With persistent inflation, war-induced energy price shocks, and rising geopolitical tensions gripping the global economy over the past four years, some of Wall Street’s most-respected names have repeatedly warned the U.S. could be headed for a repeat of the stagflationary 1970s.
Even JPMorgan Chase CEO Jamie Dimon has suggested on multiple occasions that stagflation could make a comeback, with his latest warning coming at AllianceBernstein’s Strategic Decisions conference just last week. Dimon didn’t outright predict a repeat of the toxic combination of high inflation and anemic economic growth that was last seen in the U.S. in the 1970s at the conference, but he said he believes the odds of a nightmare stagflationary scenario are “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 has been so extraordinary, how can you tell me it won’t lead to stagflation?”
“It might not,” he said. “But I, for one, am quite prepared for it.”
Now though, Henry Allen, a macro strategist at Deutsche Bank, is pushing back on the 1970s narrative. “In recent weeks, we’ve started to see increasing comparisons with the early 1950s and today,” he explained in a Tuesday note to clients.
Allen noted that both today’s economy and the economy of the 1950s featured a strong labor market, steadily rising stock prices, increasing geopolitical tensions, and a short-lived surge in inflation.
“Time will tell if the early-1950s offer a good parallel, but if these similarities do hold, there could be a lot of scope for optimism,” the strategist said. “The good news is that the early 1950s were a period of decent economic and productivity growth.”
Four similarities to the post-war 1950’s economic boom
1. An eerily familiar inflation wave
When most Americans think of the 1950s, they don’t think of inflation. The post-war era is often romanticized as a period of economic and social stability; it’s even been labeled the “Golden Age of Capitalism” by some. In many ways, this golden era economic narrative holds true, but just like the 2020s, the 1950s was also a decade of challenges—and they began with a wave of Consumer Price Index (CPI) inflation.
“U.S. inflation spiked from late-1950 into 1951. At its peak in February 1951, CPI inflation peaked at 9.4%,” Allen noted. “That’s a very similar peak to today, when CPI inflation rose to 9.1% in June 2022.”
View this interactive chart on Fortune.com
After this initial surge of consumer prices in 1950 and 1951, caused in part by the start of the Korean War, inflation fell throughout the rest of the 1950s, however. It’s a pattern that is “a closer parallel” to the 2020s, than the 1970s, according to Allen. “So far, we haven’t seen the sort of persistence that occurred in the 1970s, when CPI inflation remained above 4% for almost a decade,” he said.
Instead, in the 2020s, after hitting its 9.1% peak in June 2022, inflation has fallen substantially, hitting 3.4% in April.
View this interactive chart on Fortune.com
2. Historically low unemployment
The labor market was the powerhouse of the U.S. economy for much of the 1950s. The unemployment rate averaged roughly 4.5% during the decade, and hit a low of just 2.5% in 1953. Now, even with stubborn inflation, rising interest rates, and geopolitical tensions weighing on consumers and businesses, the 2020’s economy is walking a similar path, moving in on a more than 70-year-old labor market record.
Allen noted that if Friday's jobs report shows the unemployment rate remained under 4% in May, it would mark the longest stretch of below-4% unemployment since the early 1950s, when the economy saw a 35-month period of sub-4% unemployment.
3. Rising markets
The stock market’s meteoric rise since 2020 is another undeniable parallel between the 1950s and the 2020s. Between January 1950 and the end of 1954, the S&P 500 more than doubled, rising 100 to 225, despite a brief recession caused partly by the decline in military spending following the end of the Korean war.
Similarly, between the beginning of 2020 and today, the S&P 500 has soared more than 62%, even after a brief, pandemic-induced drop in March 2020 and multiple wars abroad. And while the stock market’s performance in the 2020s hasn’t been as impressive as it was in the early 1950s, it definitely doesn’t look like the 1970s. Between January 1970 and the end of 1974, the S&P 500 sank 45%.
4. Geopolitical risk
Geopolitical tensions were a major feature of the 1950s, just like they are today, as the staunchly capitalist U.S. sought the “global containment” of communism after World War 2, while the Soviet Union attempted to spread its own ideology. This war of economic and political systems manifested in ongoing tensions between the world’s superpowers, a persistent threat of nuclear war, and even helped spark the Korean War.
It was a time of “heightened geopolitical risk,” Allen noted, explaining that “this was in the early phase of the Cold War, when there were major tensions between the U.S. and the Soviet Union, and those tensions were evident in several regions.”
Similarly, today, the global economy is facing a persistent threat from ongoing conflicts in Ukraine and Israel. These battles have routinely caused issues for businesses and consumers in recent years, precipitating a global oil and natural gas price spike in 2022, and spurring a shipping crisis in the Red Sea more recently.
Two key differences between the 1950’s and the 2020’s
Despite the many similarities between the 1950s and the 2020s, Allen noted that there are also a few key differences, and said “we shouldn't exaggerate the comparison.”
First, the strategist pointed out that U.S. government debt is surging now, while it was heading in the other direction in the 1950s. “There was still a major deleveraging taking place after WWII, with the U.S. government debt burden falling substantially. That is very different to today's environment, where the public debt-to-GDP ratio has been on an upward trend over recent decades,” he wrote.
To his point, after soaring to a peak of 119% in 1946 after World War 2, the U.S. debt-to-GDP ratio sank dramatically during the 1950s, from 85% at the beginning of the decade to just 53% by 1960.
On the other hand, during the fourth quarter of 2023, the U.S. debt-to-GDP ratio topped 121%, slightly above its post-World War 2 high. And the Congressional Budget Office expects that figure to rise to 166% by 2054.
The second key difference between the 1950s and the 2020s lies in birth rates. Allen noted that birth rates surged in the 1950s, leading to the “baby boomers” nickname of the generation that was born in that post-World War era.
“This was a very favorable trend economically, as it meant there was an expanding cohort of younger workers that would enter the labor force over subsequent decades,” he wrote. “By contrast today, birth rates have been declining and the U.S. population is aging.”
In 1955, the U.S. fertility rate—the number of children that would be born to a woman if she lived to the end of her childbearing years—was 3.42. Today, that number has been nearly cut in half to just 1.79.
Some experts also pointed to stubborn inflation and decelerating GDP growth as evidence that stagflation could be on its way earlier this year. CPI inflation has been stuck in a range between 3% and 3.5% for nearly a year now, and GDP growth sank from 3.4% in the fourth quarter of 2023 to just 1.6% in the first quarter of this year.
“I’m starting to get whiffs of stagflation, dare I say…I know that’s a dirty word in a lot of circles,” Steve Sosnick, chief strategist at Interactive Brokers, told Bloomberg when discussing these numbers in late April.
However, Bank of America economists came out against the Stagflation narrative in a May 16 note to clients, backing up the view of Deutsche Bank’s Allen. They argued the economy isn’t likely to slow soon, despite more persistent inflation, due to the strength of the U.S. consumer.
“After the miss on 1Q GDP growth and continued upside surprises on inflation, the "stagflation" narrative has resurfaced. We push back,” economist Aditya Bhava wrote, noting there is evidence of “robust” consumer demand in the economy, particularly in the services sector, that should prevent 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 had a renaissance over the past year, rising 2.7% after a nearly two decade period of pain where annual productivity growth averaged just 1.5%.
“Indeed, there are reasons to believe that can continue,” Allen said. “Low unemployment is often a spur to productivity growth, because firms don’t have the ability to hire from a large group of unemployed workers. As such, this incentivises them to invest more in new technologies, and to help their existing staff become more productive.”
The Deutsche Bank strategist pointed to emerging technologies, including AI, as a potential catalyst for U.S. productivity growth as well, arguing “this suggests there could well be some upside risk to economic growth over the years ahead.”
Rising productivity could help combat inflation by reducing unit labor costs as well. “If this happens, then it becomes more likely we can avoid a period like the 1970s, when inflation was persistent,” Allen said.
Overall, the economy—and stock market—should perform well if we see a repeat of the 1950s, rather than the 1970s, according to Allen. But he also had a warning for investors: no era is exactly alike.
“Demographic trends are much less favorable, whilst the U.S. national debt is on an upward trajectory. So both those differences could present important headwinds to growth over the years ahead, which weren't experienced in the early 1950s,” he wrote.
