A ‘Roaring ’20s’ economy is becoming more likely as bullish factors stack up, UBS says

A slew of bullish factors suggest the economy could be headed towards “Roaring ’20s” status, according to a Monday note from UBS.

UBS’s head of asset allocation, Jason Draho, increased the odds of an economic boom through the end of the decade to 50% following positive GDP and gross domestic income data revisions last week.

The main question, according to Draho, is whether the economy can maintain the bullish factors necessary to sustain an economic advance that rivals the second half of the 1990s over the next few years.

“With the mid-point of the 2020s only three months away, and the final stage of the post-pandemic normalization underway with the start of Fed rate cuts, it’s no longer too soon nor too optimistic to suggest that the US will experience a Roaring ’20s economy,” Draho said.

He added: “It already is by our criteria, with the relevant question being whether these conditions will continue, not whether they will materialize.”

Draho defines a Roaring ’20s economy as one that sees sustained GDP growth of 2.5% or more, inflation in the 2%-to-3% range, and the Fed funds rate and 10-year Treasury yield around 3.5% and 4%, respectively.

GDP has been growing at such a clip in recent quarters, and the future looks bright. The Atlanta Fed’s GDPNow forecast suggests GDP growth of 3.1% in the third quarter.

Meanwhile, annualized inflation rates, as measured by CPI, dropped below 3% in June for the first time since before inflation soared higher in March 2021.

Finally, the 10-year US Treasury yield is hovering around 3.75%, pretty close to Draho’s Roaring ’20s target, while the fed funds rate at 4.83% has room to fall.

If Draho’s bullish prediction proves true, investors will have productivity growth to thank as the key enabler for an economic boom between now and 2030, as companies undergo a capex renaissance and reinvest heavily in their business.

Draho pointed to the adoption of AI as a promising area to see continued business investment going forward.

And odds of a capex boom get stronger as interest rates fall and the Fed moves forward with more interest rate cuts, leading to “abundantly available capital.”

“The bread crumbs suggest a policy reaction function that is directionally supportive of a Roaring ’20s outcome,” Draho said of the Fed Chairman Jerome Powell’s full employment goals.

With the Fed “in position” to deliver insurance rate cuts for a soft landing that would extend the expansion “indefinitely,” Draho said the Roaring ’20s scenario hinges on the supply-side of the economy keeping up with growth in demand.