Despite the slowdown in the US economy, UBS believes that the chance of a ‘Roaring Twenties’ outcome is already increasing.
“The hype is getting a little louder,” the bank says, with longer-term trends still in line with their criteria for such a prosperous decade.
These criteria include real GDP growth averaging 2.5% or better, inflation at 2-3%, or about 4%, and the federal funds rate at 3-4%. So far, the United States is on the right track.
While recent economic strength is due to cyclical factors, unexpected migration boosting labor supply and stronger-than-expected financial regulation provide temporary tailwinds. More importantly, UBS sees signs of higher structural growth taking hold.
Their analysis is based on four megatrends on the supply side: a capital spending boom, rising AI adoption, stronger business dynamism, and productivity gains. They created a “Roar Score” to track progress on these factors.
“Our conclusion is that the Roaring Twenties system is marginally more likely than it was in the fourth quarter of 2023,” reports UBS. Strong family finances, increased investment in artificial intelligence, rising capital expenditures, and the continued availability of risk capital all reinforce these expectations.
Although productivity growth has not yet taken off, progress in combating inflation and a potential shift to less restrictive monetary policy by the Federal Reserve raises the prospect of a decade of prosperity.
The future course of fiscal policy remains forward-looking, with high deficits likely to require fiscal consolidation. However, UBS believes the policy will ultimately be a headwind, not a deal-breaker.
UBS believes the US economy may be in a slowdown, but the foundation for the “Roaring Twenties” is being built. Although UBS is not foolproof, he urges investors not to underestimate this potential, comparing it to the productivity boom of the late 1990s that followed an earlier period of economic slowdown.