Tags: economic | expnasion | growth | threats

5 Threats That Could Derail Economic Expansion

5 Threats That Could Derail Economic Expansion
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By Monday, 30 April 2018 01:31 PM Current | Bio | Archive

Despite trade tensions and the Federal Reserve and European Central Bank gradually tightening monetary policy, the International Monetary Fund sees the global economy advancing 3.9% in 2018 - the best year since 2011. This provides a powerful backdrop for a U.S. economy soon to enter its ninth year of recovery.

Yet, even with the economy adding 202,000 jobs monthly in the traditionally soft first-quarter and publicly traded companies posting huge profits, we should not be lured into complacency.

Here are five things that could derail the expansion.

1. Auto Sales and Emission Standards

In recent years, improvements in fuel efficiency and longer expected vehicle lives helped auto makers sell more high-priced and profitable SUVs and pickups. However, drivers are now saddled with longer loans and gas prices are rising, sales have leveled off and lower priced, thin-margin sedans could become more attractive.

Auto makers are struggling to accommodate higher EPA fuel economy standards and are asking for a reprieve. However, Detroit has been investing big in electric vehicles and bending mileage standards would undermine transition from gasoline and diesel. The Trump administration should back off plans to accommodate manufacturers and let the required fleet average rise to 50 mpg by 2025 as planned - a stampede into electric vehicles could set off another round of robust growth.

2. Housing and Student Debt

Economists have been counting on a pickup in new home sales to compensate for slower growth in the auto patch but new home construction has not recovered to pre-recession levels.

Millennials should be in their prime years for buying first homes but are saddled with massive student debt. On the supply side, local governments have laid on onerous building codes, zoning laws and compliance costs that make single home and apartment building more costly.

Real debt relief - beyond programs that push college graduates into low paying public-service jobs to obtain write downs - and Trump working with the state governors to release builders from onerous municipal bureaucracies are needed to increase demand and keep home ownership affordable and contributing to growth.

3. Worker Shortages and Immigration Dysfunction

In many places, jobs go begging for skilled applicants, and state-supported job-training programs have plenty of vacancies. At the same time, the labor-force participation for prime working-age adults remains depressed below pre-financial crisis levels.

Entitlements reform is sorely needed to get more Americans working-for example, one-in-20 prime working-age adults is on Social Security disability. And immigration reform that replaced the diversity lottery with a system favoring labor-force needs would help a lot.

Czech Republic and other Eastern European countries with rapidly growing manufacturing sectors and labor shortages are turning quickly to robots and the artificial intelligence that runs them. Overcoming resistance here will be key to keeping growth going.

4. Trade and Budget Deficits

The growing trade deficit - especially with China - is a huge drain on aggregate demand, and a large federal budget deficit is required to hoist domestic demand to compensate. The twin deficits must really be fixed simultaneously.

That will require brinksmanship far beyond the targeted tariffs and entitlement reform. If not, too much foreign borrowing could ultimately send interest rates up and out of control-no matter how much money the Fed prints.

5. Political Demagoguery and Scapegoating

Both political parties are guilty of holding up progress. For the Democrats, it's resistance to reforming what are plain abuses of the social safety net and insistence that the diversity lottery give low-skilled immigrants continued preferences over new entrants with abilities in short supply. For Republicans, it's insisting that too many Obama-era regulations, such as automobile mileage standards that will help free us of dependence on imported oil, don't make economic sense.

Of all the political foolishness, the worst is the recent railing by both Bernie Sanders and Donald Trump that Amazon is too big - throwing cold water on the tech-sector stocks. Any company that can outwit Google, IBM and Microsoft to accomplish dominance in cloud computing and take on the FedEx and UPS duopoly in express delivery-not to mention stake out major roles in drones, autonomous drive cars and artificial intelligence to compete with industry giants in aerospace and autos-is one we want to feed, not break up.

Peter Morici is an economist and business professor at the University of Maryland, and a national columnist. He tweets @pmorici1

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Monday, 30 April 2018 01:31 PM
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