Perspectives

Stress tests

nd  
Eco Perspectives // 2 quarter 2022  
economic-research.bnpparibas.com  
4
UNITED STATES  
STRESS TEST  
With inflation soaring, the US Federal Reserve announced that it would accelerate the process of normalising its  
monetary policy. Held near the lower zero bound until March, the key policy rate should rise to roughly 2% or even  
higher by the end of the year. The Fed will also reduce the size of its balance sheet. Operating at full employment,  
the US economy seems to have recovered sufficiently from the health crisis to pass muster. Yet it is still sensitive to  
credit conditions and is not immunised against the impact of the war in Ukraine.  
The most recent economic surveys were not as good for the United  
States, which shows that the world’s number one economy is not  
immunised against the consequences of the Russian war in Ukraine.  
It also proves that the Covid-19 pandemic, which has just triggered  
new lockdown measures in China, has not finished causing supply  
chain disruptions. Although it is still too early to talk about recession,  
industrial orders were hard hit in March, and the regional business  
climate indexes, like the New York and Philadelphia indexes (for the  
future expectations component), are poor.  
GROWTH & INFLATION  
GDP Growth  
Forecast  
Inflation  
Forecast  
8
7
6
5
4
3
2
1
0
1
6.7  
5.7  
4
.7  
3
.7  
2
.7  
2
.5  
1.2  
FIGHTING INFLATION: THE TOP PRIORITY  
The surge in input costs – energy, metals, agricultural commodities,  
etc. – has not ended yet and will continue to drive up inflation in the  
short term. February’s record of 7.9% y/y is likely to be broken soon,  
especially since the housing market is also overheating, which in turn  
is pushing up rent, which accounts for a third of the price index.  
-
-2  
-
-
-
3
4
5
-3.5  
020  
2
2021  
2022  
2023  
2020  
2021  
2022  
2023  
With the unemployment rate dropping to 3.6% of the active population  
in March, and with the participation rate in the 20-64 age group near  
pre-pandemic records, the job market has reached full employment.  
Wage pressures are growing, especially in the sectors where most of the  
post-crisis hiring difficulties can be found: hotel & restaurant services,  
transport & storage, and retailing, among others. Wage growth is also  
higher than average in professional business services, which account  
for nearly a quarter of employment in the private tertiary sector, and  
are at the heart of the digital transformation.  
On the whole, wage growth is counterbalanced by major productivity  
gains, which is a break from the pre-pandemic trend (chart 2). Unit  
labour costs (wages and benefits as a share of production volumes)  
are not exploding (+3.7% y/y in Q4 2021) and are nowhere near the  
double-digit figures of the early 1980s. In the breakdown provided by  
the Bureau of Economic Analysis (BEA), they do not even appear as a  
key motor of the rebound in the prices of value added in 2021, which  
was due more to taxes on production and imports (which in turn were  
driven up by higher commodity prices) as well as to higher corporate  
margins.  
CHART 1  
SOURCE: BNP PARIBAS GLOBAL MARKETS  
HOURLY LABOR PRODUCTIVITY  
2019 = 100  
Pre-pandemic trend  
1
06  
104  
02  
100  
1
98  
96  
94  
92  
90  
For the US Federal Reserve, however, wage growth seemed to be  
incompatible with its price stability target”, and the monetary  
tightening phase launched on 16 March is bound to continue. Assuming  
the Fed raises its key rates by a quarter point at each of the Open  
Market Committee meetings, the Fed funds target rate would reach  
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022  
CHART 2  
SOURCE: BLS  
1
.75% to 2% by the end of the year. Starting in May, the Fed will also  
begin to reduce the size of its balance sheet, at a peace that could  
reach USD 95 billion per month. This leaves us with a big unknown: the  
aptitude of the US economy – whose recovery has been largely debt-  
financed – to pull off this policy change.  
.
4 April 2022  
Jean-Luc Proutat  
Jean-luc.proutat@bnpparibas.com  
The bank  
for a changing  
world  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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