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USA: The Economy and Jobs

Prof. Peter Morici - 11/8/2011

I. Trade Deficit Blocks Jobs Creation and Growth

Thursday, the Commerce Department is expected to report the deficit on international trade in goods and services was $46.3 billion in September. This trade deficit is the most significant barrier to jobs creation and growth in the U.S. economy—even more formidable than the federal budget deficit, because its effects are more immediate.

Simply, the U.S. economy suffers from too little demand for what U.S. workers make. Americans are spending again—the process of winding down consumer debt that followed the Great recession ended in April; however, every dollar that goes abroad to purchase oil or Chinese consumer goods, and does not return to purchase U.S. exports, is lost domestic demand that could be creating American jobs.

Jobs Creation

Oil and Chinese imports account for virtually the entire trade gap. The failure of the Bush and Obama Administrations to develop abundant domestic oil and gas resources, and address subsidized Chinese imports are major barriers to reducing unemployment.

The economy added only 80,000 jobs in October; whereas, 363,000 jobs must be added each month for the next 36 months to bring unemployment down to 6 percent. With federal and state government cutting payrolls, the private sector must add about 400,000 per month to accomplish this goal.

Too many dollars spent by Americans go abroad to purchase Middle East oil and Chinese consumer goods that do not return to buy U.S. exports. This leaves U.S. businesses with too little demand to justify new investments and hiring, too many Americans jobless and wages stagnant, and state and municipal governments with chronic budget woes.

Economic Growth

For 2011, GDP growth is on track to average about 2 percent, but 3 percent is needed just to keep up with productivity and labor force growth and keep unemployment from rising.

In 2011, consumer spending, business investment and auto sales added significantly to demand and growth, and exports have done better too; however, higher prices for oil and subsidized Chinese manufactures into U.S. markets pushed up the trade deficit and substantially offset those positive trends. Now conditions in Europe and consumer pessimism are again curbing and further discouraging new home construction and resale of existing homes.

Administration imposed regulatory limits on conventional oil and gas development are premised on false assumptions about the immediate potential of electric cars and alternative energy sources, such as solar panels and windmills. In combination, Administration energy policies are pushing up the cost of driving, making the United States even more dependent on imported oil and overseas creditors to pay for it, and impeding growth and jobs creation.

Oil imports could be cut in half by boosting U.S. petroleum production by 4 million barrels a day, and cutting gasoline consumption by 10 percent through better use of conventional internal combustion engines and fleet use of natural gas in major cities.

To keep Chinese products artificially inexpensive on U.S. store shelves, Beijing undervalues the yuan by 40 percent. It accomplishes this by printing yuan and selling those for dollars and other currencies in foreign exchange markets.

Presidents Bush and Obama have sought to alter Chinese policies through negotiations, but Beijing offers only token gestures and cultivates political support among U.S. multinationals producing in China and large banks seeking business there.

The United States should impose a tax on dollar-yuan conversions in an amount equal to China’s currency market intervention. That would neutralize China’s currency subsidies that steal U.S. factories and jobs. That amount of the tax would be in Beijing’s hands—if it reduced or eliminated currency market intervention, the tax would go down or disappear. The tax would not be protectionism; rather, in the face of virulent Chinese currency manipulation and mercantilism, it would be self defense.

Cutting the trade deficit in half, through domestic energy development and conservation, and offsetting Chinese exchange rate subsidies would increase GDP by about $550 billion and create at least 5 million jobs.


II. The Economy and Jobs: A Glass Half Full or Half Empty?


Last Friday, the Labor Department reported that the economy added only 80,000 jobs in October. Though an improvement over May to August, when jobs creation averaged only 64,000, this is not enough to keep up with labor force growth.

The unemployment rate remained steady at about 9 percent through this period, despite sluggish growth and lackluster jobs creation, and going forward it may begin to inch up.

The question remains is the glass half full—the economy showing new signs of life as indicated by preliminary data for third quarter GDP growth at 2.5 percent—or is it half empty—the economy creating too few jobs and growing too slow to be self sustaining?

The Case for Optimism

Consumer spending and economic growth have picked up in recent months. The preliminary GDP report indicates the economy expanded at a 2.5 percent rate in the third quarter, and the gains in demand were broad based. Consumer spending is up decently, as is business investment. Inventories have been cycling down, indicating some rebuild is likely in the fourth quarter and adding to optimism for stronger second half growth than the very weak, less than 1 percent, recorded during the first half.

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, and in the early months of the recovery, buyers remained cautious. While impulse buying and lifestyle statements are not prevalent in showroom interest, the math for buying as opposed to refurbishing many vehicles is solid.

Many homeowners are underwater on their mortgages, but that condition has persisted for several years, and households have ways to readjust their balance sheets. For example, many have worked down credit card balances and realigned patterns of durable goods use. Many have reconfigured after what was a permanent hit to their wealth—lower real estate values; hence, with household asset situations realigned, even if not adequately recovered, consumers are returning to the malls. Consumers remain cautious, but they are not behaving as if fearing another economic collapse.

Housing construction is rebounding a bit, but it is not your father’s boom. Increasingly, the activity is in multi-family dwellings, as households become reconciled to permanently higher gas prices, flat housing values and living closer to work—renting looks better for young couples who may be compelled to move for jobs or changes in family situations over the next several years.

Though the overhang of supply of single family units continues, many existing homes are too far from employers and too large. Hence, multi-family building activity increases, and this improves, albeit from low levels, demand for construction materials and workers in the building trades.

Reasons for Pessimism

The economy must grow at about 2.5 to 3 percent—long term—to keep unemployment steady. Simply, potential labor productivity rises, thanks to better technology, about 2 percent each year, and labor force growth is about 1 percent a year, owing to natural population increase. Together, those translate into a 3 percent trend rate of economic growth with unemployment steady.

If conditions are poor and businesses are pessimistic, productivity growth can slip—equipment and computers are kept beyond their economically useful life. Then unemployment can be kept steady with 2.5 percent growth or even 2 percent but that poses risks.

Anecdotal reports indicate that businesses are cutting back. 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 in Europe. Reflecting this assessment, companies like United Technologies, Honeywell and others have announced plans to cut costs further, even as they meet modestly growing demand. That means lower head counts, which could start a negative feedback cycle.

The U.S. economy moving along at 2 or 2.5 percent 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.

The Europeans have within their grasp the tools to handle the sovereign debt crisis but huge budget cuts and higher taxes, absent the use of compensating monetary policy, is the path to disaster. European leaders must agree to use the European Central Bank to recapitalize banks, and provide better direct assistance to rehabilitate the Greek and other troubled economies, or the Mediterranean economies will collapse and take the richer countries with them.

The various conditions being imposed on Greece and others, and the structures being created, such as the European Financial Stability Fund, are poor substitutes for the kind of support the Fed provided during the U.S. mortgage-backed securities crisis. European leaders know it, but as with so many issues, they prefer to muddle through rather than accept obvious and politically painful choices until compelled. Hopefully, they will change course before it is too late.

Half Full or Half Empty?

Even if the Europeans manage to avoid disaster, the U.S. unemployment rate will not improve much. It will likely remain steady at 9.1 percent or edge up next year. It would be higher but for the fact that many adults have become discouraged and quit looking for work.

The economy must add 13.4 million jobs over the next three years—373,000 each month—to bring unemployment down to 6 percent. 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 percent is needed to get unemployment down to 6 percent over the next several years. The outlook for 2012 indicates growth in the range of 2 or 2.5 percent, and that puts the economy at severe risk to any kind of shock—financial panic in Europe, oil price spike or even a prolonged government shutdown from failed budget negotiations.

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 $550 billion trade deficit, and
dollars sent abroad 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, redress the trade imbalance with China and the rest of Asia, the U.S. economy cannot grow and create enough jobs.

III. Economy Meanders, Adds Too Few Jobs


The economy appears to be stuck in low gear to make a real dent in the nearly 14 million unemployed.

Unemployment was down to 9.0 percent from 9.1 percent the previous month. A change that was not significant given that many adults remain on the sidelines and too discouraged to look for work.

Wholesale and retail trade, health care and social services, manufacturing, and leisure and hospitality added jobs, whereas telecommunications, banking and securities posted losses. Information technology gained and financial services lost positions in September, but both sectors posted losses for the entire third quarter reflecting broader layoffs in those sectors with more ahead.

Government employment fell by 24,000 and private sector jobs added 104,000

Jobs creation will remain inadequate to keep unemployment from falling in the months ahead, especially considering the mass layoffs recently announced, cost cutting by many large multinationals. More hospitable exchange rate and regulatory environments abroad continue to encourage outsourcing.

Such week jobs growth is inadequate to appreciably dent unemployment—at least 130,000 jobs are needed each month to keep up with growth in the adult population. Many adults are sitting on the sidelines and not looking for work, and are 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 16.2 percent. Adding college graduates in low skill positions, like counterwork at Starbucks, and underemployment is even higher.

The economy must add 13.3 million jobs over the next three years—368,000 each month—to bring unemployment down to 6 percent. Considering continuing layoffs at state and local governments and federal spending cuts, private sector jobs must increase about 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. In 2011, the economy has been growing at about 2 percent, and that pace is expected to continue through next year.

Jobs were added in recent months and unemployment remained steady only because businesses have been foregoing opportunities to increase productivity. Inadequate investment in labor saving technology, though keeping the headline unemployment number from rising too much, is an ominous sign of recession. Ultimately, employers will slash payrolls to maintain profits, and new layoffs appear in the offing. New unemployment claims continue to hover around 400K per week.

Growth is weak and jobs are in jeopardy, because temporary tax cuts, stimulus spending, large federal deficits, expensive and ineffective business regulations, and increased health care mandates and costs 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 $550 billion trade deficit. This deficit is a tax on domestic demand that erases the benefits of tax cuts and stimulus spending.

Simply, dollars sent abroad 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, redress the trade imbalance with China, relax burdensome business regulations, and curb health care mandates and costs, the U.S. economy cannot grow and create enough jobs.