Home >> United States & Canada >> Economics & Trade

     Email   Print 

Another Disappointing Jobs Report

Prof. Peter Morici - 7/9/2011

The economy added only 18,000 jobs in June, after posting a lackluster 25,000 gain in May. Jobs creation remains moribund and inadequate to appreciably dent unemployment, because the economic recovery is simply not gaining steam.

These weak jobs data indicate the economic recovery remains in low gear, and policies other than big deficits and printing money are needed to get Americans back to work.

Health care, retail, and manufacturing posted modest gains.

Construction, especially hurt by the weak housing market and tight state and local budgets, lost 9,000 jobs.

Temporary employment is falling, indicating growing business pessimism.

Government employment fell by 39,000, and private sector jobs growth was 57,000.

Unemployment rose to 9.2 percent, as jobs creation continues to lag labor force growth. Moreover, unemployment would be higher but for the fact that many adults have become discouraged and quit looking for work altogether.

Factoring in those discouraged workers, and others working part time but would prefer full time employment, the unemployment rate is 16 percent. Adding college graduates in low skill positions, like counterwork at Starbucks, and the unemployment rate is closer to 20 percent.

The economy must add 13.7 million jobs over the next three years—382,000 each month—to bring unemployment down to 6 percent. Considering layoffs at state and local governments and likely federal spending cuts, the private sector jobs must increase at least 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.

Jobs creation remains weak, 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 and dysfunctional energy policies.

Oil and trade with China account for nearly the entire $525 billion trade deficit. This deficit is a tax on domestic demand that erases the benefits of tax cuts and stimulus spending.

Simply, dollars sent aboard to purchase oil and consumer goods from China, that do not return to purchase U.S. exports, are lost purchasing power. Consequently, the U.S. economy is expanding at about 2 to 2.5 percent a year instead of the 5 percent pace that is possible after emerging from a deep recession and with such high unemployment.

Without prompt efforts to produce more domestic oil and redress the trade imbalance with China, the U.S. economy cannot grow and create enough jobs.

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.

As we said, to bring unemployment down to 6 percent over three years, the economy must add 382,000 jobs a month and grow at 4 to 5 percent 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 percent just to keep unemployment constant at 9.1 percent, because business productivity improves 2 percent a year and the labor force—through population growth and immigration—increases at about 1 percent.

The economy only grew 1.9 percent 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 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 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 percent. 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 percent is needed to get unemployment down to 6 percent 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 percent of GDP, the $525 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 2 to 2.5 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 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 $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.

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.

Recent credit agency warnings that U.S. debt may lose its AAA rating are more than statements about the political gridlock in debt ceiling negotiations. U.S. 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.