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Economy Creates Only 54,000 Jobs in May: Faltering Recovery Casts Shadow on Jobs Outlook

Prof. Peter Morici - 6/4/2011

Friday, the Labor Department reported the economy added only 54,000 jobs in May, indicating the economic recovery is faltering. Washington has not addressed structural problems that caused the Great Recession—unnecessary dependence on high priced imported oil, the huge trade deficit, burdensome health care costs, and a tax structure that disadvantages U.S. based businesses—even though reasonable solutions are at hand.

The unemployment rate rose to 9.1 percent from 9.0 percent in April. This figure belies the millions of adults who have quit looking for work altogether and part time workers who cannot find full time employment. Adding in those workers, the unemployment rate is closer to 16 percent. Finally, considering the millions of recent college graduates that have taken jobs requiring no more than a high school diploma to effectively perform, the underlying rate of unemployment is closer to 20 percent.

After adding 220,000 per month in February through April, May’s poor showing indicates the economic is faltering. Falling consumer confidence, car sales and durable goods orders, and New York banks are again reliant on commodity speculation and other trading rather than lending, and the dreaded double dip may be at the nation’s doorstep.

Without a dramatic shift in Administration approaches to energy policy, the trade deficit, health care, and taxation, the economy appears headed down, and this time for good.

The economy must add 13.2 million private sector jobs over the next three years—365,000 each month—to bring unemployment down to 6 percent. Factoring in retrenchment by state and local governments that will require nearly 390,000 private sector each month, but in May private business only added 83,000 employees

In the first quarter, the economy expanded at a 1.8 percent annual rate, and by all indications second quarter growth will be subpar and not enough to keep unemployment from rising.

Each year, the working age population increases 1 percent a year and productivity advances about 2 percent; hence growth in the range of 3 percent is necessary to keep the unemployment rate steady. Coming out of a deep recession, growth in the range of 4 to 5 percent is needed and possible to get unemployment down to 6 percent over the next several years, but policies put in place by the Obama Administration and Congress are blocking that growth.

Continued dependence on high priced foreign oil, the growing trade deficit with China, and health care and tax policies that penalize the location of businesses in the United States are responsible for slowing growing demand for goods and services made in America and much weaker jobs creation than was accomplished during past recoveries.

Simply dollars that go abroad to pay for expensive imported oil or subsidized Chinese exports that do not return to buy U.S. exports lower the demand for U.S. made goods and services and the services of American workers. Restrictions on developing U.S. oil and gas and China’s explicit policy of subsidizing exports but suppressing the value of its currency are the root causes of U.S. unemployment. These conditions are further exacerbated by health care costs that are double those borne by European competitors and a reliance on personal and corporate income taxes that under by World Trade Organization rules may not be rebated—principal U.S. competitors rely more on value added taxes, which may be rebated.

Millions of jobs could be created by: drilling for more domestic oil and gas now, which would keep money here that American drivers send to the Middle East; taxing dollar-yuan conversion to offset China’s currency market intervention, undervalued currency and 35 percent subsidy on its exports; genuine health care reform that lowers drug, insurance and administration costs, and tort burdens, rather than subsidizing a system that costs 50 percent more than private systems in Germany and elsewhere; and replacing the corporate income tax and elements of the personal income and social security tax with a value-added tax.

America has the tools at hand but Treasury Secretary Geithner fails to grasp the gravity of the situation, and President Obama is not ideologically disposed and lacks the stomach to use them. Sadly, we are not hearing much about those solutions from the cacophony of Republicans seeking the presidency either—tax cuts and deregulation, vouchers and other tea-party hobby horses are palliatives not problem solvers.

Policymakers must address the world as they find it, not as professors and presidents pontificate it should be.

America is not suffering from a poverty of ideas but shortage of leaders with the vision and courage to see what is possible and act.

Jobs growth remains too weak, and the economy is in danger of slipping into a second recession. Longer term, the nation faces fundamental structural problems that neither political party seems willing to address in a comprehensive and systemic fashion.

Unemployment stands at 9 percent and would be much higher but for the fact that many adults have quit looking for work—discouraged by poor pay and unsatisfying work in an economy that creates too few professional positions for the bludgeoning supply of college graduates.

Middle aged workers with savings and lesser earning spouses in two income families simply have quit the labor force rather than put a BA in English, MS in Social Work or an MBA in finance—and in many cases decades of professional work experience— behind the counter at Barnes and Noble, Staples or Starbucks.

To bring unemployment down to 6 percent over three years, the economy must add 380,000 jobs a month and grow at least 4 percent a year. Dependence on foreign oil and the inability of U.S. industry to pay for surging imports with more exports and compete with foreign products in U.S. markets is holding down the recovery. Housing will not rescue the economy—the only white stallions available are more realistic energy and trade policies. Something the President and GOP leadership in Congress have been want to offer.

Growth and Jobs

The economy must grow at about 3 percent just to keep unemployment constant at 9 percent, because business productivity improves 2 percent a year and the labor force—through population growth and immigration—increases at about 1 percent. However, since the recovery began in July 2009, the economy has grown at a paltry 2.8 percent, and America’s workers are in neutral. But that’s an average—those with the best jobs in places like Wall Street keep doing better, and the rest slowly sink with stagnant incomes, rising gas prices and ever more burdensome state and local taxes.

The economy only grew 1.8 percent in the first quarter. Poor weather slowed commercial construction, rising gas tapping consumer spending from other sectors, and defense and state and local government spending slowed. Initially, most forecasters and the Federal Reserve expected better weather, higher defense spending and a firming housing market would lift growth to 3 to 3.5 percent in the second quarter.

However, the housing market continues to falter under the weight of millions of unsold homes and the uncertain consequences for home values from millions of anticipated foreclosures. The latter is exacerbated by the suits brought by States’ Attorneys General and the Justice Department that emphasize exacting big financial penalties more than resolving the foreclosure crisis. With some justification, consumers are growing pessimistic—though consumer spending is increasing, it is not increasing rapidly enough to create a self-sustaining recovery.

Economists were foolish to place so many hopes on a housing market recovery and consumers. Millions of unsold homes will impel slow housing construction for many years, and consumers can’t be expected to spend a lot more if too many of their dollars go abroad to pay for expensive oil and Chinese goods and don’t return home to create jobs.

Now a second recession is a clear and present danger. Growth in the range of 2 to 2.5 percent is not sustainable, because many businesses can meet such modest growth in demand by improving productivity and laying off workers to maintain margins in the face of rising energy and other commodity prices. Layoffs slice household income, and a negative cycle of reduced spending begins.

Indeed, the four week moving average for new unemployment claims is 438,500 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 second and third quarters, the economy will cycle down into recession—it can’t likely continue to drag along at about 2 percent 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 222,000 158,000 and 229,000 jobs in February, March and April; whereas during the prior 13 months, the average gain was only 47,000.

Core private sector jobs have the potential to set off a virtuous cycle of hiring, consumer spending and more hiring, but after such a deep recession, 203,000 jobs per month is simply not enough.

The economy must add 13.7 million private sector jobs over the next three years—380,000 each month—to bring unemployment down to 6 percent. Considering layoffs at state and local governments and likely federal spending cuts, core private sector jobs must increase at least 350,000 to 400,000 a month to accomplish that goal.

Growth in the range of 4 to 5 percent is needed to get unemployment down to 6 percent over the next several years.

Prior to the turmoil in the Middle East, economists were forecasting 3.5 percent growth for 2011, but the surge in gasoline prices to nearly $4.00 per gallon and a more realistic assessment of the housing market shave at least one percentage point from that outlook. For the entire year, growth in the range of 2.5 percent would be right on the razor’s edge of what is sustainable without the economy tumbling into recession from additional layoffs.

Structural Impediments to Growth

The U.S. economy and the durability of American prosperity are too vulnerable, because temporary tax cuts, stimulus spending and large federal deficits do not address structural problems holding back GDP growth and jobs creation—the huge trade deficit, dysfunctional energy and tax policies, and rising health care costs are the culprits.

At 3.3 percent of GDP, the $500 billion trade deficit is a tax on domestic demand that erases the benefits of tax cuts. Consequently, the U.S. economy is expanding at about 3 percent a year instead of the 5 percent 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 U.S. 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 the balance of this decade.

Americans will continue to burn 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 $450 billion in foreign currencies each year—this reduces domestic Chinese consumption and subsidizes Chinese exports by about 35 percent. 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.

More broadly, major trading partners in Europe and Asia rely on value added taxes to finance government and health care, whereas Americans pay higher corporate taxes and directly for health care. Under WTO rules, VATs are rebateable on exports from Europe and Asia and are applied on imports from the United States into those markets, creating huge pricing disadvantages—American products are essentially taxed twice. A neutral change in U.S. tax policy toward a VAT—swapping a VAT for reductions in corporate and personal income taxes—would help remove a major competitive disadvantage on U.S. exporting and import-competing industries.

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 U.S. employers.

The recent Standard & Poor’s warning that U.S. debt may lose its AAA rating was more than a statement about the political gridlock in budget negotiations. U.S. debt problems will ultimately require more robust growth in employment and tax revenues and require Congress and the President to revamp energy, trade, tax, and health care policy. Without those, the American economy cannot succeed.