- - Tuesday, November 27, 2018

The Trump economy is sizzling, but the stock market is behaving like a recession is just around the corner. Equity prices have swooned then recovered many times, and whether the economy collapses depends mostly on Washington policymakers wrecking things.

Americans emerged from World War II with worn-out cars and appliances, and the rush to replace sent the economy surging. Once consumers were satiated, the collapse in demand that followed precipitated a slowdown, and such boom-bust cycles repeated for several decades.

Beginning in the 1980s, an economy more based on services and technology became less vulnerable to such cyclical swings. And nascent artificial intelligence and logistics software helped businesses better anticipate demand to avoid overproduction and layoffs.

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Until the financial crisis — which was precipitated by the disastrous government policy decisions to repeal Glass Steagall and ignore reckless mortgage lending and securities trading by banks, insurance companies and other, shadowy financial institutions — growth and unemployment became much less variable. Economists call these decades the Great Moderation.

Now with the financial crisis behind us, Federal Reserve Chairman Jerome Powell is optimistic the economy can continue expanding and unemployment in check, but both the Fed chairman and president are giving stock investors a bad case of nerves.

Trade with China and our allies needs fixing. Everything from WTO rules to international postal rates has been rigged to give America a whopping trade deficit. Despite being the most competitive economy on the planet, we are racking up foreign debt to finance our deficits like pre-crisis Greece.

The broad tariffs on Chinese imports may be essential to resetting our trading relationship, but the administration has them substantially wrong.

From bicycles to pleasure boats, the administration has levied tariffs on imported components but not on the final products. That is driving manufacturers to move production or source more outside the United States — and basic product design, software, logistics and a multitude of other supporting service activities will follow.

The Fed is correct to gradually move up interest rates, because permanently low interest rates overinflate land and other asset values. However, Fed policy statements indicate its target federal funds rate is about 3.4 percent by early 2020, and that’s well above what economists estimate is the neutral rate of interest that neither slows nor overheats the economy.

Mr. Powell, a lawyer and untrained and inexperienced at managing market expectations, is rattling equity investors by displaying agnosticism about our knowledge of such limits. If he doesn’t change his tune — or perhaps get better advisers to write his score — he could literally scare the recent adjustment in stocks into a bull stampede and precipitate a recession.

The boom for big tech appears over as Facebook, Apple, Amazon, Netflix and Google are nearing market saturation and all face tough regulatory challenges. But where technology takes away, it also gives.

Artificial intelligence and robotics are spreading through the economy. Businesses are investing heavily in these and worker training, and investors need to seek out the next round of stars. Some will be among old line, dull companies like Walmart, which is learning to use the web to compete effectively with Amazon but mostly it’s companies that are developing technologies like drones and driverless vehicles and those that build the robots and write the software that multiply the productivity of ordinary workers.

The rotation out of big tech and the difficulty of finding these new stars — especially, when startups are staying private longer — makes stocks more volatile and equity investing more difficult. In the fullness of time, markets work these things out.

For now, the two most critical events are the December meeting of the Fed policymaking committee, when it is set to raise federal funds rate to nearly 2.5 percent and give new guidance about how much further it intends to push that rate next year.

And Mr. Trump’s decision to further raise tariffs on Chinese imports if no new progress is achieved at the Dec. 1 conclusion of the G20 Summit. Watch closely for whether he broadens tariffs to include more final goods that are disadvantaged by duties on their imported components.

A crisis in the Middle East is always possible, but for now oil prices don’t appear headed for $100 a barrel and whatever else can happen is beyond even the much storied forecasting abilities of economists.

• Peter Morici is an economist and business professor at the University of Maryland, and a national columnist.

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