Peter Morici is an economist and professor at the Robert H. Smith School of Business at the University of Maryland. He is a recognized expert on international economics, industrial policy and macroeconomics. Prior to joining the university, he served as director of the Office of Economics at the US International Trade Commission during the Clinton Administration.

On Friday, the US Labor Department will report employment data for August. In July, the economy lost 247,000 jobs, and the consensus forecast is for another 200,000 jobs lost in August.

Unemployment was 9.4 percent in July, and professional forecasters expect it to surge to 9.6 percent for August. My forecast indicates it will pierce 10 percent by year end. Factoring in adults that have left the labor force and those who work part time but would prefer full-time jobs, the unemployment rate is greater than 17 percent.

From December 2007 through July 2009, the economy lost 6.7 million jobs. The recession has wiped out all the jobs created in the private sector over the last decade.

Construction and manufacturing shed 1.4 and 2.0 million jobs, respectively, as the credit market meltdown and trade deficit wrecked havoc on residential construction and manufacturing. Layoffs then spread to commercial construction, finance, retail sales, and other sectors.

The economy contracted in the second quarter at a modest 1.0 percent, but should register positive GDP growth in the second half in the range of 2 percent.

Consumer spending, residential construction and technology sales are gaining. Both the technology sectors and materials should benefit from stronger demand powered by growth in Asia.

The stimulus package should raise GDP by about 2.5 percentage points in 2010 and 2011 and add about 3 million jobs. Most of those jobs will be temporary and 3 million and not be enough to replace the more than 7 million that will be lost before the recession ends.

With productivity growing at least two percent a year and the working aged population increasing one percent a year, GDP growth must exceed three percent to bring down unemployment.

Unless the Obama Administration addresses the structural problems that caused the recession—management issues at the banks and huge trade deficits on oil and with China—the recovery will not generate strong enough growth to bring down the unemployment rate.

Regional banks are now laboring under the weight of commercial real estate failures. Unable to effectively access money center capital markets, regional banks are short on funds to loan to small and medium sized businesses.

As the stimulus package pushes up government and consumer spending, the trade deficits on oil and with China will grow. This will tax aggregate demand for U.S. made goods and services and limit job gains.

Consequently, as the economy expands, businesses will struggle to find enough capital, and the trade deficits will create a shortage of demand for U.S. goods and services and new layoffs will begin once the stimulus spending ends.

President Obama’s near term energy policies address mostly the more efficient use of domestic coal and natural gas and alternative energy sources to generate electricity, and will do little to quickly reduce oil imports. Increased mileage standards for cars and trucks will not have a meaningful impact on the value of oil imports for several years.

President Obama, like George Bush, emphasizes diplomacy to persuade China to stop subsidizing exports, undervaluing its currency through currency market manipulation and blocking imports. It remains to be seen whether President Obama will get serious about China’s biggest unfair trade practice—its undervaluation of the yuan by some 40 percent.

In Friday’s jobs report the key variables to watch are:

Jobs Creation: August 7, the Labor Department reported the economy lost 247,000 payroll jobs in July. The government sector added 7,000 jobs, and the private sector lost 252,000.

With a slowly accelerating economic expansion, job losses will continue for several more months, and total losses will exceed 7 million before the hemorrhaging ends.

Unemployment: In July, the unemployment rate, as computed by the Labor Department, was 9.4 percent, and is expected to rise to at least 9.6 percent for June. According to my forecast, unemployment will peak at 10.3 percent late in 2010 or early 2011.

Since 2001, more adults have chosen not to seek employment owing to worsening labor market conditions. If labor force participation today were at the same level as when President Bush took the helm, the unemployment rate would be about 12 percent. The difference is discouraged workers that have quit looking for work that the Labor Department does not count when computing the unemployment rate. Add in part-time workers who would prefer full-time employment, and the hidden unemployment rate is above 17 percent.

Business vs. Government Payrolls: In July, government employment rose 7,000, and since the recession began in December 2007, it is up by 195,000.

Importantly, state and local government employment has risen by 110,000 since the recession began. The emphasis in Obama Administration stimulus spending on shoring up the state and local government employment is misplaced, and the money would be better spent encouraging private sector employment through infrastructure projections and incentives for private spending on domestic manufacturers.

Construction: In July, construction lost 76,000 jobs. Since construction employment peaked in October 2006, the sector has lost 1.4 million jobs.

Retailing: Retail trade has shed 843,000 jobs since November 2007, and lost 44,000 jobs in July.

Finance and Insurance: During the economic expansion finance and insurance, along with technology sectors offered some of the best new job opportunities, outside of health care and technology-related activities. Since December 2007, finance and insurance has shed 332,000 jobs, and 13,000 in July alone.

Manufacturing: In July, manufacturing lost 52,000 jobs, and over the last 112 months manufacturing it has lost 5.5 million jobs. The dollar remains overvalued against the Chinese yuan and other Asian currencies, and the large trade deficit with China and other Asian exporters is a key factor pushing down U.S. manufacturing employment.

Peter Morici,

Professor, Robert H. Smith School of Business, University of Maryland,

College Park, MD 20742-1815,

703 549 4338 Phone

703 618 4338 Cell Phone

pmorici@rhsmith.umd.edu

http://www.smith.umd.edu/lbpp/faculty/morici.html

http://www.smith.umd.edu/faculty/pmorici/cv_pmorici.htm