US economic data has been unusual, unexpected, and hard-to-explain, with GDP growth of 4.9% q/q annualized in 3Q23 despite 525 basis points of Fed rate hikes since March 2022, and a 10-year yield at its highest level in 16 years.
While stimulus and pandemic recovery led to accelerated growth, inflation, and higher rates, positive structural shifts in aggregate supply and demand also influenced levels of growth and inflation from 2020 through 2023.
With various conditions currently in place, we believe the probability that we are in a new Roaring ‘20s macro regime is trending higher. We forecast demand to continue at an average level since US consumers are in good shape financially, with higher net worth, low debt burden, and real wage growth.
However, we believe a Roaring ‘20s outcome requires a positive supply shock to lead the economy to faster growth and disinflation.
We see four megatrends that require enormous capital investment over many years with decade-long implications for supply and higher potential for improved growth from labor and productivity in the US.
• A capital spending boom could occur in the US. We believe aging capital stock and a tight labor supply will encourage capital expenditures after a decade of underinvestment. Private sector investment has begun to pick up momentum, helped by US fiscal spending following the Inflation Reduction Act (IRA), CHIPS Act, and Infrastructure and Jobs Act.
• Enormous investment is required for the transition to green energy. Sustainability targets are a priority for several countries and have complex implications for energy supply and demand. To meet the Paris Accord 2050 net-zero requirements, an additional USD 17tr of global investment is required through 2035, thereby providing a boost to GDP, and probably inflation.
• A focus on security and deglobalization could require a large amount of unproductive spending. Geopolitical risks and a focus on supply chain security improvements are expected to lead to increased spending on national defense and secure supply chains via reshoring, nearshoring, and friend-shoring.
• Investments in Artificial Intelligence technology are expected to rise. As spending on AI infrastructure and applications & models ramps to nearly USD 300bn by 2027 (from USD 26bn in 2022), the impact on labor markets will vary. While long term demand could decline with the labor displacement, productivity improvements could lead to greater supply growth across industries.
But, there are many things that could prevent a Roaring ’20s outcome, including geopolitical conflicts, political dysfunction, a debt crisis, an energy crisis, climate disasters, and AI fizzling.
A Roaring ’20s regime is our bull case scenario, yet the probability of it happening has increased to 50%. While the Roaring ’20s regime should lead to higher trend growth over time, mid-regime cycles could include a growth slowdown in 2024. Nonetheless, we forecast continued outperformance for the US from a Roaring ’20s regime given the potential for strong earnings growth longer-term.
Source : UBS