In December, BlackRock executives told their clients that the U.S. recession “propheticThey warned that the Fed’s aggressive interest rate hikes, even if only to curb inflation, would eventually lead to a wave of job losses and lower GDP. Experts who run companies have grown more optimistic about the future — at least in the short term.

“Our base case is that with high interest rates across the board The impact is showing, consumers have depleted their savings during the epidemic, and the economy will be roughly flat for the next year.” On August 14 blog post.

A stagnation is slightly better than a contraction, but Boivin and Brazier note that if their forecasts are correct, the economy will essentially be “flat” for two and a half years in a row. “This will be the weakest post-war period outside of the global financial crisis,” they explained, referring to the financial collapse triggered by the 2008 subprime mortgage crisis.

Boivin and Blaser also argued that “major structural shifts” are underway that could cause problems for the United States in the long run. Demographic changes and an increase in early retirement are increasing the proportion of retirees in the U.S. population. That could lead to a labor shortage that could slow the economy and potentially reignite inflation.

“Our assessment is that we face ‘full-employment stagnation,'” the pair wrote Monday. They see inflation “riding the roller coaster” and making a comeback as labor shortages begin to “constrain” in 2024.

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Changing consumer spending patterns and supply chain problems related to pandemics and wars have created a “mismatch” in the economy that has sparked higher inflation over the past few years, BlackRock said.

Essentially, economies are not built to produce things that people actually want to buy, and this supply and demand imbalance causes prices to skyrocket. But now, while that imbalance is being “resolved” and inflation recedes, labor shortages threaten to drive consumer prices sharply higher.

Boivin and Brazier found that if the U.S. labor force continued to grow at pre-COVID-19 rates, the U.S. labor force would shrink by 4 million people. Because of demographics, the duo think growth is now averaging just 0.5% a year, compared with 1.5% before the pandemic.

This could lead to “full employment stagnation”, a period of weak growth and higher inflation due to labor shortages. “This should lead to a shift in the distribution of all income generated in the economy: more of it ends up in the pockets of employees, and a smaller share goes to companies and their shareholders,” Boivin and Brazile explained. .”

BlackRock said higher wages are a good thing for workers, but as wages rise, profits fall and costs rise for businesses, which “could depress business investment” and fuel inflation. Bottom line: “A smaller workforce means lower growth rates that the economy can sustain without an inflationary recovery: more like 1% rather than the 2% we’re used to,” Boivin and Brazile said. warned.

Of course, some economists — even billionaire CEOs — argue that rising wages are not necessarily an economic problem.Barry Sternlicht, founder and CEO of Starwood Capital, said: wealth That may not have been the worst trade-off last September, even if rising wages pushed inflation higher.

“I think the whole conversation is wrong. I don’t think we need 2% inflation,” he said. “I mean, the inflation driven by wage growth is staggering. We should want wages to go up — it’s going to help with the social problems in America. It’s the trickle-down effect of low unemployment that we’ve been waiting for.”

Warning to the Fed

For the Fed, full employment stagnation is a serious problem. Keeping inflation under control while ensuring continued economic growth amid labor shortages leading to steady wage increases will be a real challenge.

On top of that, strategies used in the past to stimulate economic growth, including cutting interest rates or buying government bonds and mortgage-backed securities, could lead to higher inflation in future labor shortages because of lower interest rates and increased Liquidity can lead to inflation. Unsustainable wage growth.

With that in mind, Boivin and Blaser had a message for central bankers:

“This is not the business cycle. We are in the midst of a structural shift. Monetary policy cannot save the economy from weakness. The Fed needs to make sure that the U.S. economy does not grow faster than it can currently sustain without soaring inflation.”

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