Trumponomics may be wrong medicine for US economy

WASHINGTON: Tax cuts, deregulation and more federal spending advocated by the incoming Trump administration are a classic remedy for economic stagnation and long unemployment lines.

But that medicine may be too strong for an economy that has grown for eight years, with wages now rising and the jobless rate near what many economists consider "full" employment.

A Reuters analysis of regional jobs data and historic trends suggests that stimulus could boost demand for workers in areas where labor is already tight.

That in turn, could stoke inflation, force the Federal Reserve to raise rates faster than expected, and make recession a greater threat.

What the country needs now, labor economists and Fed officials say, is small-bore surgery - policies focused on depressed regions in its rural areas and industrial heartland, which fell out of sync with the global economy and emerged as Donald Trump´s power base, helping him win the presidency.

"When you think of what Trump is inheriting, it is an economy in which much of the recent crisis has been solved," said Jed Kolko, chief economist for the job site indeed.com.

"The challenges that remain are the ones that are harder to fix," he said, citing as examples the decline of the nation´s coal belt or the rise in drug abuse in "middle America´s" depressed communities.

Trump takes office on Friday promising to strengthen the middle class and put millions of sidelined workers back to work by spending big on the nation´s aging infrastructure, playing tough on trade, and cutting taxes to spur investment.

There is an argument to be made about using a burst of spending to give the economy a jolt after a long spell of tepid growth that has rarely exceeded 2 percent.

Yet Fed officials are increasingly worried that since the U.S. economy is already performing close to its potential, such a growth spurt could lead to labor shortages, unsustainable wage hikes and too much rather than too little inflation.

In the weeks since the Nov. 8 election, the focus of central bankers has shifted from how to parse out gradual rate increases that could sustain unemployment around its current levels, to the risks of growth that comes on too fast.

The periods where unemployment has gone too low, without a Fed response, "have ended in some kind of recession," Atlanta Federal Reserve bank president Dennis Lockhart said in Naples, Florida, last week.

Uncertainty as to how far the jobless rate can drop could make the central bank wait for too long or slam on the brakes too hard, Lockhart said.