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Analysis/Comment Last Updated: May 3, 2013 - 10:13 AM


Dr. Peter Morici: Fed actions and Friday's job's report
By Professor Peter Morici
May 3, 2013 - 6:24 AM

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The number of Americans making initial jobless benefit claims following layoffs, fell by 18,000 to a seasonally adjusted 324,000 in the week ended April 27, the Labor Department said Thursday. It was a 5-year low -- to one month after the recession officially began in December 2007.

Dr. Peter Morici: Wednesday, the Federal Reserve announced it is keeping its foot on the gas--for good reason. The fiscal drag imposed by the $160 billion January tax increase, and $45 billion in sequester spending cuts is slowing consumer spending and smothering investment. Jobs will remain tough to find, and wages in the doldrums well into summer. 

Now the risk is more for a second recession than inflation, even with the Fed printing enough money to purchase all the new mortgage backed securities and about 70% of the new federal government debt issued each month. Prolonged money creation at that level sooner or latter will cause asset bubbles that will burst when the fed pulls back--who will catch the economy then?

Here is my April monthly commentary on the job market...

Why Unemployment Remains a Nagging Problem

Friday, the Labor Department is expected to report the economy added 153,000 jobs in April-up from 88,000 in March-and unemployment is expected steady at 7.6%. This gain may prove short lived, and this pace is well below what is needed to get unemployment to acceptable levels.

New hiring lags broader economic growth. In the fourth quarter, GDP was up only 0.4%-with businesses continually improving productivity, the economy was lucky to have created any jobs at all this past winter. Businesses remain cautious about future demand, and reluctant to invest in new machinery, computers and software that would improve worker efficiency.

In the second quarter, GDP growth rebounded to 2.5%, but about 40% of that growth came from businesses piling up inventory-not from the final sales. Underlying demand remains weak-January tax increases limit household spending, trade deficits on China and oil continue to leak consumer dollars abroad, and sequester spending cuts reduce government purchases.

Generally, economists expect second quarter growth at 2% or less-about the same or less than potential improvements in worker productivity; hence, jobs creation should slow through the spring.  The unemployment rate would rise but for so many additional folks choosing not to work-663,000 in April.

Should economic growth pick up, many adults may be expected to rejoin the hunt, and the economy would have to add more than 360 thousand jobs each month for 3 years to lower unemployment to 6%. That would require growth in the range of 4 to 5%-this is possible but not likely with current policies.

Since turning the corner in mid 2009, GDP growth has averaged 2.1% and unemployment has fallen from 10.0% to 7.6%. In contrast, high oil prices and double digit interest rates pushed unemployment to 10.8% during Ronald Reagan's first term; then GDP growth averaged 5.3% for the next three and half years, and unemployment fell to 7.3%.

Factors contributing to the slow pace of recovery include the huge trade deficits on oil and manufactured products from China and elsewhere in Asia-these drain demand for U.S. goods and services. Absent U.S. policies to confront Asian governments about their purposefully undervalued currencies, and to develop more oil offshore and in Alaska, the trade deficit will continue to tax growth.

The recent surge in natural gas production, and accompanying lower prices, is substantially improving the international competitiveness of industries like petrochemicals, fertilizers, plastics, and primary metals-as well as consuming industries like industrial machinery and building materials. However, the Department of Energy is considering proposals to boost exports of liquefied gas, which would create many fewer jobs, than keeping the gas at home.

Dodd-Frank regulations continue to make lending by regional banks to small businesses difficult. Many smaller banks have sold out or are considering consolidation with money center banks, which are less inclined to small business lending.

More onerous regulatory reviews are an increasing complaint among businesses. Government needs to subject policies to protect the environment and other goals to the same efficacy standards the market applies to commercial technologies-regulatory assessments and enforcement are needed but those must be delivered cost effectively and quickly to add value.

Many businesses look to Asia where government policies are more accommodating and prospects for growth remain stronger.

A better jobs market is simply not possible without better trade, energy and regulatory policies.

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

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