Over the past four years, continuing inflation, war-fueled energy price spikes and rising geopolitical tensions have rattled the global economy, with some Wall Street figures repeatedly warning that the United States could be heading for a repeat of the stagflation of the 1970s.
JPMorgan Chase & Co. CEO Jamie Dimon has also hinted at the possibility of a return of stagflation on multiple occasions, with his latest warning coming at an AllianceBernstein strategy conference last week. While Dimon didn’t say explicitly at the conference that the toxic combination of high inflation and sluggish economic growth last seen in the U.S. in the 1970s would return, he said he believes the odds of a nightmare stagflation scenario are “much higher” than most experts think.
“If you look at the scale of fiscal and monetary stimulus that has taken place over the last five years, it has been so extraordinary, how can we be sure that it won’t lead to stagflation?”
“It may not happen,” he said, “but I’m very prepared for it.”
But now Deutsche Bank macro strategist Henry Allen is disputing the 1970s view. “In recent weeks, we have begun to see increasing comparisons to the early 1950s and today,” he explained in a client note on Tuesday.
Allen noted that both today’s economy and the 1950s economy were characterized by strong labor markets, steadily rising stock prices, rising geopolitical tensions, and short-term spikes in inflation.
“Time will tell if the early 1950s will provide parallels, but if these similarities hold, there’s plenty of room for optimism,” the strategists said. “The good news is that the early 1950s was a time of good economic and productivity growth.”
Four similarities to the postwar economic growth of the 1950s
1. An eerily familiar wave of inflation
When most Americans think of the 1950s, they don’t think of inflation. The postwar period is often romanticized as a time of economic and social stability.The Golden Age of Capitalism” Some have said. In many ways, this “Golden Age” economic narrative is true, but like the 2020s, the 1950s was also a challenging decade. And it began with a wave of Consumer Price Index (CPI) inflation.
“U.S. inflation rose sharply in late 1950 and 1951. At its peak in February 1951, CPI inflation reached 9.4%,” Allen noted. “This is very similar to today’s peak, when CPI inflation rose to 9.1% in June 2022.”
But after a spike in consumer prices in 1950 and 1951, driven in part by the outbreak of the Korean War, inflation fell for the rest of the 1950s. Allen said this pattern is “closer” to the 2020s than it is to the 1970s. “So far we haven’t seen the persistence of the 1970s, when Consumer Price Index (CPI) inflation was above 4% for almost a decade,” he said.
Rather, in the 2020s, inflation peaked at 9.1% in June 2022 before falling significantly, reaching 3.4% in April.
2. Historically low unemployment
For much of the 1950s, the labor market was the driving force behind the U.S. economy, with the unemployment rate averaging about 4.5% throughout the decade, hitting a low of 2.5% in 1953. Now, with persistent inflation, rising interest rates, and geopolitical tensions weighing on consumers and businesses, the economy of the 2020s is on a similar path, approaching the labor market record of more than 70 years ago.
Allen noted that if Friday’s jobs report shows the unemployment rate fell below 4 percent in May, it would mark the longest period of time the rate has remained below 4 percent since the early 1950s, when the rate remained below 4 percent for 35 months.
3. Rising Market
The stock market’s meteoric rise since 2020 is another unmistakable similarity between the 1950s and the 2020s: Between January 1950 and the end of 1954, the S&P 500 rose 100 points to 225, more than doubling, despite a brief recession caused in part by a drop in military spending following the end of the Korean War.
Similarly, from the beginning of 2020 to today, the S&P 500 has surged more than 62%, even after a brief pandemic-induced selloff in March 2020 and multiple wars overseas. And while the stock market’s performance in the 2020s has not been as impressive as that of the early 1950s, it certainly doesn’t resemble the 1970s: from January 1970 to the end of 1974, the S&P 500 fell 45%.
4. Geopolitical risks
The 1950s, like today, were marked by geopolitical tensions, as the staunchly capitalist United States sought to “contain” Communism globally after World War II, while the Soviet Union sought to spread its own ideology. This war of economics and political systems manifested itself in continued tensions between the world’s superpowers and the constant threat of nuclear war, which also led to the Korean War.
Allen noted that it was a time of “heightened geopolitical risks”, explaining: “It was the early stages of the Cold War and there were significant tensions between the United States and the Soviet Union, and those tensions were evident in several regions.”
Similarly, the global economy currently faces constant threats from the ongoing conflicts in Ukraine and Israel. These fighting has caused routine problems for businesses and consumers in recent years, contributed to a surge in global oil and natural gas prices in 2022, and recently spurred a shipping crisis in the Red Sea.
Two big differences between the 1950s and the 2020s
Allen noted that while there are many similarities between the 1950s and the 2020s, there are also some key differences, and “the comparisons shouldn’t be overstated.”
First, the strategists noted that while U.S. government debt is currently soaring, it was heading in the opposite direction in the 1950s. “Massive deleveraging also took place after World War II, significantly reducing the U.S. government’s debt burden. This is very different from today’s environment, where public debt-to-GDP ratios have been trending upward for the past few decades,” they wrote.
He points out that the U.S. debt-to-GDP ratio rose sharply to a peak of 119% in 1946 after World War II, before falling dramatically in the 1950s, from 85% at the start of the decade to just 53% by 1960.
Meanwhile, in the fourth quarter of 2023, the U.S. debt-to-GDP ratio will exceed 121%, just above its highest level since World War II. And the Congressional Budget Office expect That figure will rise to 166% by 2054.
The second big difference between the 1950s and the 2020s is birth rates. Allen noted that birth rates skyrocketed in the 1950s, and the generation born after the war became known as “baby boomers.”
“This was a very positive economic trend because it meant that an expanding cohort of young workers was entering the workforce over the following decades,” he writes. “Today, by contrast, birth rates are falling and the U.S. population is aging.”
In 1955, the U.S. fertility rate (the number of children a woman will have if she lives to childbearing age) was 3.42. Today, that number has fallen by almost half, to just 1.79.
Some experts pointed to persistent inflation and slowing GDP growth earlier this year as evidence that stagflation was on the way: CPI inflation has been stuck in the 3% to 3.5% range for nearly a year now, while GDP growth has slowed from 3.4% in the fourth quarter of 2023 to just 1.6% in the first quarter of this year.
“You’re starting to smell stagflation, dare I say it — I know that’s a dirty word in a lot of areas,” said Steve Sosnick, chief strategist at Interactive Brokers. He told Bloomberg When we discussed these numbers in late April.
But economists at Bank of America disagreed with the stagflation theory in a May 16 client note, backing Deutsche Bank’s Allen. They argued that despite more persistent inflation, the strength of the U.S. consumer makes it unlikely the economy will slow down anytime soon.
“The ‘stagflation’ narrative has resurfaced after first-quarter GDP growth weakened to expectations and inflation continued to beat expectations. We push back,” economist Aditya Bhabha wrote, noting there was evidence of “robust” consumer demand in the economy, particularly in the services sector, which should prevent the economy from sagging.
Rapid productivity growth is key to avoiding 1970s-style stagflation
For Allen, the key to avoiding 1970s-style stagflation is to increase labor market productivity, and he believes the economy has the potential to do just that. U.S. labor market productivity has undergone a revival over the past year, rising 2.7% after nearly two difficult decades in which annual productivity growth averaged just 1.5%.
“Certainly, there’s reason to believe that will continue,” Allen said. “Low unemployment often stimulates productivity growth because companies can’t afford to hire lots of unemployed people, so it encourages them to invest more in new technology and help their existing employees be more productive.”
Deutsche Bank strategists noted that emerging technologies, including AI, are a potential catalyst for productivity growth in the U.S., arguing that “this suggests there may be upside risks to economic growth over the next few years.”
Higher productivity could also help fight inflation by reducing unit labor costs, “which would give us a better chance of avoiding a period of inflation like the 1970s,” Allen said.
Overall, the economy and stock market should do well if we see a repeat of the 1950s instead of the 1970s, Allen said, but he cautioned investors that no two eras are ever exactly the same.
“Demographic trends are much more unfavorable, while the U.S. national debt is on the rise. These two differences therefore could pose significant headwinds to growth in the coming years not experienced in the early 1950s,” he wrote.
