McKinsey predicted 4 possible scenarios for the U.S. economy. Which is most likely to happen?

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McKinsey predicted 4 possible scenarios for the U.S. economy. Which is most likely to happen? In one of his coaching comments delivered to the Valens Research workforce, Rob Spivey, Director of research at Valens Research, said that practically overnight, everyone seemed to have become an “expert” on the U.S. economy. The top ideas from these people implied that the U.S. will remain a superpower for decades… or that the country’s time is over and China will steal the title. Consulting firm McKinsey added fuel to this fire. It published a report on global wealth in late May, stating that USD 48 trillion of U.S. wealth is on the line this decade. The report wasn’t exactly bullish… Basically, what McKinsey’s report was saying is that the next decade isn’t going to be like the previous two. Since the Great Recession, investment returns—or "paper gains"—seriously outpaced actual U.S. economic productivity. According to Spivey, that’s not sustainable in the long term… [Paper Gains: Unrealized capital gain on securities held in a portfolio based on a comparison of current market price to original cost.] The report also outlined four possible scenarios for the U.S. economy. Based on Spivey and his team’s analysis, two of these scenarios are more likely than the others. That’s why in today’s article, we’ll look at all four scenarios and explain what each might mean for investors like you. Here’s a summary of the outcomes according to McKinsey’s report: A continuation of the past 15 years—meaning, more paper gains and economic stagnation A high-inflation scenario like the U.S. saw in the 1970s A “Japanification” of the U.S. economy A significant productivity boom that leads to a soaring market The first scenario, a continuation of the past 15 years, is possible although not ideal. Spivey said this would mean running the risk of a serious investment recession into the future where even if the economy is growing, investment prices would fall. Basically, it’s not sustainable for asset prices to surge without the economy backing them up. The second option is for the U.S. to see a repeat of the 1970s. The economy would get stronger while asset prices suffer. According to Spivey, this is also possible. However, inflation has already started to come down and what the market is seeing is much more like the late 1940s than the 1970s. The economy has been chugging along, more or less, despite the challenges the market has faced coming out of the pandemic. The third option is scary—and it’s one of the two most likely outcomes in Spivey and his team’s view. Here, the “Japanification” of the U.S. economy means investments and the economy would completely stagnate, and companies would shrink. High interest rates and a string of recent bank failures have put pressure on the lending market. This could cause banks to string along weak borrowers rather than letting them default. However, Spivey and his team believe the U.S. has the strength and position to avoid this scenario. Why? It’s because the U.S. doesn’t face some of the governance issues that hurt Japan’s bank sector. U.S. banks aren’t protected by complex conglomerate systems. So, they don’t have as much of an incentive to create “zombie” companies that can’t afford the interest on their debt. [“Zombie” Companies: Companies that need bailouts to operate, or indebted companies that are able to repay interests on their debts but not repay the principal.] The “Golden” Scenario Spivey said the fourth option is that the U.S. gets a significant productivity boom that drives the market higher. McKinsey compared this scenario with something longtime readers are familiar with: The post-World War II economic boom. The supply-chain supercycle will be a HUGE factor in making this scenario a reality. That’s the wave of infrastructure investment that’s just getting underway in the U.S. Construction spending is booming… and it can keep rising for years. What’s more? Companies are investing in infrastructure and supply chains, and the U.S. government is supporting them. That clears the way for gross domestic product (GDP) growth. McKinsey highlighted that while this scenario would lead to a lot more GDP growth, it would also lead to less wealth creation. Inflation would be slightly higher than the 2% target, so multiples wouldn’t expand as much. BUT! In terms of setting the U.S. on a path towards long-term wealth creation, this scenario is ideal. — To sum it all up… According to Spivey, these are just long-term outlooks… but the markets can change fast. So, as an investor, you shouldn’t put too much faith in any one scenario as absolute truth. McKinsey recognizes the same potential Spivey and his team see in the supply-chain supercycle. In the near term, the U.S. needs to focus on and invest in its manufacturing capacity. At present, the government and corporations are ramping up investments in facilities, roads, bridges, and other kinds of infrastructure. U.S. production and supply chains will become more efficient as a result. That’s why Spivey and his team are so bullish on the supply-chain supercycle! For them, the country’s long-term wealth and economic health depend on it. Hope you’ve found this week’s insights interesting and helpful. EXCITING NEWS AHEAD The world of work has shifted, and there’s no going back. The barriers to entry have never been lower for talented professionals to work independently, and today’s massive external workforce is hardly a pandemic-produced fad. Business owners can only survive in the new work landscape by partnering with this deep talent pool. 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