The U.S. economy is potentially on the verge of a revival similar to the Roaring '20s, according to UBS, a prominent European financial institution.
UBS suggests that there is a 50% chance of entering a booming economic cycle, as current conditions align with the characteristics of a robust economic period. This parallels the historical context of the 1920s, which was marked by significant economic growth, technological advancements, and a postwar consumption boom.
UBS's analysis indicates that the U.S. economy is already showing signs of a Roaring '20s scenario, and recent developments in demand, supply, and monetary policy support this optimistic outlook.
A survey conducted by the Financial Times, which included 37 economists, further strengthens the argument for a soft landing in the economy, as it revealed a consensus that a contraction is unlikely in the near future.
To officially declare the 2020s a "Roaring '20s," UBS has outlined specific criteria, including sustained GDP growth of 2.5% or higher, inflation within the 2-3% range, a Fed funds rate around 3.5%, and a 10-year Treasury yield near 4%.
Real GDP for Q2 2024 increased at an annual rate of 3%, meeting the first criterion. The Consumer Price Index (CPI) for August 2024 registered at 2.5%, satisfying the inflation requirement. However, the current Fed funds rate exceeds UBS's target, and it is suggested that the Federal Reserve may need to compromise on its inflation target to stimulate employment and consumer spending.
Recent policy adjustments by the Federal Open Market Committee (FOMC) hint at a direction supportive of a Roaring '20s outcome, even though they have not publicly acknowledged a shift in their inflation target.
Despite the optimistic outlook, rising unemployment remains a significant concern that could hinder the U.S. economy's return to a prosperous era. The Sahm Rule, which assesses the current three-month moving average of U.S. unemployment against the lowest average from the past year, was triggered in July, indicating a potential downturn.
The cooling labor market over the past six months presents a challenge to economic recovery. Additionally, external factors such as the upcoming U.S. elections and geopolitical tensions in the Middle East pose risks to the economic landscape.
The historical context of the original Roaring '20s serves as a reminder that periods of significant growth can be abruptly interrupted, as seen with the Great Depression following the stock market crash in October 1929.
Investor sentiment appears to be shifting toward a more optimistic view as the economic landscape evolves. Economists suggest that the likelihood of a recession in the next couple of years is diminishing, which influences investment strategies and capital allocation decisions.
The anticipation of a soft landing, along with supportive monetary policy, has increased confidence among investors. The potential for a Roaring '20s revival depends on sustained economic growth, manageable inflation, and a stable labor market.
The decisions made by the Federal Reserve in the coming months will be crucial in shaping the trajectory of the U.S. economy.
Overall, while challenges remain, the current indicators and investor sentiment suggest a cautiously optimistic outlook for the future.