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President Barack Obama talks with Patrick and Donna Festa at their home, in Scranton, PA, Nov 29 2011
Friday, forecasters expect the Labor Department to report the economy added only
120,000 jobs in November, after scoring a nonplus 80,000 gain in October. The
three month moving average stands at 120,000 jobs, a pace inadequate to much
The unemployment rate is expected to stay at 9.0%, mainly because so many
displaced professionals report themselves as “self-employed,” when working only
a few hours a week from home.
Even before escalating troubles in Europe and China are considered, the economic
outlook is mediocre, with GDP growth expected at about 2%—hardly enough jobs to
absorb adult population growth. With Italy likely to default in a manner similar
to Greece, and new questions raised about China’s accounting practices,
fraudulent stock and bank reports, and inflation and growth statistics, all
risks are to the downside.
Without more assertive efforts to address America’s structural problems—huge
trade deficits with China and on oil, and ineffective and expensive regulations
in banking and health care, America is headed for a protracted period of high
youth unemployment and permanent displacement of many older workers. These
conditions are not destiny—solutions are at hand but leadership and a genuine
willingness to compromise, absent excessive partisanship, are required to
Too Little Economic Growth
Consumer spending and economic growth have recovered from their first half
nadir, and GDP growth will be about 2% in the latter half of 2011. Broad gains
in consumer spending, business investment and exports are high points.
Auto sales have firmed. Businesses and commuters faced strong financial
incentives to replace cars and trucks as the vehicle fleet grew older during the
Great Recession—the math for buying as opposed to refurbishing many vehicles is
solid. Appliance sales are more heavily focused on replacement sales than would
be with stronger new home sales.
Housing remains weak but for some recovery in the construction of new rental
units, as for many young households economic calculations favor renting over
owning—even with rock bottom prices for existing homes in many parts of the
country. The inability to sell homes reasonably fast, if employment
considerations compel, makes owning too risky for many young workers.
Weak inventory build indicates retailers expect consumer spending has recovered
about all that is possible. That makes a lot of sense, Black Friday and Cyber
Monday gains notwithstanding.
Much has been made of the need for consumers to rebuild their balance
sheets—that requires working down debt on credit cards and lowering mortgages.
The former was largely completed by last April. Now, household net worth and
liquidity will not improve much further until the value of existing homes
rebounds, but housing prices continue to move south
Sadly, millions of foreclosures and second homes purchased for speculative
reasons during the boom will keep the market oversupplied for much of this
decade. Also, many existing homes are too far from jobs and too large—those made
more sense when gasoline and heating costs were low but not with oil near $100 a
Overall, economic growth at about 2%—and certainly now better than 2.5%—can be
expected through 2012.
The economy must grow at about 2.5 to 3%—long term—to keep unemployment steady.
Simply, potential labor productivity rises, thanks to better technology, about
2% each year, and labor force growth is about 1% a year, owing to natural
population increase. Together, those translate into a 3% trend rate of economic
growth with unemployment steady.
If conditions are mediocre and businesses cautious, productivity growth can
slip—equipment and computers are kept beyond their economically useful life.
Then unemployment can be kept steady with 2.5% growth or even 2% but that poses
Anecdotal reports indicate that businesses are extraordinary reluctant to hire.
They don’t expect a recession but are gearing for persistent subpar growth in
the United States, slower growth in Asia and virtually no growth or a recession
in Europe. Many firms will meet modestly growing demand with smaller
workforces—exploiting labor saving strategies to boost profits. Lower head
counts could ignite a negative feedback cycle—fewer employees at enough firms
spell lower spending and less demand for all firms and then layoffs cascade.
The US economy moving along at 2 or 2.5% growth is like an airplane flying at
low altitude. In a steady environment, the plane can keep going, but the
slightest downdraft, never mind an unexpected tall obstacle, and the plane
ditches. And a tall obstacle may soon emerge across the pond.
Overall, if the recovery is not derailed, continue to expect jobs growth of
about 120,000 a month, and not much positive movement in the 9% unemployment
Also, many adults are discouraged and not looking for work altogether, and not
counted among the unemployed. Others hold part-time positions but would prefer
full-time work. Factoring in those adults who say they would rejoin the labor
force if conditions were better and part-timers who would prefer full-time
positions, the unemployment rate is about 16.5%. Adding college graduates in low
skill positions, like counterwork at Starbucks, and the unemployment rate is
likely closer to 20%.
What Is Needed
The economy must add 13.3 million jobs over the next three years—369,000 each
month—to bring unemployment down to 6%. Considering continuing layoffs at state
and local governments and federal spending cuts, private sector jobs must
increase at least 400,000 a month to accomplish that goal.
GDP growth in the range of 4 to 5% is needed to get unemployment down to 6% over
the next several years. The outlook for 2012 indicates growth in the range of 2
or 2.5%, and that puts the economy at severe risk to any kind of shock—financial
panic in Europe, implosion in China or an oil price spike.
Growth is weak and jobs are in jeopardy, because temporary tax cuts, stimulus
spending, and easy monetary policy are not enough to address the chronically
weak demand holding back economic recovery. Large trade deficits overwhelm the
positive effects of Washington’s efforts to jump start the economy.
Oil and trade with China account for nearly the entire $550bn trade deficit, and
dollars sent abroad to purchase oil and consumer goods from China that do not
return to purchase US exports are lost purchasing power. 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.
Without prompt efforts to produce more domestic oil, redress the trade imbalance
with China and the rest of Asia, the US economy cannot grow and create enough
Moreover, without efforts to lower costs by curbing a Washington regulatory
bureaucracy out of control and health care executives gorging while pushing up
insurance costs, the cost of doing business will remain too high, and real wages
and living standards for most Americans will not improve.
Professor, Robert H. Smith School of Business, University of Maryland,