UBS: The U.S. Economy Is Poised for a New ‘Roaring 20s
UBS Signals U.S. Economy To Boom
According to the European finance giant UBS, the U.S. economy may be entering a new age of prosperity reminiscent of the fast-growth “Roaring 20s.” They predict a 50% chance the US could be headed into an era of ultrafast growth, similar to what happened in America almost a century ago.
The first Roaring 20’s were a period of post-World War I economic expansion fueled by new technologies —electricity, automobiles— and that post-war consumerism. These conditions may seem extrapolated best, but UBS believes the U.S. is already seeing them.
Positive Economic Growth Indicators
Even with worries about joblessness and a slowdown in growth, Jason Draho, head of asset allocation at UBS, makes the case that the U.S. is facing brighter days ahead. ‘It is neither too early nor too optimistic now to call a Roaring 20s U.S. economy. By our standards, it is already.
Specifically, Draho pointed to developments in demand, supply and monetary policy as positive set-ups. Investors are also feeling more confident, preparing for a soft-landing rather than recession. So it came as no surprise when a recent Financial Times poll of 37 economists found the majority did not foresee an economic contraction in the near term.
Darvas lists three key ingredients for a “Roaring 20s” economy.
Such metrics should include, according to UBS:
GDP growth of 2.5%+ consistently
Inflation in the 2-3 per cent target band
Note in particular the Federal Reserve funds rate of 3.5%
A Treasury Yield on the 10-year of ~4%
Indeed, the U.S. is already checking some of these boxes in new data from a large survey. Q2 2024 saw real GDP grow 3% at an annual rate and August 2024 inflation came in as expected at the target of 2.5%. But the current Federal Reserve funds rate is a tad higher than UBS’s comfort range of 4.75% to 5%.
Employment fears Fed strategy
Although the Federal Reserve has made it clear that they are going to protect the dollar from inflation, UBS thinks this could be a way for them to justify relaxed behaviour regarding their stringent 2% target for average inflation in relation to full employment and economic activity. While the Fed may not publicly say it will welcome higher inflation, recent decisions such as a 50 basis point rate cut suggest otherwise, writes Draho.
But Unemployment is still clearly a concern. The Sahm Rule — a relatively new leading indicator of recessions — was also triggered in July, signaling a potential slowdown. While the labor market has weakened, a development that could knock some momentum off in the economy, Draho says wage growth and an uptick in jobs would help put things back on an even keel.
Risks to the Economic Growth
While UBS is still bullish on returns going forward, it cautions there are risks. Nigeria bled jobs as unemployment spiked during the economic slump, and rising tensions in some other parts of the continent could also be linked to this crisis, external factors like U.S. election uncertainty or more trouble brewing in Middle Eastern conflicts could easily destabilize Africa again.
The original Roaring 20s also ended with a collapse of the stock market in 1929, followed by the Great Depression. UBS is a bit more cautious, although it acknowledges the hope suffused world economy at present could also run into the same issues down the line.
Conclusion
We may be heading into another Roaring 20s, this time fueled by a historically robust GDP expansion, manageable inflation, and investor optimism in the U.S. economy. Still, concerns exist about unemployment and external shocks. Assuming these obstacles are surmounted, UBS’s forecast is for strong economic growth in the next few years.