Gary Shilling, the money manager who predicted the housing bubble that led to the 2008 Great Recession and the global inventory overhang that preceded the 1973-1974 recession, is no longer saying the U.S. economy is in a recession, but he hasn't abandoned those concerns.

While other economists and market strategists "believe that a recession has been averted and are relieved that the first phase of the trade deal with China is at hand … we remain cautious," writes Shilling in his latest Insight report. "Enthusiasm may not have reached the high level that virtually guarantees a bear market in equities, but it's moving in that direction … A 2020 recession is a strong possibility."

In previous 2019 Insights, Shilling said the U.S. economy was already in recession.

Recessions are becoming increasingly difficult to predict in what Shilling describes as an "atypical economy." The excesses that usually build up in the economy, in the housing market, manufacturing and even wages, which prompt reaction from the Federal Reserve to slow things down, are lacking, according to Shilling. 

In the housing sector, lending conditions are tight and demand from young people, who traditionally lead the market for new homes, is soft, writes Shilling. Business inventories now are better controlled and traditionally a big issue for manufacturing, which accounts for a smaller share of the U.S. economy. Wages are rising but at a slower rate than previously due to globalization.

Given these differences from past expansions, Shilling doesn't expect that the current business expansion will end as others have before, with the Fed "worried about economic overheating" and hiking interest rates to slow the economy. Nor does he believe that the shocks that inspired more recent recessions such as the dot-com implosion, which led to the 2001 recession, or the subprime mortgage market collapse, which ended with the 2007-2009 Great Recession, will be repeated.

He sees "no glaring excesses that are just begging to be unwound," but rather several potential  shocks that could end the business expansion, among them:

1. Excessive Debt in China and among U.S. businesses, where BBB-rated corporate debt now comprises more than half of total issues outstanding. A dip below BBB into junk bond territory, which large institutional investors like pension funds are not allowed to own, could "induce dumping of other low-quality bonds in a self-feeding downward spiral," writes Shilling.

2. Trade War Escalation.  Shilling does not believe the Phase One agreement between the U.S. and China, which was recently announced, will necessarily prevent another escalation of the conflict. The agreement doesn't address China's subsidies to domestic companies and Chinese pressure on American businesses to share technology, which he says is "the heart of the U.S.-China struggle for global dominance."  Moreover, Shilling doesn't trust Trump, whose "past record of unpredictability" suggests that even the limited deal reached in December may not be completed or will be followed by "anything but more uncertainty."

3. U.S. Consumer Retrenchment and Deflation. "U.S. consumer spending is the only major source of economic strength at home and abroad, so we're watching it closely to signal the next major moves in the economy and financial markets," writes Shilling. The November retail sales report provides him no solace. Sales rose just 0.2%; excluding gasoline and vehicle purchases they were flat. Slower consumer demand could also feed expectations of deflation which could further depress spending and become self-fulfilling.

4. Corporate Profits. A nosedive in overpriced U.S. stocks could precipitate the next recession, according to Shilling. The share of profits in the national economy is sliding and pretax profits have fallen 13% in five years. Even after accounting for the 2017 corporate tax cuts, profits are merely flat. At the same time, S&P 500 earnings per share through mid-November reached a record high, culminating a 31% jump in the past five years due to creative accounting, one-shot boosts, share buybacks and shifts of intellectual property to offshore tax havens among multinationals — all factors that are not likely to be sustained.