Invesing.com — The U.S. economy is on the verge of experiencing a modern-day version of the “Roaring ‘20s,” according to UBS strategists.

In a Monday note to clients, the bank outlines the reasons behind this prediction, noting that the current economic backdrop increasingly mirrors the fundamental criteria of this optimistic scenario.

The idea of a “Roaring ‘20s” scenario, likened to the economic boom of the 1990s, hinges on strong GDP growth, moderate inflation, and stable interest rates.

Strategists highlight that for this regime to materialize, sustained growth above 2.5%, inflation between 2-3%, and a Fed funds rate of around 3.5% are necessary. These conditions, supported by robust capital expenditure (capex) and AI investments, could boost productivity, resulting in long-term economic benefits.

This bullish outlook, which seemed unlikely during the height of inflationary concerns, is now more plausible.

Recent revisions to GDP and gross domestic income (GDI) indicate stronger consumer demand than previously thought, with real GDI growth revised up by 1.3 percentage points in 2023 and 0.7 percentage points in 2022. UBS notes that this demand shock has been a significant factor in driving economic performance, keeping recession risks at bay for now.

Monetary policy also plays a crucial role in this scenario. UBS sees the Federal Reserve’s recent signaling as supportive of a Roaring ‘20s outcome.

“The Fed starting rate cuts with a bold 50bps helps the near-term growth outlook at the margin,” strategists said in the note, with the Fed seemingly focused on maintaining full employment while inflation gradually declines. This approach, they suggest, could buy time for productivity and supply-side improvements to take root.

Still, strategists caution that certain challenges could derail this optimistic path, particularly a cooling labor market and sluggish manufacturing activity.

A weaker-than-expected jobs report and continued tepid consumer confidence could dampen growth prospects. Moreover, external risks such as the U.S. election, global geopolitical tensions, and the impact of Hurricane Helene could introduce further uncertainty.

Overall, UBS remains cautiously optimistic, stating that the odds of a “Roaring ‘20s” economy are rising. The U.S. economy has already met the key criteria for this scenario, according to the bank.

The real question now is whether these favorable conditions will persist long enough to create sustained economic prosperity.

“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,” strategists note, pointing to continued improvements on both the demand and supply sides, as well as in terms of monetary policy.

“The way things have been trending, it’s quite possible that by early 2025 only the most pessimistic investors will need rose-colored glasses to see a clear path to a Roaring ‘20s outcome,” they concluded.

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