US Economy Dr. Peter Morici: US jobs outlook hardly stellar; Recession watch
By Professor Peter Morici
Jul 7, 2011 - 5:20 AM
In the first ever Twitter Town Hall at the White House, July 06, 2011, President Obama answers questions on jobs and the economy and asks for feedback on reducing the deficit. Jack Dorsey, Twitter co-founder is on the left.
Dr. Peter Morici: Friday, forecasters expect the US
Labor Department will report the economy gained only 110,000 jobs in June, after
adding a lackluster 54,000 in May. Though an improvement, jobs creation is
hardly stellar, because GDP growth slowed the first half of 2011 to about 2%.
Unemployment is expected to remain steady at 9.1%. It would be higher but for
the fact that many adults have quit looking for work—discouraged by poorly
paying and unsatisfying opportunities in an economy that creates too few
professional positions for the growing supply of college graduates.
Middle aged workers with savings and lesser earning spouses in two income
families have quit the labor force altogether rather than put a BA in English,
MS in Social Work or an MBA in finance behind the counter at Barnes and Noble,
Staples or Starbucks.
To bring unemployment down to 6% over three years, the economy must add 365,000
jobs a month and grow at 4 to 5% a year. Together, dependence on foreign oil,
the lack of exports to pay for imports of consumer goods, and rocketing health
care costs are frustrating the recovery.
Growth and Jobs
The economy must grow at about 3% just to keep unemployment constant at 9.1%,
because business productivity improves 2% a year and the labor force—through
population growth and immigration—increases at about 1%.
The economy only grew 1.9% in the first quarter, and recent retail sales, new
unemployment claims, and consumer pullback from purchases of cars, appliances
and other big ticket items indicate that weak growth continued into the second
Now a second recession is a clear and present danger, because many businesses
can meet such modest growth in demand by improving productivity and laying off
workers to improve profits. Layoffs slice household income, and a negative cycle
of reduced spending begins.
Indeed, the four week moving average for new unemployment claims is 426,750 up
from 390,000 the week of April 2—a rate below 350,000 is consistent with a
strong economy and above 400,000 is perilously close to recession levels.
Without stronger growth in the third and fourth quarters, the economy will cycle
down into recession. The economy can’t likely continue to drag along growing at
about 2% indefinitely.
Importance of Core Private Sector Jobs
Until February, the private sector was creating few permanent jobs. Most jobs
were either in health care and social services, which enjoy heavy government
subsidies, or temporary business services. Excluding those activities, the
“core” private sector gained only 83,000 jobs in May.
Core private sector jobs have the potential to set off a virtuous cycle of
hiring, consumer spending and more hiring. With the public sector shedding jobs
and state and local subsidies to private health care and social services likely
to grow more slowly or even be cut, the core private sector must carry the ball.
The economy must add 13.2 million jobs over the next three years—365,000 each
month—to bring unemployment down to 6%. Considering layoffs at state and local
governments and likely federal spending cuts, core private sector jobs must
increase at least 385,000 to 400,000 a month to accomplish that goal.
Growth in the range of 4 to 5% is needed to get unemployment down to 6% over the
next several years.
Structural Impediments to Growth
American prosperity remains endangered, because temporary tax cuts, stimulus
spending and large federal deficits do not address structural problems holding
back dynamic growth and jobs creation—the huge trade deficit, dysfunctional
energy policies, and rising health care costs are the culprits.
At 3.5% of GDP, the $525bn trade deficit is a tax on domestic demand that erases
the benefits of tax cuts. Consequently, the US economy is expanding at about 2
to 2.5% a year instead of the 5% pace that is possible after emerging from a
deep recession and with such high unemployment.
Oil and trade with China account for nearly the entire US trade deficit.
The Administration is banking on electric cars and alternative technologies,
such as wind and solar, to replace imported oil but those won’t pull down
gasoline consumption enough to reduce enough the oil import bill for at least
the balance of this decade.
Americans will continue to use millions of barrels of gasoline each day and
require oil. Developing domestic reserves and more aggressively building out
fuel efficient vehicles would fire up growth and create high paying jobs.
However, Obama Administration energy policies block domestic drilling and
inadequately encourage more natural gas use. Government rescued General Motors
fights fuel efficiency tooth and nail. The Volt is a novelty on its balance
sheet—it lags Ford and Toyota in hybrid technology, and gas-guzzling Escalades
still anchor its business model.
Failure to actively encourage more domestic oil and gas production and push GM
to get with the program on energy conservation, by sending dollars abroad for
oil imports, are lethal jobs killer.
China maintains an undervalued currency by purchasing about $450bn in foreign
currencies each year—this reduces domestic Chinese consumption and subsidizes
Chinese exports by about 35%. Failure to act to offset Chinese currency
subsidies, for example by taxing dollar yuan conversions, is the single most
significant failure in the Obama Administration policy to create an adequate
number of jobs.
Finally, the 2010 health care law is pushing up health care costs, rather than
reducing those as promised, making insurance unaffordable for many small and
medium sized businesses. Although manufacturing has enjoyed a stronger recovery
than the rest of the economy, it has been significantly focused on activities
that use very little labor illustrating the burden that health care imposes on
Recent credit agency warnings that US debt may lose its AAA rating are more than
statements about the political gridlock in debt ceiling negotiations. US deficit
problems will ultimately require more robust growth in employment and tax
revenues and require Congress and the President to revamp energy, trade, and
health care policy. Without those, the American economy cannot succeed.
Why Can't Economy Create Jobs?
Professor, Robert H. Smith School of Business, University of Maryland,