Capacity utilization<\/strong><\/p>\nDaalder says the current US industrial capacity utilization rate of 76% suggests that there is
\nstill enough spare capacity to be put to work, though this metric can be unreliable, given
\nthat the service sector has become much more dominant.<\/p>\n
\u201cThe ability to ramp up services domestically depends much more crucially on the availability
\nof skilled labor,\u201d he says. \u201cThe unemployment rate is already pretty low, which raises the
\nquestion whether there is enough flexibility to match the increased demand for these
\nservices. Put simply: stimulating an economy that is already running at a high speed
\nintroduces the risk of a wage-inflation spiral.\u201d <\/p>\n
\u201cThere is a less painful option as well. Goods and services can be produced outside the US
\nand imported, thus lowering the risk of an overheating domestic economy. In fact, this is the
\nsituation that is often referred to as the \u2018Twin Deficit\u2019 by economists: high (and rising)
\ngovernment deficits tend to go hand in hand with high (and rising) trade deficits.\u201d
\n\u201cPut another way: if you stimulate the economy, part of it may indeed lead to higher
\ndomestic production, but part of it may \u2018leak away\u2019 to your trade partners. <\/p>\n
This amount of
\nleakage will of course be higher if the domestic economy is already running at its max.
\nAlmost all experts agree that in the current situation, it is very likely that the higher
\ngovernment deficit will lead to a boost in the current account deficit, the only question being
\nby how much. It makes you wonder whether this was what Trump had in mind when he was
\ntalking about \u2018Making America Great Again\u2019.\u201d<\/p>\n
Tariffs may be toxic<\/strong><\/p>\nDaalder says Trump\u2019s latest plans for tariffs on imported aluminum and steel add further fuel
\nto the fire. \u201cEconomists will tell you that starting a trade war is a bad decision under all
\ncircumstances, but doing so while you are stimulating an economy that is already near full
\ncapacity is a macroeconomic poison cocktail,\u201d he says.<\/p>\n
\u201cBy cutting off the external sector as a potential ventilation point that can alleviate some of
\nthe pressures that are being build up in the domestic economy, you only increase the chances
\nof an overheating system. Higher wages, which are already on the rise, and higher inflation,
\ndue in part to the tariff increase, will certainly cause the Fed to raise rates more aggressively,
\nthereby countering the effect of the tax cuts. Additionally, higher interest rates and bond
\nyields could in theory trigger a strong rise of the dollar, which would only hurt the US in
\ninternational trade.\u201d<\/p>\n
It remains just theory<\/strong><\/p>\nSo, is the US heading for economic disaster? Not necessarily, says Daalder: \u201cOne potential
\npositive is that no tariffs have been levied yet, and economic theory is by definition just that:
\ntheory. For example, one of the bigger puzzles that we currently see in financial markets is
\nthe continued weakening of the dollar, defying the ongoing rise of the interest rate
\ndifferential in favor of the US. It indicates that higher rates do not automatically lead to a
\nhigher dollar.\u201d<\/p>\n
\u201cProbably the most important uncertainty is the one that is linked to the US economy
\nrunning at or near full capacity. If it is, then there is no doubt that the current policy mix is a
\nmistake of historical proportions. In that case, roof fixing would have been the better
\noption.\u201d
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