The US economy is growing fast and the unemployment rate is very low, however there are crawling risks that might turn the current bull into a bear:
Higher Interest Rates The Fed is constantly raising the prime rates to damper crawling inflation.
Despite the Federal Reserve’s concern abut rising inflation, which currently sits around 2%, this is quite low for a boom economic cycle.
The Fed’s ability to manipulate interest rates (through higher prime rates) is often exaggerated. The past two months show the market interest rates were mainly stagnant. This is similar to the late 90s when the Federal Reserve was not able to harness the financial expansion.
Despite the higher prime rates, consumers keep spending, banks keep lending, stocks keep growing, and employers keep hiring; showing the market’s resilience to higher prime rates.
Slowing Real Estate. One of the biggest concerns among market analysts is the decline in homes sold over the past six months. The higher mortgage rates, caused by the higher prime rate, has decreased the home buyers’ affordability.
Trade Wars The White House, with its mercantilism approach, is too optimistic about the US’ ability to close the trade gap. The White House’s “easy war to win” is a lose-lose game to everyone.
Mercantilism is a popular misconception about how the economy works. The US trade deficit is natural and is a privilege to the US. It is caused by the “Capital Account Surplus.” The US is the world’s capital market: while the US economy accounts for less than 20% of the world’s economy, the US capital market is about 50% of the world’s capital market. Therefore, it is natural (and healthy) to see the US attracting a tremendous capital inflow from the rest of the world, which means the US would have a huge trade deficit (excess imports over exports.) The US is the world’s Manhattan.
Trade policies such as higher tariff would result in Stronger US Dollar (the monetary substitution effect) and Economic Inefficiencies (the real economy substitution effect). Nonetheless, the White House has shown flexibility in reaching deals with its’ neighbors and the EU. The only big concern is the US trade war with China, which seems to be an unfortunate popular policy. The market is strong enough to overcome this problem, especially through the stronger dollar and weaker Chinese Yuan.
Skill Shortage The populist wrath against immigration, accompanied with low unemployment, might cause lack of skilled workers to fill the jobs that an economy needs when growing faster than usual. This is one of the biggest threats for sustainability of the high economic growth.