Jamie Dimon is preparing for stagflation, but he could achieve a 1950s-style boom instead

Even JPMorgan Chase CEO Jamie Dimon has repeatedly suggested that stagflation could make a comeback, with his latest warning coming at AllianceBernstein’s Strategic Decisions conference just last week. Dimon did not quite predict a repeat of the toxic combination of high inflation and weak economic growth last seen in the US in the 1970s at the conference, but he said he believed it was possible. The likelihood of a nightmare stagflation scenario occurring is “much higher”. than most experts appreciate.

“I look at the amount of fiscal and monetary stimulus that has taken place over the last five years – it’s extraordinary, how can you tell me it won’t lead to stagflation?”

“Maybe not,” he said. “But I was pretty prepared for that.”

Now, however, Henry Allen, macro strategist at Deutsche Bankis pushing back against the 1970s narrative. “In recent weeks, we have begun to see increasing comparisons to the early 1950s and Nowadays”.

Allen notes that both today’s economy and the economy of the 1950s have strong labor markets, steadily rising stock prices, rising geopolitical tensions, and short-term increases in inflation.

“Time will tell whether the early 1950s provide good parallels, but if these parallels hold there could be plenty of room for optimism,” the strategist said. . “The good news is that the early 1950s were a period of decent economic growth and productivity.”

Four similarities with the post-war economic boom of the 1950s

1. The wave of inflation is strangely familiar

When most Americans think about the 1950s, they don’t think about inflation. The postwar period is often romanticized as a time of economic and social stability; it is even labeled as “The golden age of capitalism” by some. In many ways, this golden age economic story is true, but like the 2020s, the 1950s were also a challenging decade – and they began with a wave of inflation. consumer price index (CPI).

“Inflation in the United States skyrocketed from late 1950 to 1951. Peaking in February 1951, CPI inflation peaked at 9.4 percent,” Allen notes. “That is a very similar peak to today, when CPI inflation rose to 9.1% in June 2022.”

However, after an initial surge in consumer prices in 1950 and 1951, prompted in part by the onset of the Korean War, inflation declined throughout the remainder of the 1950s. According to Allen, it was a pattern of “ “closer parallel” to the 2020s than the 1970s. “To date, we have not seen persistent inflation like the 1970s, when CPI inflation remained above 4% during nearly a decade.”

Instead, in the 2020s, after peaking at 9.1% in June 2022, inflation fell significantly, reaching 3.4% in April.

2. Historically low unemployment rate

The labor market was the engine of the American economy for much of the 1950s. Unemployment averaged about 4.5% throughout the decade and hit a low of just 2.5% in 1953. Now, Even with persistent inflation, rising interest rates and geopolitical tensions weighing on consumers and businesses, the economy in 2020 is following a similar path, moving towards a more labor market record. 70 years old.

Allen noted that if Friday’s jobs report shows the unemployment rate remained below 4% in May, it would be the longest stretch of unemployment below 4% since the early 1950s, when the economy saw a 35-month period of unemployment below 4%. .

3. The market is rising

The stock market’s meteoric rise since 2020 is another undeniable similarity between the 1950s and 2020. From January 1950 to the end of 1954, the S&P 500 more than doubled, from 100 to 225, despite a brief recession caused in part by a decline in military spending after the end of the Korean War.

Similarly, so far in 2020, the S&P 500 is up more than 62%, even after a short-term decline caused by the pandemic in March 2020 and multiple wars abroad. And while the stock market’s performance in the 2020s wasn’t as impressive as the early 1950s, it certainly wasn’t like the 1970s. From January 1970 to the end of 1974, the S&P 500 fell 45%.

4. Geopolitical risks

Geopolitical tensions were a major feature of the 1950s, as they are today, as capitalist America resolutely sought to “globally contain” communism after World War II, while the Soviet Union trying to spread his own ideology. This battle between economic and political systems manifested itself in the ongoing tensions between the world’s superpowers, the persistent threat of nuclear war, and even helped spark the War. North Korea.

Allen noted that it was a time of “increased geopolitical risk,” explaining that “this was the early stages of the Cold War, when there were great tensions between the United States and the Soviet Union, and tensions That is clearly evident in some areas. ”

Similarly, today, the global economy faces a persistent threat from the ongoing conflicts in Ukraine and Israel. These wars have regularly caused problems for businesses and consumers in recent years, causing global oil and natural gas prices to spike in 2022 and triggering a shipping crisis in the Middle East. Red. Sea more recently.

Two key differences between the 1950s and 2020s

While there are many similarities between the 1950s and the 2020s, Allen notes that there are also some key differences and says “we should not overstate the comparison.”

First, the strategist points out that US government debt is currently rising, whereas it was going in the other direction in the 1950s. “There was still a big deleveraging that took place after World War II, with the The US government’s debt load decreased significantly. That is very different from today’s environment, where the public debt-to-GDP ratio has been trending upward in recent decades,” he wrote.

In his view, after skyrocketing to a peak of 119% in 1946 after World War II, the US debt-to-GDP ratio fell dramatically in the 1950s, from 85% at the beginning of the decade to just to 53% in 1960.

On the other hand, in the fourth quarter of 2023, the US debt-to-GDP ratio reached 121%, slightly above the post-World War 2 peak. And the Congressional Budget Office expectation That number will increase to 166% by 2054.

The second main difference between 1950 and 2020 lies in birth rates. Allen notes that birth rates soared in the 1950s, leading to the nickname “baby boomers” for the generation born in that post-World War period.

“This is a very favorable trend economically, as it means that more and more young workers will enter the workforce in the coming decades,” he wrote. “In contrast today, birth rates are falling and the U.S. population is aging.”

In 1955, the US fertility rate – the number of children a woman would have if she lived to the end of her childbearing years – was 3.42. Today, that number has nearly halved to just 1.79.

Some experts also sharp In the face of persistent inflation and decelerating GDP growth, there is evidence that stagflation could take hold early this year. CPI inflation has been stuck between 3% and 3.5% for almost a year now, and GDP growth fell from 3.4% in the fourth quarter of 2023 to just 1.6% in the first quarter of this year.

“I’m starting to feel signs of stagflation, dare I say…I know that’s a dirty word in many circles,” said Steve Sosnick, chief strategist at Interactive Brokers, speak Bloomberg when discussing these numbers in late April.

However, Bank of America economists disputed the Stagflation narrative in a May 16 note to clients, supporting the view of Deutsche Bank’s Allen. They argue that the economy is unlikely to slow anytime soon, despite more persistent inflation, due to the strength of the American consumer.

“After missing GDP growth in the first quarter and continuing inflation surprises, the ‘stagflation’ narrative has resurfaced. We object,” economist Aditya Bhava wrote, noting that there is evidence of “strong” consumer demand in the economy, especially in the services sector, that should prevent a slowdown. economic stagnation.

The key to avoiding 1970s-style stagflation is a productivity boom

For Allen, the key to avoiding 1970s-style stagflation is improving labor market productivity – and he believes the economy has the potential to do just that. U.S. labor market productivity has enjoyed a renaissance over the past year, rising 2.7% after nearly two difficult decades when annual productivity growth averaged just 1.5%.

“Indeed, there are reasons to believe that could continue,” Allen said. “Low unemployment is often a driver of productivity growth because companies are unlikely to recruit from a large pool of unemployed workers. This therefore encourages them to invest more in new technology and helps their existing staff work more efficiently.”

The Deutsche Bank strategist pointed to emerging technologies, including AI, as also potential catalysts for US productivity growth, arguing that “this suggests there could be some risks going against economic growth in the coming years.”

Increased productivity can help fight inflation by reducing unit labor costs. “If this happens, it is likely that we can avoid a period like the 1970s, when inflation was persistent,” Allen said.

Overall, the economy – and the stock market – would do well if we saw a repeat of the 1950s, rather than the 1970s, according to Allen. But he also issued a warning to investors: no two eras are exactly the same.

“Demographic trends are much less favorable, while the US national debt is trending upward. So both of those differences could create important headwinds to growth in coming years that were unheard of in the early 1950s,” he wrote.