% at Dollar General and 14.1% at Five Below over the last quarter, a shift Shilling links to prolonged inflation pressure since the pandemic and renewed price strains tied to tariffs and the ongoing war in Iran.

Our earlier article on record 401(k) and IRA balances in Q2 2026 noted that retirement savings rose on market gains and steady contribution rates. However, it also highlighted mounting cash pressure, as more workers took 401(k) loans and hardship withdrawals to cover everyday costs—an important clue about household resilience even when asset values improve.

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