Perspectives

Monetary easing, political unease

Eco Perspectives // 4th quarter 2020 (completed on xxxx September 2020)  
economic-research.bnpparibas.com  
3
UNITED STATES  
MONETARY EASING, POLITICAL UNEASE  
Social distancing and lockdown measures implemented to combat the Covid-19 pandemic severely damaged the US  
economy in Q2 2020, resulting in a record 9.1% decline in GDP. The ensuing recovery is still incomplete and inequitable,  
as many of Americans still unemployed because of the pandemic are from low-income categories. The health toll  
is getting worse, and the United States is the country with the highest number of deaths (nearly 200,000 victims to  
date). President Donald Trump long played down the disease but must now deal with consequences during the run  
up to the presidential election on 3 November. Although the incumbent president is lagging in the polls, the election’s  
outcome is still highly uncertain.  
The US economy, like nearly every other economy, was partially  
GROWTH AND INFLATION (%)  
paralysed in spring 2020 due to lockdown measures introduced  
to contain the Covid-19 pandemic. US GDP plummeted by an  
GDP Growth  
Forecast  
Inflation  
unprecedented 9.1% in Q2 2020 (an annualised rate of 31.7%). Business  
nonetheless managed to recover thanks to the brief respite offered  
by the disease and massive support from the Federal government,  
with transfers of roughly USD 2,200 billion over the past six months,  
Forecast  
6
4
2
0
2
1
4.2  
nearly the equivalent of France’s GDP . As fall approaches, household  
2.9  
and corporate economic surveys have returned to quasi-normal levels.  
According to estimates by the Atlanta and New York Federal Reserve  
Banks, GDP rebounded between 6% and 7% in the third quarter.  
2.2  
2.4  
1.9  
1
.8  
1
.3  
-
AN INCOMPLETE AND INEQUITABLE RECOVERY  
-4  
-6  
-
4.2  
That leaves a shortfall of 4-5 percentage points of GDP relative to 2019  
levels, which is less than in Europe but still a considerable gap to close.  
Whereas unemployment figures need to be approached with caution  
2018  
2019  
2020  
2021  
2018  
2019  
2020  
2021  
CHART 1  
SOURCE: BNP PARIBAS GLOBAL MARKETS  
(
see box), job statistics probably paint the most realistic picture of the  
severity of the shock. Available through August, it shows that only half  
of the 22 million jobs destroyed between March and April have been  
restored. Although it cannot be compared with the 2008 financial crisis,  
the Covid-19 pandemic has had similarly profound and inequitable  
repercussions on the labour market.  
ACTIVE POPULATION WITHOUT A COLLEGE DIPLOMA  
Million  
4
4
4
4
7
6
5
4
Two thirds of the job losses reported since February have hit unskilled  
and low-income populations. This is also where we find the highest  
concentration of people experiencing difficulties enrolling in the  
2
unemployment insurance system . As a result, numerous low-income  
Americans have been excluded from the labour force. Data from  
the Bureau of Labor Statistics (BLS) shows an historic decline in the  
3
participation rate for adults without a diploma , and this decline cannot  
43  
42  
be seen in the rest of the population, at least not to the same extent.  
Since February, nearly 4 million people have already left the labour  
market (see chart), and this exodus from the radar screen can have  
unexpected effects on certain macroeconomic variables. This is the case  
for hourly wages, for example, where the buoyant rise recently (+6.6%  
year-on-year in Q2) is due less to the enrichment of American workers  
than to a reduction in working hours and to the underrepresentation  
4
1
2017  
2018  
2019  
2020  
2021  
CHART 2  
SOURCE: BUREAU OF LABOR STATISTICS  
4
of the poorest categories . There are no inflationary pressures, to  
the contrary: increasingly fierce competition and the need to slash domestic footprint (residential construction, utilities, food retailing  
5
inventory have tended to pull down consumer prices in recent months . etc.), or specifically requested during the crisis (computer equipment,  
financial services, telecommunications, etc.). In contrast, the situation  
is still very difficult in sectors that depend on international trade and/  
or imply large crowds or physical contact. Hotel and food services,  
The recovery is also unequal not only by population but also by sector.  
Unsurprisingly, the sectors that have preserved or returned to qua-  
si-normal levels of business and employment are those with a large  
1
2
Committee for a Responsible Federal Budget (2020), USD2.2 of USD4 Trillion in Fiscal Relief is Out of the Door, September.  
According to estimates by One Fair Wage, a large percentage (44%) of hotel and food service employees who lost their jobs during the pandemic did not have unemploy-  
ment insurance in May 2020. See CNBC, 2020, “Study finds 44% of US unemployment applicants have been denied or are still waiting”, May 15.  
3
4
5
Adults in the 25 and over age group, without a college degree or only a high school diploma.  
The Washington Post, 2020, “The awful reason wages appeared to soar in the middle of a pandemic”, May 15.  
Food, energy and used car prices are notoriously volatile in the United States. To better understand inflationary trends, the BLS proposes a “core” price index for goods  
that excludes these three components. Although core inflation rebounded a little in August, it is still on a downward trend: -1.3% at an annualised rate over the six months  
prior to the latest reckoning.  
The bank  
for a changing  
world  
Eco Perspectives // 4th quarter 2020 (completed on xxxx September 2020)  
economic-research.bnpparibas.com  
4
leisure and the performing arts, transport industries and services, and  
clothing together account for 15% of total US employment, but about  
half of the job losses since February.  
THE DIFFICULTY OF MEASURING UNEMPLOYMENT  
Like in almost all business sectors, the production of macroeconomic data  
was disrupted during the Covid-19 pandemic. Establishing price indices  
or unemployment figures, to cite but two, implies field surveys that could  
not be carried out normally. Concerning the collection of unemployment  
data, which is collected directly through individuals, the BLS said it had  
proceeded by using telephone interviews almost exclusively, resulting in  
a much lower response rate than normal (70% in August, compared to  
MONETARY EASING, POLITICAL UNEASE  
A full recovery should not be expected soon. Most countries are  
experiencing resurgence in Covid-19 cases and international trade  
is far from showing a return to normal. Aware of difficulties, the Fed  
has embarked on a policy shift. At the Jackson Hole Symposium in  
late August, Fed chairman Jerome Powell unveiled new longer-term  
monetary policy targets and strategy that seem to herald in a system  
of unlimited monetary easing. The inflation target is still set at 2%,  
but will now be assessed “over time”, a manner of indicating greater  
tolerance of overshoots. The job mandate will become asymmetric. It  
aims explicitly to eliminate any shortfalls, but will no longer attenuate  
any labour market tensions, a decision that de facto disqualifies the  
Taylor Rule.  
8
3% normally). Not only is the margin of error higher, the results could  
underestimate the unemployment rate (8.5% in August, but in reality, more  
than 9%), since many respondents said they were employed even though  
that had not worked during the reference period. A priori, employment  
data collected directly from companies should be more reliable, if for no  
other reason than the response rate is higher (77%, close to the pre-crisis  
average).  
Presented as the end of a long process of disinflation and the lowering  
of the neutral rate, this new strategy is also shaped by exceptional  
circumstances which require the Fed to monetise considerable  
quantities of public debt. In counterpart, the Fed is creating an  
unprecedented amount of central bank liquidity, which risks feeding  
asset bubbles (see chart). Another inconvenience is a loss of precision  
in forward guidance. In the end, assuming the situation will return  
to better fortunes, it is hard to see what might trigger a change of  
course. Monetary policy committee members have just updated their  
macroeconomic projections, and they do not foresee any rate increases  
before 2024.  
That year will also mark the end of the 4-year term of the next US  
president. Who the winner will be is still an open question, and  
one that risks dominating the headlines well beyond Election Day  
on 3 November. The most likely winner, at least theoretically, is the  
Democrat Joe Biden, who has a significant and stable lead in the  
national polls (50% of voting intentions, compared to 43% for the  
incumbent Republican, Donald Trump). Yet the results will hinge on  
a few swing states (which could swing to one candidate or the other).  
Under the “winner takes all” principle, the candidate that receives the  
most votes in a state will receive all of that state’s electoral college  
votes, which are the only votes that count when electing the president.  
A candidate who receives the most popular votes can still lose the  
election, as was the case with Hillary Clinton, who had nearly 3 million  
more popular votes than her rival Donald Trump.  
SOURCE: BUREAU OF LABOR STATISTICS  
MAGIC MONEY  
Federal deficit  
USD bn  
Fed total assets  
USD bn  
PER S&P500*  
28  
3
1
000  
900  
800  
7 200  
5 400  
3 600  
21  
14  
1
9
20  
21  
19 21  
20  
21  
19  
20  
(
*) Price / earnings per share 12M trailing  
CHART 3  
SOURCE: FED, STANDARD & POOR’S  
If the results are tight, they are bound to be contested by one of the  
two parties, a scenario that Donald Trump has already espoused. Mail-  
in ballots lie at the heart of the upcoming battle: though welcomed in  
the midst of a health crisis, they risk slowing down the vote counting  
process. Donald Trump also sees them as a source of fraud, without  
6
which his victory is basically assured . If he fails to win the presidential  
election on 3 November, the current occupant of the White House may  
well be reluctant to concede.  
6
“The only way we are going to lose this election is if it is rigged [...] That is the only way we can lose this election, so we have to be very vigilant.” D. J. Trump, Wisconsin  
speech, 18 August 2020.  
The bank  
for a changing  
world  
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