The U.S. economy is on a tear. How long can it last?

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Elkhart County, Ind., bills itself as the recreational-vehicle capital of the world. It could just as easily describe itself as a barometer of the U.S. economy.

A decade ago, the financial crisis clobbered Elkhart County’s factories and devastated its job market. Nearly one in 10 workers fled the town of 200,000 people to hunt for new employment elsewhere.

Today? RV sales are booming, employment is surging and manufacturers have applied for permits to open 50 factories. To fill 9,000 jobs at those new plants and other local businesses, companies are scrambling to find anybody willing to work – even soon-to-be-released inmates from state prisons.

"Employers are asking, ‘Do we know when the next batch of ex-offenders will be released?’” says Mark Dobson, chief executive of Elkhart County’s Economic Development Corp. “‘Can we get their résumés? Can we do a job fair down at the local correctional facility?’”

It’s just one sign of how stretched the labour market has become in the area, where employment grew by nearly 5 per cent in 2017 and is on track to be even stronger this year. Entry-level wages at local fast-food restaurants have soared past Indiana’s US$7.25 minimum wage to US$14 or US$15 an hour.

“We’re kind of harkening back to the heyday of Detroit when, perhaps, mom or dad went to work at Ford or GM and they could make more than enough money to keep food on the table and buy a really nice home,” Mr. Dobson says. “We emulate that today.”

For Elkhart County, and for the U.S. in general, the good times are most definitely back. Unemployment across the country hovers around 4 per cent, near its lowest level since the turn of the century. On Friday, the Commerce Department reported that economic output surged 4.1 per cent in the second quarter, the strongest performance since 2014.

While the prosperity surge is great news for Americans, it’s a particularly sweet development for Donald Trump. The U.S. President credits his America First policy for sparking the boom. As the U.S. heads toward crucial mid-term elections in November, Mr. Trump and other Republicans are pointing to galloping growth and a drum-tight jobs market as proof of their skill in managing the economy.

But is that really true? Independent, non-partisan observers such as the Congressional Budget Office are skeptical the current boom will endure. The CBO sees growth sliding to 2.9 per cent in 2019, 2 per cent in 2020 and a mere 1.5 per cent in 2021.

“What you’re seeing here is a sugar high,” says Joel Naroff of Naroff Economic Advisors in Holland, Penn. “I expect the rest of this year to be good, and the first half of next year, but as the sugar rush fades, growth is going to slow sharply in the second half of 2019.”

Any slowdown would inevitably ripple through to Canada and other U.S. trading partners. For Canadian companies looking to sell in the U.S. market, or for Canadian investors betting on U.S. stocks, it’s crucial to understand what caused the current boom. It’s even more important to understand what could end it.

The challenge confronting Mr. Trump, or anyone else who wants to spark U.S. growth, is that it’s difficult to make America great again without making America young again.

An economy grows because of two factors – more workers and more productivity. For a half century following the Second World War, the U.S. labour force expanded at 1 to 2 per cent a year. Once you added in healthy productivity growth of around 2 per cent a year, the economy typically grew at 3 per cent or more annually.

But that happy math has deteriorated since the turn of the century. Aging boomers are leaving the work force in droves and new workers are becoming scarce. Since the financial crisis, the number of people aged 15 to 64 has expanded at barely half a per cent a year. Meanwhile, for reasons that still aren’t well understood, productivity growth has declined to around 1 per cent a year.

The roots of economic growth now look a lot less impressive than they did a couple of decades ago. Most economists add the scant number of new workers to underwhelming productivity gains and conclude the long-term sustainable rate of U.S. growth has fallen to below 2 per cent a year. The Federal Reserve Bank of San Francisco, for instance, pegs it at a mere 1.8 per cent a year.

So how do you create an economic boom in this unpromising environment? Simple. You unleash a wave of stimulus that temporarily propels the economy past its own speed limits.

Washington did just that in 2017 with massive tax cuts and pledges for new spending. “After basically seven years of [budget] austerity, what we saw was a very sharp reversal last year,” says Michalis Nikiforos, a research scholar at the Levy Economics Institute of Bard College. “Given that very significant fiscal boost, you would expect the growth rate to increase.”

The problem, he points out, is that the effect of the tax cuts and increased spending are transient. They will begin to fade over the next year without addressing more fundamental issues, such as the persistently weak level of consumption in the U.S. economy.

The low level of demand reflects the growing gap between rich and poor in the U.S. economy, according to Mr. Nikiforos. Poorer people have no money to spend, while richer people tend to save a large portion of their incomes. Both result in anemic overall consumption.

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Optimists argue the current hiring boom will help to pump more money into consumers’ pockets and reverse this trend. But many observers – including most economists – remain skeptical. “Wages are rising, but so is inflation,” says Mr. Naroff. “Real buying power is going nowhere.”

He points out that the typical U.S. household hasn’t seen its average weekly earnings increase, in real terms, in a decade. And despite the current hiring boom, many of the jobs being created are low-paid positions that offer little security or chance of advancement. Unemployment has fallen, but so has the quality of employment.

This has led to a growing divide between the affluent and the less well off. It’s a chasm that gapes particularly wide in places such as California’s Silicon Valley, where software millionaires are a dime a dozen, but people willing to perform menial tasks have become an endangered species because of the exorbitant cost of living.

Zareen Khan knows the problem all too well. A former technology manager, she now runs two popular restaurants in the Valley. But she has found it a battle to attract and keep workers in an area where unemployment is less than 2 per cent. Boosting wages to as high as US$20 an hour and offering free food weren’t enough to lure employees to an area where two-bedroom apartments rent for upwards of US$4,000 a month.

So last year Ms. Khan came up with an unorthodox strategy: She bought her workers a house.

She figures it’s the only way to stop constant staff turnover. After purchasing the Menlo Park house for US$950,000 and furnishing it, she offers rooms for below-market rents to her employees. She loses money on the deal as a result, but it’s the only way she knows to compete against tech companies that can pay far more than she can.

“Right now the unemployment rate is so low in the Valley that it’s impossible to find people,” she says. “They’re just not here. Everyone is employed.”

The hunt for workers has become a national obsession. In southern Nebraska, midway between Omaha and Denver, the community of North Platte just can’t find enough people to fill the roughly 2,000 jobs now open in the city of 25,000. So local officials are offering to pay workers as much as US$10,000 to relocate.

The local Union Pacific rail yard – the largest of its kind in the world – is looking to do one better: It’s pledging to pay workers US$25,000 bonuses to move to North Platte.

“We’re clicking on all cylinders,” says Gary Person, chief executive of the local chamber of commerce. “With the economy coming back stronger than ever in the U.S. right now, it just accelerates the demand for additional employees here.”

In addition to its Union Pacific rail yard, the city is home to a Walmart distribution centre, a health-care company that just opened a new US$100-million patient centre and several financial companies. Those businesses depend largely on domestic U.S. demand and so long as the White House continues to pursue pro-U.S. economic policies, the staunchly Republican community will continue to prosper, Mr. Person says.

“If we blow everything up and we get back to liberal policies that don’t understand business and industry and what makes it work, I think we will again have our challenge,” he says. “If we can keep our policies strong and the message strong, I think America stays strong.”

There is a chance he’s right. One of the big unknowns in the current boom is how much slack remains in the U.S. economy. While the ultralow unemployment rate suggests nobody is left to hire, broader measures offer reasons for hope.

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The ratio of employees to the overall population, for instance, is still well below its precrisis peak, indicating there are still many discouraged workers, who have given up looking for jobs but could be drawn back into the work force. On top of that, there are workers who may be labouring at jobs beneath their true qualifications.

Consider Eron Prosper, an information technology manager, who weathered the 2008 financial crisis, but lost his US$80,000-a-year job in 2015, when his Miami-based employer downsized. He moved back home to St. Thomas in the U.S. Virgin Islands and landed a US$7-an-hour job doing data entry for a local hotel. “Going from a pretty high salary to $7 an hour was probably a low point for me,” he says. “I was pretty sure I was never going to get a job in my field again.”

Fortunately, a rebounding economy has provided new opportunity. In May, Mr. Prosper landed a job with an infrastructure-consulting firm back in Miami. After three years of severe underemployment, he is once again an IT manager, this time with a salary of US$90,000. He has taken advantage of his good fortune to upgrade his car and sign the lease on a new apartment.

Still, he remains cautious and plans to start saving as soon as he can in an attempt to rebuild his cushion against future layoffs. Employers in his field are now demanding more from applicants without offering much more money, he says. “When I looked for jobs I would see people who wanted the moon: They wanted an expert with an entry-level salary. It’s hard for me to imagine how they’re filling positions.”

The simple answer is that employers could find more employees by offering bigger salaries. But it’s not quite so straightforward, because of the link between higher wages and higher inflation.

Washington’s massive stimulus program contradicted conventional wisdom in economics, which holds that you unleash stimulus when the economy is in the doldrums, as a way to restore flagging demand. Instead, the administration and Congress decided to inject their stimulus at a time when the U.S. economy was already near full capacity by most standard measures.

Instead of creating a sustainable budget situation, the new tax cuts are will add more than US$1.8-trillion to deficits over the next decade, according to the CBO. The nonpartisan adviser to Congress expects the federal government’s annual deficit to top US$1-trillion in 2020 despite healthy economic growth.

Supertight job markets and soaring deficits are, according to most economists, a recipe for higher inflation – which the Federal Reserve will then proceed to fight with higher interest rates. In effect, the central bank will find itself leaning against the stimulus unleashed by Washington. Any sign of higher salaries and wages is likely to speed up the pace of the Fed’s rate increases and bring the boom to an even quicker end.

This is the scenario that worries the folks at Capital Economics. They point out that the yield curve, a measure of how short-term rates compare with longer-term rates, has been a reliable indicator of U.S. recessions ahead. Short-term rates are almost always lower than long-term rates. But when the curve inverts – that is, when short-term rates rise higher than long-term rates - a downturn usually follows.

Right now, the curve is very close to inverting. Short-term rates have ticked steadily higher as investors grow increasingly sure the Fed will hike rates in the months ahead. The strong growth numbers released on Friday just add to the case for more rate hikes ahead. “When the curve inverts, a sharp slowdown in economic growth won’t be far behind,” says Andrew Hunter of Capital Economics.

A Fed-induced slowdown would not be happy news for the U.S. economy, but it would at least have the advantage of being a gradual, controlled event. More worrisome is the possibility of a shock to the economy that would result in an uncontrolled downturn.

One scenario would feature a new outburst of trade hostilities. If Mr. Trump decides to double down on his America First agenda, the imposition of tariff barriers, especially in areas such as the automotive sector, could send the prices of many products soaring and bump up against the constrained buying power of U.S. consumers. Factories would then lay off people as sales shrink.

“I don’t know exactly when the economy will hit a bump,” Mr. Naroff says. “But I do know that if GM and other auto makers suddenly start hiking vehicle prices by a couple of thousand bucks, which is the result you might expect from auto tariffs, you better watch out.”

Another scenario hinges on the possibility of a financial sector crisis. Mr. Nikiforos at the Levy Economics Institute worries that corporate debt has bounded ahead in recent years, as companies have seized on rock-bottom rates to lever up their balance sheets. This could leave them more fragile in the event of a shock.

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The stock market, in particular, invites worry. The S&P 500 has soared over the past decade. The cyclically adjusted price-to-earnings ratio, a widely used measure of how stock prices compare with long-term corporate earnings, suggests that Wall Street is now more expensive than at any point in its history except the dot-com bubble.

Asset prices that soar far above their fundamentals typically end badly, whether they happen in stocks or in home prices, Mr. Nikiforos says. Any shock that hurt the stock market would wound the portfolios of investors, lead to a drop in consumption and probably drag down the economy. “It’s hard to see why this time would be different than in 2007, 2000 or 1929,” he says.

For any economist, worries over financial instability and tariff wars are compelling stuff. But don’t tell it to American workers who are enjoying the benefits of the tightest job market in years.

Take Panther RV Products. The family-run company in southern Washington State barely survived the 2008 financial crisis by switching its business model from building custom camper vans to selling accessories and components online.

Today the business is booming thanks to the popularity of online shopping and trends like the tiny house movement that have fuelled demand for the kind of luxury, RV-sized appliances that Panther sells. The company is looking to hire five new employees this year and is moving into a warehouse more than three times the size of its existing location.

Yet co-owner Ethan Sweet is watching U.S. trade relations with some caution. Many of the company’s products are imported from Europe and Mr. Sweet expects escalating trade wars will increase prices for his customers. The firm explored manufacturing custom components in China, but is now looking to U.S. firms instead.

At the same time, RV sales are already starting to slow. Nationally the industry reported that sales, which had tripled between 2009 and 2017, were down 11 per cent this June from the same period last year. Some industry buyers are reporting significant jumps in the price of aluminum and steel because of U.S. tariffs.

Still Mr. Sweet is optimistic that companies like his have learned hard lessons about how to be more resilient when the next economic downturn comes.

“Right now is the perfect timing with the economy. We’re trying to capitalize on that so we can fortify ourselves a little bit for whenever things potentially change,” he said. “Or you never know – the economy could just keep going up and up and up. “