UBS’s forecast for the U.S. economy edging toward another “Roaring ’20s” reflects an unusual mix of optimism and caution.

According to Jason Draho, the head of asset allocation at UBS, several positive economic indicators are aligning that could result in a prolonged period of growth. These conditions include sustained GDP growth, controlled inflation, and favorable interest rates. The U.S. economy is showing resilience, with real GDP increasing by 3% in Q2 2024 and inflation settling within an acceptable range at 2.5%.

This potential boom is being driven by a combination of factors on both the demand and supply sides. Draho notes that recent developments—such as an easing of supply chain constraints, increased consumer spending, and a more balanced labor market—are all contributing to this positive outlook. Additionally, many investors are now moving toward a “soft landing” consensus, suggesting that the U.S. economy could avoid the deep recession that some had predicted in the wake of high inflation and aggressive interest rate hikes by the Federal Reserve.

Despite the progress, unemployment remains a sticking point. The labor market, while cooling, has yet to stabilize completely. The Sahm Rule, an indicator of an approaching recession, was triggered in July, showing a slight increase in unemployment. Although this signal has caused concern, Draho believes that the labor market still holds potential for growth, particularly if the Federal Reserve prioritizes maintaining full employment even at the cost of slightly higher inflation. This trade-off could allow the economy to continue expanding without triggering a significant downturn.

A broader issue for the Fed is whether it will adjust its longstanding 2% inflation target. Some, including JPMorgan’s CEO Jamie Dimon, have floated the idea that a slightly higher inflation rate might be tolerable if it helps sustain growth and employment. Draho suggests that the Fed may not publicly acknowledge this shift, but recent moves, such as a 50-basis-point rate cut, indicate that policymakers are leaning toward supporting a “Roaring ’20s” outcome.

Even with the promising economic signs, risks loom on the horizon. The U.S. election cycle and escalating geopolitical tensions, particularly the conflict in the Middle East, could affect market stability. Moreover, the comparison to the original Roaring ’20s—an era that ended with the Great Depression—serves as a reminder that no economic boom is guaranteed to last indefinitely.

Draho and other experts remain cautiously optimistic, suggesting that if the right conditions continue, the U.S. could enter a new golden age of economic prosperity by 2025. However, achieving this outcome will require careful navigation of inflation management, labor market stabilization, and the global economic landscape. For now, the possibility of a booming economic cycle is higher than it has been in recent years, signaling renewed hope for sustained growth in the U.S. economy.