Are We Ready For The Roaring '20s?

July 23, 2021

The Roaring ‘20s refers to the 1920s when economic prosperity flourished in the United States and Europe. Deferred spending from the effects of World War I and the Spanish Flu Pandemic, a construction boom, and the growth of consumer goods more than doubled our Nation’s wealth from 1920 to 1929.

No question we have been through the Gloom and Doom of 2020. No question we are clearly in the Boom of 2021. The big question is: are we returning to the Glooming and Dooming, or are we heading for more Zooming and Consuming?

To answer this question, I’d like to look at several factors and their short- and long-term implications.

  • COVID 19 and the Delta variant
  • The economy and the stock market
  • Inflation and interest rates
  • Jobs
  • Taxes
  • Climate change
  • Longevity and birth rates

The COVID 19 pandemic was devastating not only to economies worldwide, but also industries, companies and of course, individuals and families. With two major COVID 19 surges in 2020, the national death rate in the US increased by over 16% from 2019, according to the Centers for Disease Control and Prevention (CDC). Same as in the 1920s, consumers have deferred spending. This deferred consumer spending aided by government stimulus checks have caused personal savings rates to soar to 21% of disposable income! The short-term effect is to super charge the economic recovery – This seems like a BOOM in economy to me! The Delta variant has caused a 5% spike in COVID cases in the US in the last 2 weeks and as of this writing, could become the dominant strain the next two to three weeks. Again, this will probably be more of a short-term dampening effect in areas of the country with lower vaccination rates.

The economy and the stock market are booming. Vaccines (which were developed and distributed in record time), unprecedented government spending to aid businesses and the economy, stimulus checks sent directly to individual citizens, and the pent-up consumer demand as mentioned above, have led the International Monetary Fund (IMF) to more than double its growth estimate of 2021 US Gross Domestic Product (GDP) from 3.1% to 6.4%. The US Federal Reserve Bank estimates a 7.0 growth rate by year end. As shown in the graph, this is worldwide recovery, not just in the United States. {Graph} The stock market increased during the second quarter 2021. The S&P 500 has gained more than 5% for five consecutive quarters in a row. This is only the second time the stock market has done this since 1945! So, what could go wrong?

Inflation and interest rates have started to increase. Federal Reserve Bank Chairman, Jerome Powell, has called the rising inflation rate “transitory”. This means he feels inflation will not be a long-term problem like we had in the 1970s. Many economists think the stimulus induced spike in consumer demand along with supply chain bottlenecks will work themselves out as the economy returns to equilibrium and we go back to about a 2% inflation rate. Of course, if you are remodeling your house, buying a car, or even trying to rent a car, you may feel differently. If interest rates continue to go up, including mortgage rates, it may slow down the housing market which has seen prices of existing homes increase by 24% last year. While not an issue now, we will continue to monitor inflation signs on your behalf, since I believe some causes of inflation will be transitory, but “too much money chasing too few goods” is a textbook definition of inflation that I learning at UCONN Business School years ago.

One of the major components of inflation is wage inflation. Job openings have significantly increased with the lifting of COVID restrictions. As of April 2021, there were 9.3 million job openings, which just happens to equal to the total number of people who are unemployed. According to a survey by the National Federation of Independent Businesses, 48% of employers have a job opening they can’t fill. There seems to be a reluctance on the part of some unemployed workers to return to work. Possible reasons include enhanced unemployment benefits they are still receiving, fear/safety issues of returning to work while COVID 19 is still an issue, and the lack of childcare options. Again, I believe these are short term problems which will ease as people settle into the new “normal”.

Taxes are always a wild card causing economic uncertainty. In my opinion, President Biden’s tax plan will not be passed into law as presented, but some taxes will increase. Tax increases have a dampening economic effect. Hopefully, new tax revenue will not be used for programs no longer needed as the economy recovers and surpasses pre-COVID 19 levels but be used to retire the money we borrowed for the pandemic programs needed over the last 18 months. Some in congress believe that our national debt doesn’t matter. If a sovereign country like the US can spend, tax and borrow/print money that they control, they can spend more than they take in. This is called Modern Monetary Theory, and I don’t agree with it. When I was born, the National Debt was $286 Billion. Today it is $28.1 Trillion. Short-term, this is not too much of a problem. Long-term, I see it a big problem as we have to pay more and more interest on this debt which will squeeze out money that could be used for social programs, infrastructure, etc.

Climate change is another longer-term problem, but it needs to be addressed soon. As I write this over the July 4th holiday, the high temperature is 60 degrees! I woke up this morning and put on fuzzy slippers and a sweatshirt! It was 110 degrees in Portland, OR last week. Both temperatures are at or near records. Companies are addressing these issues now, but the economic impact of climate change will be huge, to individuals, families, companies, and countries. Drought, declining water supplies, more serve and frequent storms, wildfires, and rising sea levels are a few of the consequences of climate change. As always, there will be economic opportunities for those involved in solving these issues!

My last concern is longevity and birth rates, which are longer-term concerns. In 1960 the average life expectancy in the US was 69 years. Now it is 79 years. If you are a 65-year-old man today, you can expect to live another 18 years; and a 65-year-old woman will live another 22 years on average. The US birth rate in 2020 hit a record low. There was no COVID baby boom like many thought. Apparently during the pandemic, we watched Netflix and, well, just watched Netflix! Couple this with an immigration system which let in fewer people to the US, and we have significant financial and economic consequences. Medicare and Social Security are based on more, young workers contributing to the systems for the benefit of the older retired workers. Older people living longer and taking money out of the system, and fewer young people paying into the system will make both Medicare and Social Security more strained than they are currently. Obviously, Government programs will not be the only things effected. Retirement planning, healthcare, leisure, transportation and living arrangements will all need to be readdressed going forward.

While I am enjoying the current boom, these are some of the things that I think about at night. It certainly is not a complete list of issues that we monitor on your behalf, but they are top of mind now. I do feel confident that we can solve these issues and others that will inevitably arise in the future. We always have. So, for all you flappers with your short “bob” hair styles and guys in zoot suits listening to Jazz in night clubs, this century’s Roaring 20s won’t be exactly the same as the 1920s. For one thing, we won’t have to wait for prohibition to end. Alcohol is now legal and in fact, so is marijuana in 18 states and Washington DC. Enjoy the reopening and stay safe!