BlackRock Predicts a Future Economy of Full-Employment Stagnation

In a pair of blog posts, Jean Boivin and Alex Brazier, respectively head and deputy head of the Blackrock Investment Institute, have a view of the economy that runs differently from the general odds institutions and experts are giving on whether there will be a “soft landing” in the wake of inflation. A world in which rather than a coming storm of a recession, a gentle drizzle would turn into mist and the economy would settle back into a peaceful state.

Boivin and Brazier instead say that a “macroeconomic environment the like of which we have never seen before” because of “a mismatch in what the economy was set up to produce and what people wanted to buy,” which helped drive inflation, and a “worker shortage [that] has emerged as baby boomers age into retirement.”

The result, they think, will be a continuation of an 18-month flatlined economy into an additional year, “making it the weakest two-year growth stretch in the post-war era, aside from the GFC.”

The mismatch between consumers and producers was driving by supply chains, but also a sudden shift from services outside the home and more on goods at home. People wanted what they couldn’t get and that, with additional forces like rising shelter and energy prices, helped increase inflation because companies needed more workers and supply chain issues made products more expensive to make.

“The mismatch between spending and supply is now resolving,” they wrote, with about two-thirds of the spending shift has settled and job vacancies falling without increased unemployment. “Consistent with that, wage pressures have eased from over 6% a year in 2021 to 4% in the second quarter of 2023.”

But job growth is down and “the economy has experienced very tepid growth over those three years,” so they think that “the workforce will grow by only 0.5% on average each year, compared to 1.5% before the pandemic.”

The smaller workforce will hold economic growth to about 1%, rather than the 2% experts had previously expected. The authors think that the demographic shift will sustain only 70,000 additional jobs a month “to avoid ever-growing pressure on the labor market and wages rising unsustainably quickly.”

Scarce labor will likely shift the balance of profit division between labor on one side and companies and their shareholders on the other. Now, the pendulum had swung dramatically in the other direction from the 1970s on, so this might be more of a rebalancing toward an older state.

Ultimately, the co-authors expect that while a number of outcomes are possible, the most likely result is “full-employment stagnation.” That is, low growth with steady employment.

“Most of the inflation and wage growth we’ve seen to date reflects the mismatch associated with pandemic,” they wrote. “That is now reversing well, and inflation is set to fall further. But as the process of resolving the mismatch ends and labor shortages start to bind, we expect inflation to go on a rollercoaster ride, rising again in 2024.”

Resurgent growth is another possibility, but while that’s typically considered good, things are more complicated this time around.

“It would quickly put pressure on the labor market, amplifying the upswing in the inflation rollercoaster next year,” they said. “Employment already needs to slow sharply to avoid too much pressure on the labor market, and stronger growth would make that nigh on impossible. As Fed Chair Powell said: ‘Reducing inflation is likely to require a period of below-trend growth.’ A reacceleration would tell the Fed that its current policy isn’t restricting the economy as much as it thought. So, it would likely respond by raising rates further, and keeping them there for longer.”