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