World Economy

US Economy Could Crash in 2019

Higher tariffs on steel and aluminum could end up destroying instead of creating jobs for US workers
A US steel plant in Braddock, PennsylvaniaA US steel plant in Braddock, Pennsylvania

The US economy is on a tear right now, but it can’t last for long, says Joerg Angele, a senior economist for Austria’s Raiffeisen Bank International and the winner of the February Forecaster of the Month award from MarketWatch.

 “I’m very optimistic about the US economy in the medium term,” Angele said in a phone interview from Vienna. But he fears the growth isn’t sustainable. “Everything is pointing to an overheating economy.”

The economy is already growing much faster than its long-term potential rate of around 1.5%, with the unemployment rate “way below” its long-term natural rate of around 5%, Angele said. And that’s before the impact of tax cuts and budget stimulus hits. The economy has “absolutely no need” for the additional stimulus.

He expects the economy to grow at almost 3% this year. The jobless rate should drop from 4.1% currently to about 3.5% next year.

By the middle of 2019 or so, the US economy will probably be in a sharp slowdown, and perhaps even a recession, the economist said. He expects a positive output gap of two to three percentage point. The economy would look a lot like the overheated economy of 2000, which fell into a recession the next year. “It can’t go on forever,” he said. “The bubble will burst.”

He sees no reason why the Federal Reserve won’t be aggressive about raising interest rates to cool the economy. He expects four rate hikes this year and possibly two more in early 2019. Even so, inflation will creep up to an annual rate of 2.5% or so.

The rising tide of protectionism is a wild card in his forecast, he admits. He doesn’t expect it to have much impact on either economic growth or inflation as long as “everybody calms down, talks and finds solutions.” But if a trade war erupts, “it will be disastrous for the US.”

“I’m hopeful it won’t escalate,” he said.

Trump Hurting Own Economy

President Donald Trump’s proposal to levy a 25% tax on steel imports and a 10% tax on aluminum is exceptionally ill advised because restricting free trade is likely to damage the economy and undermine the nation’s long-term security despite claims to the opposite.

The proposed tariffs are themselves a threat to the country’s national and economic security.

The administration claims that the tariffs are needed for national security reasons because domestic production of steel and aluminum is vital for the national defense effort.

Of equal concern to the US economy are the effects of the tariffs on the nation’s domestic industries that rely on aluminum and steel imports. The US automobile industry, for one, is apprehensive about the effect on the production costs of cars, trucks, buses and other vehicles, particularly when compared to overseas car companies. The construction industry is also worried about higher costs as the proposed tariffs will increase the prices of needed essential materials, especially for the construction of commercial buildings.

Energy companies are concerned about the several hundreds of millions of dollars increases in the cost of Keystone and other pipelines. Even Pepsi, Coke and Coors are facing higher costs as the price of aluminum cans will increase, which in turn will cause a ripple effect on the prices of canned soda and soups.

Agricultural commodity groups are also legitimately worried that access to important export markets for their farmers will be restricted or terminated because of “countervailing measures” by other countries: i.e., the imposition of high tariffs on some US exports. Such actions are permitted under the World Trade Organization agreements when a country like the United States is deemed to have violated its commitments to open markets for products like steel and aluminum.

American soybean growers and wheat farmers, for example, are worried that important potential markets for US grain and oil seed exports, such as China—and other countries like Japan from which America imports steel and aluminum products—will impose retaliatory high tariffs on US agricultural commodities.

In addition, ironically, despite some of the claims being made by supporters of high tariffs, any gains in employment in the US mining, steel and aluminum industries will very likely be more than offset by job losses in other sectors of the US economy. Higher tariffs on steel and aluminum could well end up destroying instead of creating jobs for US workers, when all of their economy-wide employment effects are taken into account.

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