DoubleLine Capital CEO Jeffrey Gundlach isn’t predicting a recession right now, but he sees a growing number of indicators that need to be monitored. Topping his list of recession signals are consumer sentiment, which has plunged in recent months, and the yield curve.

“The yield curve, like consumer confidence, is not sending a ‘Don’t Worry, Be Happy’ signal,” he said.

A recent survey of economists found the consensus was that inflation would fall to the 2.5% area by the first half od 2023. Gundlach called that “wishful thinking.”

Prices are surprising economists to the upside “globally” almost “everywhere.” Gundlach said that’s one reason Fed Chairman Jay Powell has changed his tune on inflation so dramatically.

One year ago, DoubleLine’s models called for inflation to run at about 5% annually, making the firm an outlier at the time. Now the CPI is at about 7%, Gundlach noted.

Many economic observers have drawn parallels between the current economic environment and that of the 1970s. Gundlach noted that both eras were characterized by rising inflation and negative real interest rates. However, the U.S. economy experienced unusually high interest rates in the 1970s and today those same rates are extraordinarily low.

Against the backdrop of a looming Federal Reserve interest rate hiking cycle, Gundlach said bond market signals “look pre-recessionary.” If the Fed follows through with its plans to raise the Fed funds rate three or four times in 2022 and continues into 2023, it’s possible the yield curve, a classic recession signal, could invert.

That remains to be seen. “I’m not calling for a recession,” Gundlach said.

The falloff in consumer sentiment coincides with a year that saw the creation of six million jobs and what is likely to be the highest GDP growth in the last 36 years. Clearly, the emergence of the Delta and Omicron variants after the Biden administration touted a return to normal life were a major factor.

Gundlach noted, however, that consumer spending and confidence were also trending in a negative direction in early 2020 before Covid arrived. While the economy is growing about 5% a year today, wages are rising about 4%, good in ordinary times but not when inflation is running at a 7% clip.

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