The U.S. economy is showing promising signs that it might be on the brink of another Roaring ’20s era, according to UBS. The European finance giant has assessed the likelihood of a booming economic cycle at around 50%, stirring excitement and speculation across financial circles.
What Does a Roaring ’20s Economy Look Like?
The term “Roaring ’20s” evokes images of post-war prosperity and rapid economic growth that characterised the 1920s. Back then, America experienced a surge in:
- Industrial expansion
- Adoption of new technologies (like electricity and automobiles)
- Widespread consumerism
Just as in the previous decade, today’s economy is experiencing significant growth, although many people may not fully appreciate it yet. Jason Draho, UBS’s head of asset allocation for the Americas, argues that we might already be living in a modern-day version of this vibrant era.
Key Indicators of Economic Health
Draho’s analysis highlights several factors suggesting the U.S. is on a similar trajectory:
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Sustained GDP Growth: The latest data indicates that the real GDP for Q2 2024 increased at an annual rate of 3%. This exceeds UBS’s criteria of 2.5% for sustained growth.
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Stable Inflation Rates: The 12-month Consumer Price Index (CPI) for August 2024 showed inflation at 2.5%, fitting within the desired range of 2-3%.
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Interest Rates: The Federal Reserve’s target for the federal funds rate sits at 4.75% to 5%, slightly above the 3.5% target set by UBS.
These indicators combined suggest that the economic conditions are ripe for a period of growth and stability.
Optimism Amid Concerns
Despite some worries about rising unemployment, Draho remains optimistic. He noted that many recent developments in demand, supply, and monetary policy are all supportive of a bullish economic outlook.
The “Soft Landing” Consensus
A recent survey of 37 economists from the Financial Times found a prevailing sentiment against a recession over the next couple of years. This soft-landing scenario, combined with anticipated Federal Reserve rate cuts, is fostering a sense of optimism about continued economic activity.
Draho stated, “By early 2025, even the most pessimistic investors may need rose-colored glasses to see a clear path to a Roaring ’20s outcome.”
Criteria for the New Roaring ’20s
To officially declare the 2020s as a Roaring ’20s, UBS outlines several key economic indicators:
- GDP growth of 2.5% or higher
- Inflation in the 2-3% range
- Fed funds rate around 3.5%
- 10-year Treasury yield at approximately 4%
With current statistics largely meeting these criteria, the outlook remains positive. However, there are still hurdles to overcome.
Unemployment: A Sticking Point
The potential rise in unemployment is one significant concern that could derail the Roaring ’20s narrative. The Sahm Rule, which accurately predicts recessions based on unemployment trends, was triggered in July. This rule compares the current three-month moving average of unemployment with the lowest three-month average from the past year.
As of August, the reading stood at 0.57 percentage points, signalling a looming economic downturn.
Draho acknowledged that while the labor market has seen some cooling, it remains looser than pre-pandemic levels. The dynamics in the job market will be crucial for sustaining economic growth.
Global and Domestic Risks
In addition to domestic concerns, external factors like the ongoing war in the Middle East and the upcoming U.S. election could pose risks to the economy. These uncertainties may affect investor confidence and economic stability.
Looking Ahead: Will the Roaring ’20s Return?
While the possibility of another Roaring ’20s captivates the imagination, it’s important to remain cautious. The original Roaring ’20s eventually ended in the Great Depression, reminding us that economic cycles are rarely predictable.
Draho concludes, “The Federal Reserve’s focus on maintaining a soft landing and full employment could pave the way for sustained growth, even if it means accepting inflation rates slightly above their target.”
As we monitor these developments, one thing is clear: the narrative of the U.S. economy is changing, and there are reasons to be hopeful.
