U.S. Economy Poised for a Modern-Day ‘Roaring ’20s’

According to UBS strategists, the U.S. economy is nearing a contemporary version of the “Roaring ‘20s,” drawing parallels to the economic boom of the 1990s.

Key Predictions

In a recent note to clients, UBS outlines several factors contributing to this optimistic outlook, emphasizing the current economic landscape as increasingly reminiscent of the criteria necessary for such a scenario.

The ‘Roaring ‘20s’ concept hinges on:
– Strong GDP growth
– Moderate inflation
– Stable interest rates

For this outlook to materialize, sustained growth above 2.5%, inflation between 2-3%, and a Fed funds rate of around 3.5% are needed. Investments in AI and capital expenditure (capex) could enhance productivity, leading to long-term economic advantages.

This positive perspective has gained traction, particularly as recent GDP and gross domestic income (GDI) revisions indicate stronger consumer demand than initially estimated. The upward revision of real GDI growth by 1.3 percentage points in 2023 and 0.7 percentage points in 2022 suggests this demand shock is pivotal in driving economic performance, effectively mitigating recession risk.

Role of Monetary Policy

Monetary policy’s influence is vital, as UBS assesses the Federal Reserve’s recent actions as supportive of a ‘Roaring ‘20s’ scenario. According to strategists, initiating rate cuts with a bold 50bps can bolster the immediate growth outlook.

This approach appears focused on sustaining full employment while gradually curbing inflation, providing breathing room for productivity and supply-side enhancements to develop.

Challenges Ahead

Despite optimism, strategists warn that certain hurdles could obstruct this upbeat trajectory, including:
– A cooling labor market
– Sluggish manufacturing activity
– Weaker-than-expected jobs reports
– Ongoing consumer confidence issues
– External risks such as the U.S. election, global tensions, and natural disasters like Hurricane Helene

Conclusion

In summary, UBS expresses cautious optimism, asserting that the likelihood of a ‘Roaring ‘20s’ economy is growing. They suggest that the U.S. economy has already met the essential criteria for this outcome.

The challenge lies in whether favorable conditions can sustain long enough to foster lasting economic growth. Strategists conclude that the improving trajectory could lead to a clearer path toward a ‘Roaring ‘20s’ economy by early 2025.