Second Half Economic Outlook

SPEAKER_1 (0:02)

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Paul Sweeney (0:27)

Joining us here in studio right now is a real treat, James Egelhof, Chief US. Economist, BNP Paribas. The BNP Paribas offices in Paris. Awesome. Been there many times. James, thanks so much for joining us here. Talk to us about what you're seeing in this US economy right now. It seems pretty darn solid.

James Egelhof (0:47)

Look, we've been optimistic on the US all year. I mean, the economy is doing really well and it's staged to keep doing well. We think it's benefiting from stimulative monetary policy, stimulative fiscal policy, stimulative wealth effects from the equity rally, and stimulative effects on investment demand from AI. We think that that's poised to continue. We think the Fed's rate hike last week was really good news. It shows that the Fed is embracing this optimistic narrative, they have worse use the word optimism in his press conference.

We're seeing that the Fed is prepared, it's willing and able to use its tools to keep the expansion healthy and balanced.

SPEAKER_4 (1:20)

I do get your notes that you sent out to clients. We saw last week after the Fed's decision that you were sticking with an expected another hike in December and January. But this week, we get more than a half dozen Fed speakers. We did hear from Austin Goolsbee earlier this morning. It's saying the road to 2% inflation may not be painless. So you were talking about how you might potentially add a hike for that October meeting depending on what you hear throughout this week. What did you view with Goolsbee's comments this morning? What else are you watching for from these Fed speakers this week?

James Egelhof (1:48)

Look, we agree that the road might not be painless. And we think, ultimately, the risks to our Fed path. We have the hike we just had. We have two more. We have one in December, one in January. We think the risks are to a more concerted, a longer and a stronger tightening cycle, just because the growth impulse in the economy is so strong, because inflation has gotten a little bit sticky, and because it's important to build credibility. So we see those features of the economy as meaning that it's going to be a bit harder to fight inflation. Maybe the Fed had thought the past few years and that it might think now. So there's a risk they have to do a bit more.

Paul Sweeney (2:19)

So, on the underlying inflation, we've got WTI crude oil at or near 100 bucks a barrel. That's not good for inflation. John Tucker's paying $4.50 a gallon at the Wawa, Route 36 in Jersey.

Talks about underlying inflation. What are you seeing out there? How do you feel about it?

James Egelhof (2:35)

Look, it's worse if you're a truck driver. You can pay $6.57 bucks for diesel, and we're starting to talk about being over $200 bucks a gallon. So one of the risks to the economy that we see is that we could have continued rises in energy prices. Our view has been that the economy is going to be resilient to that, so long as we don't get back to a price and inflation adjusted level like we got in 2008, which would be something like well over 200 And we look, we could get there. If things get worse, we're not there now. So we're thinking we're in good shape now. But that's a risk to monitor. We think ultimately inflation in the US is driven by momentum. And so we've had now over five years of high inflation, including the big surge in inflation during the pandemic reopening. We think it's just, it's just, it's accumulated inertia.

In order to fight that inertia, the Fed might just have to push harder into it. The Fed's been hoping that inflation would just repeat or out by itself without the need for having to push back on the labor market. And that might not work. The Fed's coming to terms with that.

SPEAKER_4 (3:30)

What do you think is the biggest risk to your call?

James Egelhof (3:34)

Look, we think that if you're an economist and you're worried about the risk, you're mostly worried about some kind of imbalance. And for us, for most of the other risk was that the Fed wouldn't act.

And the Fed would let the economy overheat. We get the unemployment rate to fall too much. And then the Fed would have to sort of like you jump like you're hit by a cattle product, respond to and respond excessively. And when you start seeing these big amplifying moves, that's when you worry about something breaking, having a recession. The fact that we're seeing the Fed respond more timely now and showing that they're on the path to stabilize and the economy reduces that risk. We're worried about the war. We also think that AI is primarily driven by optimism right now. That's fine. That's a normal part of this phase of the technology cycle. But if something happens that causes people to somehow lose some of that optimism about the commercialization of AI, that could be a problem too. But right now, we think these risks are manageable.