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News : US Economy Last Updated: Jul 7, 2011 - 6:26 AM

Dr. Peter Morici: US jobs outlook hardly stellar; Recession watch
By Professor Peter Morici
Jul 7, 2011 - 5:20 AM

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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 quarter.

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 US employers.

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?

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




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