UBS believes the US economy will return to the Roaring Twenties

The US economy appears to be doing so well that UBS has discussed a potential return to its glory days.

The European financial giant believes Uncle Sam is getting closer to the Roaring Twenties scenario, estimating a 50% chance of the next booming economic cycle.

The phrase harkens back to the same decade a century ago, when massive economic growth brought a construction boom and growing prosperity for families.

Looking back, the 1920s had the hallmarks of a strong business cycle: wider adoption of electricity and automobiles, as well as a postwar consumer boom.

At the time, the average person may not have realized how lucky they were, and that's the phenomenon the U.S. finds itself in now, writes Jason Draho, head of asset allocation for Americas at UBS.

While economists worry about possible rising unemployment, recession or stagflation, Draho argues that the scales are only tipping toward a period of prosperity for Americans.

In a note published yesterday, Draho wrote that, by banks' standards, the U.S. economy is already in another wild decade.

He said: “It is no longer too early or too optimistic to suggest that the United States will experience a Roaring Twenties economy. This is already the case according to our criteria, the relevant question being whether these conditions will persist, not whether they will materialize.

The odds continue to increase for this bullish scenario, with many recent developments on the demand side, supply side and monetary policy all favorable.

Investors are increasingly reaching a consensus on a soft landing, he added.

A Financial Times survey of 37 economists in September found that the majority did not expect a contraction over the next two years.

The survey and its upbeat outlook came ahead of the Fed's planned rate cut last month, which markets have since seen as a rebalancing toward the unemployment side of the Federal Open Market Committee's (FOMC) mandate. , thus guaranteeing a level of productivity and activity.

The way things are going, it's quite possible that by early 2025, only the most pessimistic investors will need rose-colored glasses to clearly see the path to Roaring20's results, Draho added.

Powells target of 2%

Draho laid out UBS's criteria for officially declaring the 2020s as the Roaring Twenties: sustained GDP growth of 2.5% or more, inflation between 2 and 3%, a federal funds rate around 3, 5% and a 10-year Treasury yield around 4%.

According to the Bureau of Economic Analysis, real GDP for the second quarter of 2024 grew at an annual rate of 3%, checking the first box.

Following Jerome Powell's intense fight against inflation, the 12-month CPI percentage for August 2024 stood at 2.5%, checking the second box.

Despite a larger-than-expected drop last month, federal funds exceeded UBS's threshold of between 4.75% and 5%.

And in an effort to boost employment and, therefore, productivity and consumer spending, Draho believes the Fed may have to compromise on its 2% inflation target.

It's an idea that JPMorgan CEO Jamie Dimon has discussed before, and Draho adds: The relevance to the outcome of the Roaring Twenties is that the Fed demonstrated a strong desire to preserve the soft landing and maintain the full employment, even if it means that inflation falls further. gradually to 2%.

The FOMC would never publicly admit that it would accept inflation above 2%, Draho added, but he countered: A 50 basis point rate cut is not an explicit signal that the Fed is aiming for that outcome, but the breadcrumbs suggest a policy feedback function that directionally supports inflation. a result of the Roaring Twenties.

Unemployment is the sticking point

Rising unemployment is the factor that has caused even the most hawkish members of the FOMC to pause.

The Sahm rule, which in the past was accurate in predicting when an economy would enter recession, was triggered in July.

The Sahm rule takes into account two factors: the current three-month moving average of U.S. unemployment and the lowest three-month moving average of U.S. unemployment over the past year.

If the current average is more than half a percentage point higher than the lowest average, the U.S. economy is headed for a recession. Its latest reading for August stands at 0.57 pp.

Draho admits that the labor market may prove to be the problem in America's return to economic peak, writing: The cooling over the past six months has done more than just rebalance the labor market, it has left it more flexible than it was before the pandemic.

The US elections and the escalation of war in the Middle East are also sources of potential risks, adds Draho.

Of course, the original Roaring 20 also ended. The Great Depression began with the Black Tuesday Wall Street crash of October 1929.

Sources 1/ https://Google.com/ 2/ https://fortune.com/2024/10/01/economy-roaring-20s-ubs-growth-unemployment-inflation/ The mention sources can contact us to remove/changing this article

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