BlackRock thinks the economy will stay at the same level for a year before inflation returns in 2024. Get ready for a change from “full-employment stagnation” to “full-employment stagnation.”
The top minds at BlackRock told their clients in December that a U.S. recession was “foretold.” They warned that the Federal Reserve’s bold interest rate hikes, which were only meant to slow inflation, would eventually cause job losses and a drop in GDP. But now that inflation is going down, the economy is still growing, and the job market is still strong, experts at the world’s biggest asset manager are more optimistic about the future—at least in the short term.
In a blog post on August 14, the head of the BlackRock Investment Institute, Jean Boivin, and his deputy head, Alex Brazier, said, “Our base case is that the economy stays mostly flat for another year as the full effect of high-interest rates is felt, and consumers use up their pandemic savings.”
A stagnant economy is better than a falling one. Still, Boivin and Brazier pointed out that if their prediction is correct, the economy will have “flatlined” for two and a half years straight. “That would be the worst time since World War II, except for the Global Financial Crisis,” they said, referring to the 2008 financial crisis caused by the subprime housing crisis.
Boivin and Brazier also say that the U.S. is going through a “big structural shift” that could cause problems in the long run. The number of retirees in the U.S. population is increasing because the population is getting older, and more people are retiring early. That could make it hard to find people to work, slowing the economy and making inflation start up again.
“Our assessment is that we are set for ‘full-employment stagnation,'” the two economists wrote Monday. They said that when labour shortages start to “bind” in 2024, inflation will go on a “roller-coaster ride” and return.
BlackRock says that over the past few years, changing customer spending habits and problems with the supply chain caused by pandemics and wars led to a “mismatch” in the economy that caused inflation to rise.
Prices went up because the economy wasn’t set up to make what people wanted to buy, and this imbalance between supply and demand led prices to go up. But now, even though this “imbalance” is “resolving,” which means inflation is going down, the lack of workers could cause prices to increase again with force.
Boivin and Brazier found that the U.S. workforce is short by 4 million compared to where it would have been if it had kept growing at the same rate before COVID. And because of how people live, they think it will only increase by 0.5% each year, down from 1.5% before the pandemic.
That could lead to “full-employment stagnation” or slow growth and higher prices because there aren’t enough workers. “And that should cause a change in how all the money made in the economy is spent: a bigger share goes to employees and a smaller share to companies and their shareholders,” Boivin and Brazier said.
According to BlackRock, rising wages are good for workers, but they mean less profit and higher costs for businesses, which “could hold back business investment” and make inflation worse. And on top of that, Boivin and Brazier said, “A smaller workforce means the rate of growth the economy will be able to support without inflation rising again will be lower: more like 1% than the 2% we were used to.”
Some economists and CEOs who are worth a billion dollars think that rising wages are only sometimes a problem for the economy. Barry Sternlicht, the founder and CEO of Starwood Capital, told Fortune last September that even if increasing wages make prices go up, that might not be the worst trade-off.
“I disagree with the whole conversation. He said, “I don’t think we need 2% inflation.” Inflation that comes from rising wages is excellent. We should all want pay to go up because that will help with social problems in the U.S. We’ve all been waiting for this to happen, and now that unemployment is low, it has.
The full-employment decline is a big worry for the Federal Reserve. It will be hard to keep inflation under control and keep the economy growing at the same time when there aren’t enough workers and wages keep going up.
On top of that, the things that were done in the past to boost economic growth, like lowering interest rates or buying government bonds and mortgage-backed securities, may be much more inflationary if there needs to be more people to work. Lower rates and more liquidity could lead to wage increases that can’t be kept up.
In light of this, Boivin and Brazier had a warning for the people in charge of the central bank:
“This is not a cycle in business. We are in the middle of a significant change. The economy can’t be saved by monetary policy when it’s weak. The Fed must ensure the U.S. economy doesn’t grow faster than it can now without sending inflation through the roof.
