The roar is getting a little louder

Assessing the “Roaring ‘20s” outlook for the US economy

UBS Chief Investment Office GWM

Jason Draho, Ph.D.
Brian Rose, Ph.D.
Paul Hsiao
Michael Gourd
Danny Kessler

June 2024

This report has been prepared by UBS Financial Services Inc.

Please see important disclaimers and disclosures at the end of this document.
Executive summary
A “Roaring ‘20s” macro regime for the US is very much in play. Such Our “roar score” for capital, labor, and productivity factors is a gauge
a regime has become more plausible with growth far exceeding for the Roaring ‘20s likelihood. We map developments in the supply
expectations over the past year. When we asked whether another Roaring megatrends to these three factors and then track capital investment, labor
‘20s for the US was possible our conclusion was that it hinged on the supply, AI deployment, business dynamism, and productivity gains to
supply side of the economy. That is still true and the case for this outcome determine whether they’re at sufficient levels to support a Roaring ‘20s
is at least as strong as it was in 4Q23 based on subsequent developments. regime.
Current US economic performance is consistent with a Roaring ‘20s Assessment: A Roaring ‘20s regime is marginally more likely than it was
macro regime... Our criteria for this outcome is a decade with GDP in 4Q23, but it's still the bull case. The continued strength of the economy,
growth averaging 2.5% or better; inflation of 2-3%; 10-year Treasury yield including strong household finances in aggregate, accelerated investment in
around 4%; and the Federal funds rate at 3–4%. In essence, it requires AI, surging capex in specific areas, and the availability of risk capital all
annual nominal GDP growth of 5-6%. Nearly halfway through 2024 and fundamentally support a higher probability of this regime. Productivity growth
the 2020s US economic conditions are still in line with these criteria. has been elevated, though not likely because of the preceding
factors. Disinflation progress gives us confidence that sticky inflation will not
...but this economic strength mostly reflects cyclical factors, not yet
be an impediment to this regime. The probability of this regime is
structurally higher growth. An unexpected increase in immigration that
getting closer to 50% and no other scenario is clearly more likely.
significantly boosted labor supply over the past year and a half has lifted
growth. The growth impulse from fiscal legislation passed two years ago The regime requires secular growth drivers to take over from cyclical
was also stronger than expected in 2023. This stimulative effect is likely to drivers. Growth may slow this year due to cyclical moderation before secular
fade in 2024, while the labor supply boost could also soon dissipate. factors take over, which could happen by 2025. Sustainably higher productivity
growth due to a capex boom and AI is necessary, but it's more expectation
A sustained Roaring ‘20s regime hinges on continued positive
than reality so far.
supply side developments. Pandemic supply disruptions are largely over,
but other supply issues will dominate this decade, whether labor, capital, Policy is a wildcard, but still more likely to be a headwind than a
or technological in nature. Over the long term, growth is a function of tailwind. The fundamental case for a Roaring '20s regime is solid, but policy
labor and capital inputs, and productivity gains. A Roaring ‘20s requires the could go in multiple directions that make it either more or less likely. Large
capital contribution (K) and productivity gains (A) to be nearly comparable deficits and debt point to fiscal consolidation that is a growth headwind, but
to their 1990s levels. there is little political appetite. Monetary policy should become less restrictive
in the next year, and may even succumb to fiscal dominance, which would be
Two of the four supply megatrends—capex boom and AI—are most
positive for growth and inflation.
relevant for a Roaring ‘20s. A capex boom due to prior underinvestment
and the need to substitute capital for scarce labor and AI being deployed Preliminary investment implications: Higher growth should be positive for
across industries are necessary to drive productivity gains required for a equity returns, but if it appears to be due primary to AI, then the tech sector
Roaring ‘20s, but that outcome is highly uncertain. The green energy will be the real benefactor. Higher inflation usually increases the correlation
transition and security and deglobalization megatrends both require between stock and bond returns, diminishing portfolio diversification, and
substantial investment, but they should have a neutral to mildly negative increasing portfolio volatility. That increases the appeal of alternative asset
productivity impact. classes.

1
Table of contents

Section 1 Are we already living in a "Roaring '20s" regime? 3

Section 2 Revisiting mega trends that will affect the supply side 7
Section 3 Tracking the case for a roaring '20s regime 13
Section 4 The policy impact 34
Section 5 Investment considerations: Look to the 1990s 39
Section 6 Appendix 42
Section 1

Are we already living in a "Roaring '20s" regime?

Economic conditions remain consistent with a Roaring ’20s regime
US growth, inflation, and long-term interest rates are at levels consistent with our criteria for a "Roaring
’20s" economic regime, with high policy rates being the lone exception.

Roaring
Attribute 2023 2024 Summary
'20s

Growth has defied recession calls and

Real GDP Growth
≥2.5% 2.5% 2.4% has stayed very close to ‘Roaring ’20s’
(y/y)
target.

Inflation has cooled substantially from

CPI Inflation
~3.0% 4.1% 2.9% 2023 and on track trend around
(y/y)
‘Roaring ’20s’ target.

Policy rates still restrictive, with more

Policy rates 3-4% 5.3%* 4.9%*
easing to come next year.

Year-end target for longer-term rates

Long-term rates ~4.0% 3.9%* 3.8%*
broadly similar to 2023.

Note: Real GDP growth and inflation measured year-over-year and come from consensus Bloomberg forecasts; “Policy rates” refer to the Federal Funds Target and “Long-term rates” refer to the end-of-year yield
of the 10-year Treasury derived from UBS forecasts.
Source: Bloomberg, UBS, as of 17 June 2024

4
The economy looks a lot more like the 1990s than the 2010s
Even with the “soft landing” trajectory crystalizing, the post-pandemic economy looks more like the
robust expansion seen pre-GFC compared to the post-GFC sluggishness.

~6% nominal GDP growth 1.5x fast as last cycle I Headline CPI also running hotter close to 3% Roaring ’20s
Quarter-over-quarter (q/q) annualized rate, in % Year-over-year (y/y), in %
15 10

Pre-GFC avg. 8 Pre-GFC

10 “Inflation above target”

6
5 6%
Roaring
4
’20s
0
3%
Post-GFC avg. 2 Roaring
’20s
-5
0
Post-GFC
“Inflation below target”
-10 -2
1990 2000 2010 2020 1990 2000 2010 2020
Note: Axes have been truncated Source: Bloomberg, BLS, UBS, as of 17 June 2024
Source: Bloomberg, BEA, UBS, as of 17 June 2024

5
Higher short and longer-term rates are indicative of a new regime
The market pricing for the Fed funds rate to be above or near 4% through 2026 should support the 10-
year Treasury in a range around 4% for the foreseeable future.

10-year Treasury yield is trading in a pre-GFC range Market is pricing for a sustainably high Fed funds rate in
in % %
16 10

14
8
12

10 Current
6 pricing

4
6

4 Start of ’24
2 pricing
2

0 0
1970 1980 1990 2000 2010 2020 1990 1995 2000 2005 2010 2015 2020 2025
Source: Bloomberg, UBS, as of 17 June 2024 Source: Bloomberg, UBS, as of 17 June 2024

6
Section 2

Revisiting mega trends that will affect the supply

side
The supply side of the economy will determine the 2020s regime

Why supply matters and how to evaluate it A positive supply shock is necessary for a Roaring '20s

• A simple aggregate supply and demand Positive supply shift

framework illustrates how positive and negative supply shifts S’ S’’
influence the growth rate and inflation.
• Supply chain problems plagued the economy during
the pandemic. Those have eased, but supply issues are
expected to keep dominating, whether labor, capital,
or technology.
• Unlike the subdued recovery in the 2010s, demand Inflation slows
should be stronger this decade since households are in
much healthier financial shape.
• In a long-term growth model supply developments are
captured by changes in labor and capital inputs, and
productivity gains.
• Four megatrends are expected to impact supply this decade,
for good and bad: a capex boom, the green energy
transition, security and deglobalization, and AI, likely shifting D’
the supply curve to the right.
• We monitor the likelihood of a Roaring-'20s regime by
analyzing how the megatrends are impacting the supply-side
factors of the economy. Growth accelerates

Source: UBS as of 17 June 2024

8
More formally, economic growth models link the supply side to output
The basic Solow-Swan growth model states that output (GDP) is a function of capital (K) and labor (L)
growth multiplied by a productivity (A). While simple, it captures the essential supply elements.

2020s output should eclipse the 2007-19 cycle because of

more capital and technological progress
Productivity (Y) % contribution to GDP
4

3 Roaring 20s
Labor Capital Dynamism /
X X Threshold AI adoption
(L) (K) Technology (A)
should push
? (A) higher
2
All things equal, An economy Productivity (or Total Labor (L)
an economy with where workers Factor Productivity), constant, but
a larger labor have more captures the output immigration
force should have capital should created that is may be a big
1 positive.
a higher output. have more output unexplained by capital
compared to one and labor alone. Gains Rising capex
that doesn’t. from technology are should boost
captured here. (K)
0
1990-2000 2007-2019 Roaring 20s
Capital (K) Labor (L) TFP (A)
Source: UBS, as of 17 June 2024 Source: BLS, UBS, as of 17 June 2024

9
GDP data provides a way to track growth model components
While growth models provide a theoretical framework, quarterly GDP estimates provide a way to track
parts of the Roaring ’20s thesis, particularly investment that should lead to more capital (K).

The Solow-Swan output decomposition can be translated... ...into traditional GDP accounting, focusing on investment
% contribution to GDP % contribution to GDP
4 4

3 3

2 2

1 1 • Structures
• Equipment
• IP
0 0 • Residential
• Inventories

-1 -1
1990-2000 2007-2019 Roaring 20s 1990-2000 2007-2019 2021-2023
Investment Consumption
Capital (K) Labor (L) TFP (A)
Net Exports Government
Source: BLS, UBS, as of 10 June 2024 Source: BEA, UBS, as of 17 June 2024

10
Four megatrends will influence capital (K) and productivity (A)
A capex surge, driven by public and private investment, the green energy transition, spending on security
and deglobalization, and AI are megatrends that will potentially dominate the next decade.

Capex boom : Aging capital stock and tight labor supply will encourage Capital
companies to spend more after a decade of underinvestment. (K)

Green energy transition : Meeting sustainability targets is a priority for more and
more countries that requires enormous investment.

Security and deglobalization : A multi-polar world argues for spending to de-risk

access to critical resources and securing supply chain.

Artificial intelligence (AI) : Deploying AI capabilities across many industries is a Productivity /

potentially positive and large supply shock with uncertain productivity and labor Technology (A)
market impacts.

Focus

11
Focus on capex boom and AI since they will drive productivity
Tepid productivity growth in the 2010s sets a low baseline (~1.25%). The megatrends (capex boom and
AI) are reasons for it to rise, but the range of outcomes is large and the timing highly uncertain.

The megatrends should be net positive for productivity… …but with a wide range of potential outcomes by 2030
Potential long-term contribution to annual productivity growth, in % Productivity growth, y/y in %
AI’s impact could 4.0
be a revolution
3.5

3.0

2.5
High Forecast
productivity range
2.0 scenario
CBO Forecast
1.5

1.0

0.5

0.0
2023 2025 2027 2029

Note: Figures are meant to be illustrative only. Source: CBO, UBS, as of 6 November 2023

12
Section 3

Tracking the case for a roaring '20s regime

Our "Roar Score" maps supply megatrends to A, L, and K factors
We track capital investment, labor supply, AI deployment, business dynamism, and productivity gains.
The conviction level is the subjective likelihood of the factor supporting a Roaring ‘20s regime.

Roar score factors: (conviction as of Nov 2023) Low conviction High conviction Solow-Swan Factor

Large investment across the economy

Investment spending is large due to the supply megatrends, lifting growth cyclically and providing K
the foundation for faster productivity growth.

Labor force growth surpasses demographic trends

An aging population will lead to a structural decline of labor force growth for several decades, but L
higher immigration provides an offset.

Rapid AI adoption across the economy

AI investment accelerates and AI enablement starts to transition to AI adoption across industries, K A
with tangible productivity gains.

The economy is more dynamic post-pandemic

Economic behavior, such as increased entrepreneurial activity and technological adoption, A
remains supportive of faster productivity growth.

Productivity growth increases, with upside skew

Investment, AI, and dynamism drive productivity growth higher from a low base for the rest of the Y
decade, with wide range of outcomes.

14
K:
K Large investment across the economy, just not yet
Total fixed investment has been mediocre not booming, but segments of the economy are seeing a
historic investment surge due to the legislative tailwind. The factor outlook is still quite positive.

Prior Current Investment growth only marginally faster than post-GFC cycle
Private fixed investment, year/year, %
Conviction
K₁₉₉₀-₂₀₀₀
• Assessment: Overall private sector investment is soft, but
there are pockets of strength. K₁₉₉₀-₂₀₀₀
• Positive: Investment in manufacturing structures and
AI have clearly surged. The CHIPS and IRA Acts are K₂₀₂₁+
having a measurable effect, while the infrastructure bill K₂₀₂₁+
K ₂₀₀₇₋₂₀₁₉
impact is slower.
• Negative: Fixed investment ex-structures is sluggish,
especially from smaller firms, aside from policy
supported areas. Capex intentions are not indicative of
an imminent boom.
• Outlook: Investment is still likely to surge during the rest of
the decade. Infrastructure spending takes a long time to
ramp up. AI investment looks likely to accelerate. Rate cuts
should spur further investment, and the conclusion of the L₂₀₀₇₋₂₀₁₉
election also removes uncertainty for some firms.
• Risks: Prolonged restrictive monetary policy or sharp
economic slowdown can further postpone or cancel capex
plans. Note: The placement of “K” is illustrative only.
Source: CBO, UBS, as of 17 June 2024

15
K:
K Large variation in the performance of investment components
Overall investment levels are below the trend set during the prior cycle; IP and structures investment
show a post-pandemic pickup, while equipment spending is flat.

Investment still below previous cycle trend Non-residential fixed income components are a mixed-bag
Non-residential fixed investment, in 2017 $tr Non-residential fixed investment, in 2017 $tr

Source: BEA, UBS, as of 17 June 2024 Source: BEA, UBS, as of 17 June 2024

16
K:
K Legislation has been an unparalleled positive for investment
Three large fiscal packages—The Inflation Reduction Act (IRA), CHIPS and Science Act (CHIPS), and
Bipartisan Infrastructure Legislation (BIL) —are highly impactful, but not yet transformative.

Legislation Description $ Amount

Clean energy
Inflation
investment and ~$400 $660* billion
Reduction Act
healthcare cost through 2030
(IRA)
reduction

Accelerate US
Recent Major CHIPS and Science semiconductor ~$300 billion over
~$2 trillion
Legislation Act (CHIPS) production and 10 years
STEM workforce

~$1.2 trillion ($550

Bipartisan Provide significant
bn. in new
Infrastructure public investment
spending) over 10
Legislation (BIL) for US infrastructure
years

*Revision made by CBO in 2023 update

Source: CBO, The White House, Bloomberg, UBS, as of 28 May 2024

17
K:
K The IRA impact on investment has already been upsized
On its first anniversary, the IRA has led to nearly $132 billion in new investment and over 270 new clean
energy projects nationwide.

Federal funding embedded in IRA totals ~$400 billion New clean energy projects announced since IRA passage
$bn $bn

EV

Battery/Storage

Solar

Hydrogen

Semiconductor

Wind

Grid upgrades

Energy Efficiency

0 20 40 60 80 100

Source: CBO, UBS, as of 17 June 2024 Source: E2, UBS, as of 17 June 2024

18
K:
K Manufacturing investment spiked because of the CHIPS Act
Nearly $139 billion of additional investment aimed at boosting domestic manufacturing of
semiconductor chips has been announced since the passage of the CHIPS act in 2022.

CHIPS Act Breakdown Manufacturing Construction for electronics surged after IRA
Sub-title Rebased 12/31/2019=100
50 2
6

40

Legacy Chip
prodution
30 Loans and
31 guarantees
Other domestic
20 chip production
Semiconductor R&D

10

11

0
Source: The White House, UBS, as of 17 June 2024 Source: BEA, UBS, as of 17 June 2024

19
K:
K Infrastructure has picked up, but much more to go
The Bipartisan Infrastructure Law (BIL) authorizes >$1 trillion in transportation and infrastructure
spending with half going into “new” investment and projects. Nearly $500bn still yet to be spent.

Much of BIL still unspent and unawarded Public construction on water, power, and transportation surged
$bn.
$bn Rebased 12/2019=100
Private
0% 20% 40% 60% 80% 100% Biden signs BIL
into law

Transportation 221.1 22.4 346.8 $590bn

Energy 9.5 10.7 77.8 $98bn

Water 21.9 0 35.6 $58bn

Public

Broadband 41.7 4.8 3.8 $50bn

Water 9.6 1.7 16.5 $28bn

Other 1.4 1 12.2 $15bn

Fromula or Direct Competitive Remainng

Source: Brookings Institute, UBS, as of 17 June 2024 Source: BEA, UBS, as of 17 June 2024

20
K:
K AI investment is already large and may be a huge tailwind
AI is one of the fastest growing segments in global tech and investment is expected to total around $200
billion by 2025 and peak at around 2% of GDP in the early 2030s.

Mega caps announce aggressive capex plans for data centers AI-related investment to peak at >2% GDP
Billions % GDP
160 2.5

140
2.0
120
48%
100
1.5
USD, bn

80

60 1.0

40
0.5
20

0.0
2015 2017 2019 2021 2023 2025E 2024 2026 2028 2030 2032 2034 2036 2038 2040
Reported capex Consensus estimate Hardware: Model training Hardware: User queries Software
Note: Capex data from Microsoft, Meta, and Google Source: Goldman Sachs Global Investment Research, UBS, as of 28 May 2024
Source: Bloomberg, UBS, as of 28 May 2024

21
 K:
K Large firms plan to invest, but higher rates limit small firms
Large tech-firms are leading the capex cycle, while small firms are dealing with high borrowing costs and
economic uncertainty, both deterrents to investment.

Larger firms plan for more capex, small firms not so much Cost of financing investment for small firms is challenging
Capex intentions within 6 months, % NFIB Actual Interest rate on short-term loans, %

Note: “Smaller firms” reading taken from NFIB survey; “Larger firm” reading taken from ISM Source: NFIB, UBS, as of 17 June 2024
Manufacturing PMI report
Source: NFIB, ISM, UBS, as of 17 June 2024

22
K:
K More investment is necessary, a likely positive for productivity
Despite academic research saying that productivity is linked to capital intensity, US workers now using
the oldest capital stock on record, adding to the pressure to invest

US firms using the oldest capital stock on record Workers are more productive with higher capital intensity
Average age of private fixed assets, years Capital intensity & labor productivity
350

300
France Norway

250 Germany

Labor productivity
200 Switzerland
U.S.
Japan U.K.
150

Argentina
100

50 Mexico

Brazil
0
0 20 40 60 80 100
Capital intensity
Note: Calculation is a current-cost average age of private fixed assets Note: Capital intensity is defined as the ratio of total capital stock over total hours worked. Labor
Source: BEA, UBS, as of 17 June 2024 productivity is defined as ratio of GDP over total hours worked. Bubble size corresponds to population.
Source: Bergeaud, A., Cette, G. and Lecat, R. (2016), UBS, as of 6 November 2016

23
L:L Labor force growth overcomes demographic trends, for now
A tailwind from an unexpected immigration surge has helped rebalance the labor market and boost
growth. But unless that continues, demographics imply only modest growth in the labor force.

Prior Current Downward labor force growth reversing trend thanks to immigration
y/y, 10Y mov. Avg., %
Conviction

• Current Assessment: An immigration surge is forecasted to

add ~5 million more workers to the labor force by 2030
according to the CBO.
• Positive: The historically tight labor market has been
supported by a surprise influx of millions of immigrants
into the labor force.
• Negative: Demographics are working against the US
with a historically low birth rate that continues to
decline, while an increasing percentage of Americans
L₁₉₉₀-₂₀₀₀
say immigration is their top issue, limiting broader
absorption in the labor market.
• Outlook: Labor’s input to growth models should pick up
slightly from 0.5% annual pace from 2007-2019, elevating L₂₀₂₁+
total output, but the impact is modest and there's a high L₂₀₀₇₋₂₀₁₉
risk it won't happen (L₁₉₉₀-₂₀₀₀>L₂₀₂₁+>L₂₀₀₇₋₂₀₁₉).
• Risks: A new administration could bring additional
regulation and restrictions for migrant workers and further
Note: The placement of “L” is illustrative only.
restrict immigration flow. Source: CBO, UBS, as of 17 June 2024

24
L:L The immigration surge has boosted labor force prospects
The growth benefit of an immigration surge is that it supplies more workers in a tight labor market,
lifting US potential output, while also cooling wage growth.

A surge in immigration could add 5 million workers by 2030 Labor market participation rate is higher for immigrants
in mil. %

Source: CBO, UBS estimates, as of 17 June 2024 Source: BLS, UBS, as of 17 June 2024

25
L:L Immigration is politically problematic, so the surge may stall
A historically low birthrate provides a case for higher immigration flows in the US to support labor force
growth, but increasing hostility to immigrants may be a limiting factor.

Birth rates plumet to an all-time low Increasing number of Americans say immigration is top issue
US birth rate, % Most important problem in America, % respondents
0 5 10 15 20 25 30

Immigration

Government

Economy

Inflation

Poverty

Unifying the country

Race relations

Federal Budget Deficit

Crime

Electoral reform

Source: CDC, UBS estimates, as of 17 June 2024 Source: Gallup, UBS, as of 17 June 2024

26
K A AI investment advancing very quickly, but impact still uncertain
AI optimism has captured the budgets of many firms already, especially large tech companies must invest
to even have a chance to compete; productivity gains from adoption still in early days.

Prior Current Firms increasingly telling investors that AI is on their minds

AI mentions on S&P earnings calls, #
Conviction 200

• Current Assessment: Firms are embracing AI, leading to 180

billions of deployed investment and increasing adoption
160
plans.
• Positive: Investment in AI growing at a very fast pace, 140
aided by a public push for more high-tech
manufacturing in the US. 120

• Negative: Adoption has been unequal and still quite 100

limited so far, with academics outlining a large range
of outcomes. 80

• Outlook: AI investment and adoption should continue to 60

accelerate. But while the productivity impact should be
positive, it's also highly uncertain when the benefit will occur 40
and by how much.
20
• Risks: Tight monetary policy or sharp equity market
correction may limit investment. Implementation of AI- 0
related regulation may be another big headwind. 2013 2015 2017 2019 2021 2023
Source: Factset, UBS, as of 17 June 2024

27
K/A
K A AI adoption benefits currently limited but may accelerate

AI adoption is still slow and unequal, with manufacturing sector seeing the largest beneficial effects from
AI adoption; the upside is that there is a lot of scope for gains.

Already, firms see benefits from AI Adoption Adoption Intensity by sector

% of respondents Cost decrease Revenue increase % of workers
Major Some Minor Minor Some Major
Manufacturing
Manufacturing
Information
Service Operations Healthcare
Professional services
Risk
Education
Marketing Finance, Insurance, Real Estate
Agriculture, Mining, Utilities
Average across all functions
Wholesale trade

Human Resources Management

Transportation & Warehousing
R&D Other services
Retail trade
Strategy
Construction
Supply chain 0 2 4 6 8 10 12

-80 -60 -40 -20 0 20 40 60 80 Low Medium High

Note: Revenue increase measured as Minor (<=5%), Some (6-10%), and Major (>10%). Cost Note: Respondents were asked if they used the following technologies: Automated Guided Vehicles,
decreases measured as Minor (<=10%), Some (10-19%), and Major (>20%). Machine Learning, Machine Vision, Natural Language Processing, or Voice Automation. “High” refers
Source: McKinsey, UBS, as of 28 May 2024 to : more than 25% of production or service, “Medium” captures 5%-25% and “Low” refers to
usage less than 5%.
Source: “AI Adoption in America: Who, What, and Where” (McElheran et al.) UBS, as of 6 November
2023

28
K/A
K A AI is more likely to boost labor productivity, not displace labor

AI adoption still in the early days and the range of positive impact is still wide; more than half of early
adopters say inaccuracy is the largest issue, preventing broader adoption

Range of AI adoption on growth is wide but positive Inaccuracy is the biggest risk of AI according to surveyed firms
Effect of AI Adoption on annual firm productivity growth, % % of respondents
7 0 10 20 30 40 50 60

Inaccuracy
6
Cybersecurity

5 IP infringement
Regulation
4 Explainability
Privacy
3 Median
Labor displacement

2 Equity
Reputation
1 National security
Physical safety
0
Alederucci Czarnitzki Behrens Acemoglu Bessen and Environmental impact
et al (2022) et al (2022) and et al (2022) Righi Political stability
Trunschke
Source: Goldman Sachs Investment Research, UBS, as of 13 June 2024 Source: McKinsey, UBS, as of 13 June 2024

29
A:
A The economy appears to be more dynamic post-pandemic
The post-pandemic entrepreneurship boom looks sticky, reversing decades of declining firm dynamism in
the US.

Prior Current Rising Total Factor Productivity shows a more productive economy
contribution to GDP, %
Conviction
A₁₉₉₀-₂₀₀₀

• Current Assessment: Entrepreneurial activity is structurally

higher post-pandemic, upending decades of declining firm
A₂₀₂₁+
dynamism.
• Positive: New business formations are 50% higher
versus pre-pandemic. More firms are entering and
exiting industries, which should make them more A₂₀₀₇₋₂₀₁₉
dynamic.
• Negative: High borrowing costs are a bigger drag
for small firms and new businesses compared to large
established companies.
• Outlook: Entrepreneurship should remain high, as
technology has lowered the cost of starting and scaling a
new business. Rate cuts will help financing costs, and risk
capital is abundantly available.
• Risks: Prolonged high rates combined with financial stress
for households in lower income/wealth quintiles is a
headwind to entrepreneurial activity. AI may benefit larger Source: Bloomberg Economics, UBS, as of 17 June 2024
firms the most, making it harder for start-ups to compete.

30
A:
A The entrepreneurial surge shows no signs of slowing
New business formation remains structurally higher than pre-pandemic, while firm dynamism has picked
up - both indications of increased business dynamism.

Firm dynamism – entry/exit of the market – declining for decades Entrepreneurial activity on a higher structural level
Firm entry and exit rate, % New business formation, in thousands

+50%

Source: BLS, UBS, as of 13 June 2024 Source: BLS, UBS, as of 13 June 2024

31
Y:A Productivity is rising, but likely not yet due to K or A factors
Productivity growth has been trending higher for the past decade, without the benefits yet of the capex
surge or AI adoption; companies are getting more output from workers in a tight labor market.

Productivity has been trending higher since pre-pandemic Productivity tends to increase when labor market tightens
y/y, 5Y mov. avg., for labor productivity Unemployment rate & productivity growth since 1950
3
1Q24 Productivity at
2.9% y/y

Productivity growth, 5y lag, 3Y MA, y/y %

2

0
2 4 6 8 10
Unemployment rate, %

Source: BLS, UBS, as of 13 June 2024 Source: BLS, UBS, as of 13 June 2024

32
‘Roar Score’ assessment: A little bit louder now
Based on our assessment of the Roar Score factors, we are marginally more confident in the ‘Roaring
’20s’ regime occurring, but it remains more unlikely than likely and thus the bull case scenario.

Confidence Confidence
Factor Summary Risks
then now

While aggregate investment does not

A new administration may roll back
show strong evidence of a pickup,
Capital parts of the IRA and/or BIL. Tight
pockets of the economy already
(K) monetary policy may limit further
benefitting from a historic surge in
capex.
investment

+ More evidence of labor market Concerns on immigration from the

Labor
dynamism and a greater supply of American public may translate into
(L)
workers than previously estimated. restrictive legislation.

Productivity has trended higher since Unexpected economic slowdown

Dynamism /
the pandemic thanks to a very tight results in much higher labor market
Technology
labor market. Effects of AI and capital slack and less productivity pressure. AI
(A)
investment yet to be fully absorbed. regulation limits broader adoption.

+ Productivity modestly higher in part Deep contraction in economic activity

Productivity /
thanks to better firm dynamism. AI limits further investment. Renewed
Output
investment strong, but effects still concern over government deficits leads
(Y)
tenuous. to austerity.

33
Section 4

The policy impact

Reminder: Policy impacts demand, but could alter supply as well

Policy works primarily through aggregate demand Policy could shift the demand curve in or out
• Fiscal policy directly influences aggregate demand via
spending and tax policies, and indirectly impacts supply with Inflation
tax incentives, regulatory changes, and trade restrictions, Aggregate
among other tools. supply curve
• Over the past few years fiscal policy has been very
expansionary, increasing demand through multiple legislative
polices, including the CHIPS, IRA, and Infrastructure Acts. This
has contributed to large deficits, though they are not
the main cause of them.
• Monetary policy mostly impacts aggregate demand,
minimally affecting supply. It has been restrictive for the past
year, but it is uncertain just how tight monetary policy is
because the economy has been largely impervious to Fed rate
hikes thus far.
Negative Aggregate Positive
• Fiscal and monetary policy can work in conjunction to support
demand demand curve demand
or constrain demand, but often have opposing effects (e.g.,
shock shock
loose fiscal policy is matched by tight monetary policy).
• Combined policy has arguably been a supportive of demand Growth rate
over the past nine months because the fiscal impulse is bigger
than expected and the Fed pivot to a rate cutting bias greatly
eased financial conditions.
Source: UBS as of 17 June 2024

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A wide range of policy scenarios, and not easy to forecast
Policy is a wildcard since it's contingent on politics and the upcoming election. Unless monetary policy is
fiscally dominated, fiscal policy likely to be a headwind for a Roaring '20s due to already-high deficits.

Roaring '20s? Considerations for policy direction, a political decision

Growth
Inflation Where we are:
– Fiscal policy is very loose, with an expected deficit-to-GDP of ~5.5%in 2024 and the
Market
CBO forecasts deficits over 5% for the next decade.
expectation
Growth – Monetary policy is currently restrictive, but the Fed has an easing bias and policy
Looser Inflation should start moving toward neutral later this year; the Fed is comfortable with
inflation gradually declining to 2%.
– This policy combination has resulted in growth that has remained resilient, while
Monetary inflation has come down gradually.
policy Market expectation:
– Limited fiscal consolidation in the next two years regardless of the election outcome,
given lack of political appetite.
Tighter – Early in 2025, Congress must raise the debt ceiling and before the end of next year
the 2017 tax cuts that are set to expire at the start of 2026 must be addressed,
We are here otherwise the fiscal contraction is large.
Growth Growth – A Fed that gradually gets to a neutral policy stance; the Fed forecasts a funds rate of
Inflation Inflation 3.125% by December 2026, market pricing is for ~3.65%.
– Expect lower growth and inflation; fiscal contraction should lower growth and
inflation; lower rates likely not sufficient to counter the fiscal drag.
Fiscal Roaring ‘20s:
Tighter Looser
policy
– Little political appetite in either party for significant deficit reduction, while other
Note: Figure is illustrative only.
Source: UBS, as of 17 June 2024
considerations (security, energy transition, populism) create spending needs.
– High interest costs and lack of political will to reduce the deficit could lead to fiscal
dominance of monetary policy; the latter is constrained from fighting inflation
because rates need to be low (i.e., nominal interest rate < nominal GDP).
– Bias is to run a hot economy, with higher growth and inflation versus expectations.
36
Deficits set to remain wide for the foreseeable future…
The deficit is 6% of GDP in 2023 despite near record-low unemployment, implying public finances are
structurally imbalanced.

The budget deficit is disconnected from fundamentals Hard-to-reform mandatory spending pushing deficits higher
% CBO projections, % GDP

14 Unemployment rate -20

Budget balance (right scale)
12
-15

10
-10

8
-5
6

0
4

5
2

0 10
1970 1980 1990 2000 2010 2020
Source: BLS, CBO, Bloomberg, UBS, as of 17 June 2024 Source: CBO, Bloomberg, UBS, as of 17 June 2024

37
…putting pressure on the Fed to put a ceiling on rates
The rising cost of interest payments on fiscal policy and attempts to reduce spending are potential drags
on the economy, which may lead the Fed to lower rates and tolerate inflation modestly above 2%

The federal interest burden will rise quickly at current rates Fiscal steps in if recession occurs, slightly negative otherwise
% Contribution of fiscal policy on real GDP growth, in %

Source: CBO, Federal Reserve, UBS as of 17 June 2024 Source: Brookings Instituter, UBS as of 17 June 2024

38
Section 5

Investment considerations: Look to the 1990s

1990s continue to be the best template for a Roaring '20s regime
The current Fed hiking cycle is similar to the '94 cycle, which resulted in a soft landing. A technology-
driven productivity boom followed that led to high growth and disinflation - it could happen again.

Current rate level looks like the 1990s… …matching a very similar nominal GDP pace
Federal funds rate, in % 1Y mov. avg. y/y in %

1994
‘94 pause
before cut

1990-2000
2022
average

Source: Bloomberg, UBS, as of 17 June 2024 Source: BEA, UBS, as of 17 June 2024

40
What could a Roaring '20s mean for investing? Updated thoughts
There will be specific asset class and individual security leaders in a Roaring '20s regime, but those are
TBD. For overall asset allocation, some implications seem likely, or at least must be considered.

Higher rates for longer Higher portfolio volatility

The current level of rates is likely to A higher stock-bond correlation will

persist in a Roaring '20s regime, make multi-asset portfolios more
though with the fed funds rate volatile, a consequence
down to levels closer to current fed compounded by higher inflation
funds futures pricing. volatility.

Changing stock-bond correlation Strong case for alternatives

Higher inflation usually increases the Given increased correlation between

correlation between stock and bond stocks and bonds, the case is
returns, diminishing portfolio stronger for adding alternatives to
diversification, and increasing standard 60/40 portfolios, going
portfolio volatility instead with 40/30/30.

Positive for equities, biased to tech Continued US outperformance

Higher nominal growth should be A Roaring '20s regime is primarily a

positive for equity returns overall. But if US story, with modest versions in
it appears to be due primary to AI, then other developed economies. While
the tech sector will likely be the biggest US equities are relatively expensive,
winner, as in the 1990s. this regime could support ongoing
outperformance.

41
Section 6

Appendix
Appendix
Statement of risk
1. Equity markets are difficult to forecast because of fluctuations in the economy, investor psychology, geopolitical conditions, and other important variables.
2. Bond market returns are difficult to forecast because of fluctuations in the economy, investor psychology, geopolitical conditions and other important variables.
Corporate bonds are subject to a number of risks, including credit risk, interest rate risk, liquidity risk, and event risk. Though historical default rates are low on
investment grade corporate bonds, perceived adverse changes in the credit quality of an issuer may negatively affect the market value of securities. As interest
rates rise, the value of a fixed coupon security will likely decline. Bonds are subject to market value fluctuations, given changes in the level of risk-free interest
rates. Not all bonds can be sold quickly or easily on the open market. Prospective investors should consult their tax advisors concerning the federal, state, local,
and non-U.S. tax consequences of owning any securities referenced in this report.
3. Prospective investors should consult their tax advisors concerning the federal, state, local, and non-U.S. tax consequences of owning preferred stocks. Preferred
stocks are subject to market value fluctuations, given changes in the level of interest rates. For example, if interest rates rise, the value of these securities could
decline. If preferred stocks are sold prior to maturity, price and yield may vary. Adverse changes in the credit quality of the issuer may negatively affect the market
value of the securities. Most preferred securities may be redeemed at par after five years. If this occurs, holders of the securities may be faced with a reinvestment
decision at lower future rates. Preferred stocks are also subject to other risks, including illiquidity and certain special redemption provisions.
4. Although historical default rates are very low, all municipal bonds carry credit risk, with the degree of risk largely following the particular bond’s sector.
Additionally, all municipal bonds feature valuation, return, and liquidity risk. Valuation tends to follow internal and external factors, including the level of interest
rates, bond ratings, supply factors, and media reporting. These can be difficult or impossible to project accurately. Also, most municipal bonds are callable and/or
subject to earlier than expected redemption, which can reduce an investor’s total return. Because of the large number of municipal issuers and credit structures,
not all bonds can be easily or quickly sold on the open market.

43
Appendix
Emerging Market Investments
Investors should be aware that Emerging Market assets are subject to, amongst others, potential risks linked to currency volatility, abrupt changes in the cost of capital and the
economic growth outlook, as well as regulatory and socio-political risk, interest rate risk and higher credit risk. Assets can sometimes be very illiquid and liquidity conditions can abruptly
worsen. WMR generally recommends only those securities it believes have been registered under Federal U.S. registration rules (Section 12 of the Securities Exchange Act of 1934) and
individual State registration rules (commonly known as "Blue Sky" laws). Prospective investors should be aware that to the extent permitted under US law, WMR may from time to time
recommend bonds that are not registered under US or State securities laws. These bonds may be issued in jurisdictions where the level of required disclosures to be made by issuers is
not as frequent or complete as that required by US laws.
For more background on emerging markets generally, see the WMR Education Notes "Investing in Emerging Markets (Part 1): Equities", 27 August 2007, "Emerging Market Bonds:
Understanding Emerging Market Bonds," 12 August 2009 and "Emerging Markets Bonds: Understanding Sovereign Risk," 17 December 2009.
Investors interested in holding bonds for a longer period are advised to select the bonds of those sovereigns with the highest credit ratings (in the investment grade band). Such an
approach should decrease the risk that an investor could end up holding bonds on which the sovereign has defaulted. Sub-investment grade bonds are recommended only for clients
with a higher risk tolerance and who seek to hold higher yielding bonds for shorter periods only.
Non-Traditional Assets
Non-traditional asset classes are alternative investments that include hedge funds, private equity, real estate, and managed futures (collectively, alternative investments). Interests of
alternative investment funds are sold only to qualified investors, and only by means of offering documents that include information about the risks, performance and expenses of
alternative investment funds, and which clients are urged to read carefully before subscribing and retain. An investment in an alternative investment fund is speculative and involves
significant risks. Specifically, these investments (1) are not mutual funds and are not subject to the same regulatory requirements as mutual funds; (2) may have performance that is
volatile, and investors may lose all or a substantial amount of their investment; (3) may engage in leverage and other speculative investment practices that may increase the risk of
investment loss; (4) are long-term, illiquid investments, there is generally no secondary market for the interests of a fund, and none is expected to develop; (5) interests of alternative
investment funds typically will be illiquid and subject to restrictions on transfer; (6) may not be required to provide periodic pricing or valuation information to investors; (7) generally
involve complex tax strategies and there may be delays in distributing tax information to investors; (8) are subject to high fees, including management fees and other fees and expenses,
all of which will reduce profits.
Interests in alternative investment funds are not deposits or obligations of, or guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured
by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other governmental agency. Prospective investors should understand these risks and have the financial
ability and willingness to accept them for an extended period of time before making an investment in an alternative investment fund and should consider an alternative investment fund
as a supplement to an overall investment program.
In addition to the risks that apply to alternative investments generally, the following are additional risks related to an investment in these strategies:
• Hedge Fund Risk: There are risks specifically associated with investing in hedge funds, which may include risks associated wi th investing in short sales, options, small-cap stocks,
"junk bonds," derivatives, distressed securities, non-U.S. securities and illiquid investments.
• Managed Futures: There are risks specifically associated with investing in managed futures programs. For example, not all man agers focus on all strategies at all times, and managed
futures strategies may have material directional elements.
• Real Estate: There are risks specifically associated with investing in real estate products and real estate investment trusts. They involve risks associated with debt, adverse changes in
general economic or local market conditions, changes in governmental, tax, real estate and zoning laws or regulations, risks associated with capital calls and, for some real estate
products, the risks associated with the ability to qualify for favorable treatment under the federal tax laws.
• Private Equity: There are risks specifically associated with investing in private equity. Capital calls can be made on short notice, and the failure to meet capital calls can result in
significant adverse consequences including, but not limited to, a total loss of investment.
• Foreign Exchange/Currency Risk: Investors in securities of issuers located outside of the United States should be aware that even for securities denominated in U.S. dollars, changes
in the exchange rate between the U.S. dollar and the issuer’s "home" currency can have unexpected effects on the market value and liquidity of those securities. Those securities
may also be affected by other risks (such as political, economic or regulatory changes) that may not be readily known to a U. S. investor.

44
 Risk information
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