Could the US Economy Experience a Second Roaring ’20s?



Economists indicate the possibility of a new Roaring ’20s era, bolstered by structural shifts in aggregate supply and demand, low debt burdens, and real wage growth. This new era would require a positive supply shock and could be driven by four megatrends: a capital spending boom in the US, a transition to green energy, a focus on security and deglobalization, and increased investments in artificial intelligence (AI). However, various challenges could prevent this outcome, including geopolitical conflicts, climate disasters, and the possibility of AI not living up to its potential.

A New Roaring ’20s for the US Economy?

The combination of stimulus and pandemic recovery, alongside positive structural shifts in aggregate supply and demand, have influenced significant growth and inflation levels between 2020 and 2023. Present conditions suggest a rising probability of a new Roaring ‘20s macro regime, driven by US consumers’ robust financial health, reflected in higher net worth, low debt burden, and real wage growth.

However, a Roaring ’20s outcome hinges on a positive supply shock to propel the economy towards faster growth and disinflation. We’ve identified four megatrends that necessitate considerable capital investment and have decade-long implications for labor and productivity improvement.

The first is the potential for a capital spending boom in the US. We expect that the aging capital stock and a tight labor supply will spur capital expenditures after years of underinvestment. The Inflation Reduction Act, CHIPS Act, and Infrastructure and Jobs Act have already ignited private sector investment.

Secondly, the transition to green energy demands substantial investment, with an extra USD 17tr required globally by 2035 to meet the Paris Accord 2050 net-zero requirements. This shift will likely give GDP—and possibly inflation—a significant boost.

Thirdly, the focus on security and deglobalization could lead to substantial unproductive spending. We anticipate heightened spending on national defense and supply chain security improvements due to geopolitical risks.

Finally, investments in Artificial Intelligence are set to soar, with projections of nearly USD 300bn by 2027. Although AI could displace labor, we foresee productivity improvements stimulating supply growth across multiple industries.

However, several factors could derail a Roaring ’20s outcome, such as geopolitical conflicts, political dysfunction, debt or energy crises, climate disasters, or underwhelming AI developments. Despite these potential obstacles, we predict continued US outperformance under a Roaring ’20s regime due to the potential for strong long-term earnings growth.

Given the increased correlation between stocks and bonds due to higher inflation, we recommend a diversified portfolio mix of 40/30/30. To learn more about the megatrends affecting the economy’s supply side, view Jason Draho’s presentation: “Another Roaring ‘20s for the US?“.

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