Inflation may be a prominent concern among hard-working Americans, but BlackRock investment managers said today that it is a symptom of a much larger transition that is taking place within the economy.
In a webinar hosted by BlackRock today, managers gave their outlook for the remainder of this year, including their thoughts about the economy experiencing what they referred to as a regime change.
Starting around 1984, the economy entered a so-called "great moderation" where there was a period of increased production around the world. During this time, it was consumer spending that impacted price fluctuations in the economy, they said.
Now, in light of the recent pandemic and other factors, the economy is going through a shift to a period of restrained production, the investment managers said. Those limits will be what drives price and not consumer spending.
“No matter what, now going forward in this environment, which is shaped by supply as opposed to demand ... we are seeing a worsening tradeoff between inflation and growth,” said Jean Boivin, head of the BlackRock Investment Institute.
There are two factors that have led to this reduction in production. The first has to do with a dramatic shift in the way consumers spend money. As consumers were confined to their homes, they wound up spending more on goods than they were on services. Alex Brazier, deputy head of the BlackRock Investment Institute, described it as 18 years of change taking place within 18 months.
The second factor has to do with the difficulty in hiring labor, particularly in the U.S., where there are about 1.3 billion less people in the workforce, he said. In addition, there are service workers who are not able to find work because those industries are no longer thriving as they once were prior to the pandemic.
“The effective labor force is much lower than the measured labor force,” Brazier said.
As for the evidence of a regime change from a demand-based economy to more of a supply-based one, Brazier pointed to two factors. The first is a transition toward a net-zero industry. This is the move to companies that produce less carbon emissions. In many instances this transition is taking place faster than the industry can keep up, which will lead to more volatility.
The second factor is a rewiring of global trade systems brought on by changes in the geopolitical landscape. Regardless of the reasons, the panelists all agreed that it will not be a smooth transition and that investors and advisors should anticipate volatility ahead.