Comparing Yesterday, Today and Tomorrow

“Study the past if you would define the future.”

~ Confucius

Question: What do you think about the comparisons between today’s economy and that of the Roaring 1920’s? 

Answer: Parallels drawn between today and the Roaring Twenties are fun, interesting, and although primarily for amusement purposes, in some instances they can be enlightening. We’ll explore the details and let you decide if history will repeat itself. 

In 1918 the Spanish Flu appeared as a deadly global pandemic killing more people than the Black Plague of the 14th century. At the same time, World War I was winding down officially ending on November 11, 1918. The Paris Peace conference took place in 1919 with President Woodrow Wilson contracting the virus on April 3, 1919, while negotiating the end of World War I. The Treaty of Versailles was signed on June 28, 1919. Reparations for the losses and damages were about to begin after much of Europe had been destroyed. The U.S. helped feed and reconstruct while enjoying favorable economic conditions themselves. These events and others set the stage for the Roaring Twenties. 

During this time, the spread of technological advancement benefited many with electricity flowing and mass production of consumer driven technology including home appliances, autos, and indoor plumbing. The use of consumer credit drove growth while improving the quality of life for many. At the same time income inequality increased. It’s easy to identify similarities between then and now, with the real test materializing as we wait what’s next and experience the consequences of COVID-19 shutdowns. 

Supply-side economics were introduced during the 1920’s with lower taxes lifting the economy to increased prosperity. In contrast, today’s demand driven fiscal and monetary stimulus techniques are intended to influence consumption behavior. Innovative and disruptive technology such as artificial intelligence, autonomous vehicles, and robotics are expected to help drive today’s economy, much like the improvements seen in the 1920’s. The work-from-home phenomenon is an example of rapid and disruptive change that will evolve throughout the future. The lessons to be learned depend on whether policy can evolve into real growth and increased productivity. 

During the Roaring Twenties, radio connected citizens from coast to coast. Today the internet links individuals around the world. The Roaring Twenties eventually led to The Great Depression. Will history repeat itself? That depends. According to the Bureau of Economic Analysis, excess consumer savings have dropped to $1.7 trillion from the $2.5 trillion averaged during the start of the pandemic. The pre-pandemic level was $1.3 trillion. This indicates that consumers are easily burning through cash. Does this mean we’ll see another stimulus, and what could justify that action? Unfortunately, we may have more questions than answers at this time. 

Economic forecasting is an art and a science utilizing quantitative data while also being dependent on human behavior which can be quirky, unpredictable, and often amusing. For instance, some experts thought that hemlines could predict economic activity. In 2010, hemlines data between 1921 and 2009 was studied by economists based on the 1926 work of George Taylor who stated that he could predict the economy based on hemlines. Results showed that during difficult economic times, hemlines lengthened and during prosperous periods, hemlines crept upwards. I’m not sure how the work-from-home casual wardrobe and yoga pants trend fit into this study. 

Another so-called trend forecaster is car colors. BASF, a chemical company, and PPG Paints provide interesting information on color trends and economic forecasting. Supposedly, conservative shades of black, white, and silver can take on gloomy tones and morph into greys, browns and mirroring societal shifts telegraphing less euphoria. In contrast, primordial red signals the “can-do” spirit, while brighter blues and greens reflect technical finesse, advancement, and hope for the future. One last prophetic prognosticator is the “lipstick effect” referencing women’s tendencies to make small dollar purchases to enhance their moods. Was the affordable luxury replaced with other purchases during the pandemic because of masks? 

All kidding aside, it is helpful to watch trends and economic indicators as we consider similarities between past and present. Consider watching indices such as real disposable personal income, producer prices, consumer prices and confidence and employment indicators to help guide your planning process which should be based on your personal financial situation and goals. Stay focused and plan accordingly. 

All investments are subject to risk, including loss. Past performance is not indicative of future results. There is no assurance the trends mentioned will continue. Material created by Raymond James for use by its advisors. The information contained herein has been obtained from sources considered reliable, but we do not guarantee that the foregoing material is accurate or complete. Raymond James is not affiliated with any other entity or individual listed herein.

The opinions expressed are those of the writer as of August 1, 2021, but not necessarily those of Raymond James and Associates, and subject to change at any time. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Past performance does not guarantee future results. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.