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Economy Adds 117,000 Jobs in July

Prof. Peter Morici - 8/8/2011

The economy added 117,000 jobs in July. While not a stellar performance, those were more jobs than were expected by forecasters, and more than the 46,000 posted in June.

Health care, retail, manufacturing, mining, and construction posted decent gains, while finance and information systems posted small losses.

Government employment fell by 39,000, and private sector jobs growth was 154,000. The shutdown of government services in Minnesota greatly increased government job losses, and most of those will be regained in the August count.

Jobs creation remain inadequate to keep unemployment from rising in the months ahead, especially considering the mass layoffs recently announced in banking and pharmaceuticals that will be effected in the months ahead.

The unemployment rate did fall from 9.2 percent in June to 9.1 percent, despite the fact that at least 130,000 jobs are needed each to keep up with growth in the adult population and labor force. Many adults quit looking for work and were not counted among the unemployed.

Factoring in those discouraged adults and others working part time for lack of full time opportunities, the unemployment rate is about 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 13.9 million jobs over the next three years—386,000 each month—to bring unemployment down to 6 percent. Considering continuing layoffs at state and local governments and federal spending cuts, the private sector jobs must increase at least 410,000 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. Recent GDP data put first half growth at less than 1 percent.

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 $600 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 less than 1 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.


Earlier this week, the Institute of Supply Chain Management reports on business activity indicate demand, already weak, is slacking off further for both manufacturing and services. The Challenger survey of layoffs took a big jump—66,000 jobs nixed in July, compared to 41,000 in June. The Commerce Department report on durable goods orders told another sorry tale.

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 should post some modest gains, and construction may exhibit some bounce but over all the economy is creating too few jobs and is in grave danger of falling into another recession.

The government sector will continue to shed jobs, and the private sector is simply not growing fast enough to compensate.

Continued burdens from excessive regulation, weak demand and a general pessimistic outlook offered by the Treasury Secretary and White House advisors are killing consumer and business confidence. Continued carping and pessimism from Republicans only adds to the malaise.

When the Treasury alibis—and the GOP confirms—that slow growth is to be expected as a permanent condition, why invest in a new home or expanding your business?

Growth in demand and GDP is so slow that in many industries productivity is advancing more rapidly than sales—hence big layoffs at telecom companies and many other stalwarts of jobs creation since the recovery began.

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. Recent GDP data put first half growth at less than 1 percent.

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 less than1 percent a year instead of the 5 percent pace that is possible after emerging from a deep recession and with such high unemployment.

Also, America is not playing its advantages well. Strengths in finance, telecom and backbone technologies, pharmaceuticals, and other industries are not generating exports as much as offshore jobs. Mass layoffs recently announced in these sectors bode poorly.

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


The key factor stifling jobs creation is sluggish GDP growth, which only advanced 1.3 percent in the second quarter and 0.3 percent in the first. Businesses can’t hire and pay new workers without more customers.

The culprit is weak demand for U.S.-made goods and services, which is often attributed to a weak housing market and the consumer debt hangover from the Great Recession. However, the latter reasoning is circular—faster GDP growth and more jobs would drive up housing prices and push down debt to income ratios. Moreover, growth in demand has not been so weak.

Since the recovery began in the third quarter of 2009, purchases by consumers, businesses and government are up 4.5 percent annually but spending on imports has rocketed. Higher oil prices and soaring imports from China—driven by an undervalued currency and other subsidies—have tapped off much of the growth in domestic spending, and reduced GDP growth to a lackluster 2.5 percent over the past two years.

With growth averaging 2.5 percent, unemployment is likely to rise, because productivity advances about 2 percent a year and labor force expands 1 percent. Better than three percent growth is needed to push down unemployment with some certainty.

Since the beginning of the year, weak jobs growth has dampened consumer spending, and GDP growth has slowed to about 1 percent a year. At that pace, layoffs will soon outstrip new hires, and the economy will tumble into recession if that has not already happened.

When sales are expanding only moderately, firms in areas of rapidly changing technology find ways to accelerate productivity growth, lay off workers and boost profits.

In telecom, wireless carriers are designing phones that are more intuitive to use and require fewer customer calls to help centers. Sprint has slashed call centers from 74 to 44 and cut 20,000 jobs.

Quietly, banking has shifted from brick and mortar to the internet and shed employees, and other regulatory changes are having big consequences—some the Administration might not want to highlight.

President Obama has placed a lot of stock in doubling exports, but to do so America must play its strengths—for example, boost sales in industries like resources, finance and pharmaceuticals.

U.S. resources exports got a lift over the last decade from growth in China and elsewhere in Asia—for example, the Chinese are eating more meat and it takes American corn to feed those cattle and hogs. U.S. building materials—lumber and the like—are in big demand, but energy prices have rocketed too, as Asians drive more cars.

For the U.S. economy, higher energy prices are a bad news story, but could become a good news story with better regulatory policies. Rising global energy prices drive up oil import costs but new sources of natural gas where the Appalachians meet the coastal plain, and oil reserves in the Gulf and in declining on-shore fields become more profitable to develop at $100 a barrel.

Instead of higher priced oil choking growth by driving up import costs and funneling U.S. consumer dollars abroad, higher oil prices could be fueling large, privately-funded infrastructure projects to develop domestic energy, push out imports and develop new exports markets. Sadly, tougher state and federal regulations and absolute bans on developing domestic natural gas and oil are frustrating that potential, and millions of new jobs in construction, cement and steel, energy production, refining and chemicals, and R&D are being sent abroad.

None of that helps the environment. Obsessive regulation merely shifts fossil fuel production from the United States to developing countries where risks are not managed as effectively as in America.

The Enron debacle and similar accounting scandals during the early years of this century inspired the Sarbanes-Oxley law, which greatly increased corporate and bank record keeping costs. Sadly, those costs have not translated into the expected economy-wide benefits, as evidenced by the 2008 financial crisis, which was caused by yet another accounting debacle.

Big banks snookered bond rating agencies into believing mortgage backed securities were sound, and parked those securities offshore in Structured Investment Vehicles by convincing auditors the liabilities of SIVs would not be a claim on bank capital. When the mortgages defaulted and bonds failed, the liabilities of the SIVs nearly busted the big banks.

Now Congress has ladled on Dodd-Frank, but the casino and big bonus culture on Wall Street persists and new problems are popping up. Regulatory compliance costs are higher than ever, and U.S. companies are taking some of their investment banking business offshore.

For example, Initial Public Offerings (IPOs) are significantly less expensive in Europe and a lot of U.S. IPOs are moving across the pond. Like Telecoms, big banks are announcing mass layoffs that will hit the employment numbers over the coming months.

The U.S. pharmaceutical patent and Medicare reimbursement system have greatly incentivized block buster drugs and big advertizing budgets. The business model is simple: find a drug that treats a condition of aging like aching limbs or leaky pipes, set very high prices and drive demand with pricey advertizing. After all, if the old folks will buy it, Medicare has to pay for it.

All that money spent on advertizing doesn’t finance R&D. Now Big Pharma faces lots of brand name drugs going generic, but after squandering so much on TV ads has too few new drugs in the pipeline. Big layoffs have been announced by drug manufacturers.

Bad energy and China trade policies have juiced imports and dampened demand for what Americans buy at home, and poorly conceived industrial policies have left Americans with not a lot to export.

In the media, progressive commentators often lament weak jobs growth is the result of globalization.

Globalization is a challenge, but the Bush and Obama Administrations have not managed trade with China very well—they let the Middle Kingdom’s undervalued currency and other mercantilist policies go unanswered. And globalization lays bare poorly conceived industrial policies that require the American economy to fail.

A failing economy creates few jobs.