Smith Faculty Opinion Article

By Dr. Peter Morici, Professor of International Business E-MAIL WEB SITE

October 2, 2009 

Friday’s Employment Report and Economic Recovery

Friday’s employment report provides a key indicator of economic recovery.

Monthly job losses must continue to fall to bolster confidence and consumer spending. In August, the economy shed 216,000 jobs, and the consensus forecast is for another 170,000 jobs lost in September. If job losses exceed 200,000, prospects for strong second half GDP growth will dim significantly.

Unemployment was 9.7 percent in August, is expected to rise to 9.8 percent in September, pierce 10 percent by yearend and stay there for a long time. Factoring in workers that have left the labor force and those working part-time who would prefer full-time jobs, the real unemployment rate exceeds 17 percent.

Since December 2007, the economy lost seven million jobs, and the economy has not added a single private sector job in the last decade.

Construction and manufacturing have lost 1.5 and 2.0 million jobs, placing particularly strong pressure on wages, household income, and consumer spending. As those industries pay ordinary workers the best wages, they are ground zero in the struggle to resurrect robust growth.

The economy contracted in the second quarter at a modest 0.7 percent, but should register positive GDP growth in the second half in the range of 0.5 to 2.0 percent.

Consumer spending, residential construction and technology sales have shown gains. Both the technology and materials sectors should benefit from stronger demand powered by growth in Asia.

Simply, China, with more effective stimulus and trade policies, is doing better than the United States and is holding up demand for U.S. industries. Also, U.S. multinationals producing and selling in China, like Caterpillar and GE will do well, even if their domestic operations and workers struggle.

The stimulus package should raise GDP by about 2.5 percentage points in 2010 and 2011 and add about 3 million jobs. However, most of those jobs will be temporary and 3 million and not be enough to replace the more than 7 million that will be lost before the recession ends. The only truly strong job gains will be in government and government-related employment, such as health care and public works.

With productivity growing at least two percent a year and the working age population increasing one percent a year, GDP growth must exceed three percent to bring down unemployment.

Unless the Obama Administration addresses the structural problems that caused the recession—management issues at the banks and huge trade deficits on oil and with China—the recovery will not generate strong enough growth to bring down the unemployment rate.

Regional banks are now laboring under the weight of commercial real estate failures. Unable to effectively access money center capital markets, regional banks are short on funds to loan to small and medium sized businesses.

Ninety-five regional banks have failed, the FDIC is technically insolvent, hundreds more are in peril domestically, and $1.5 trillion in additional bank write downs is expected globally over the next two years.

These will significantly raise the cost of capital, unless central banks flood markets with liquidity and create inflationary dangers.

As the U.S. stimulus package pushes up government and consumer spending, the trade deficits on oil and with China will grow. This will tax aggregate demand for U.S. made goods and services and limit job gains.

Consequently, as the economy expands, businesses will struggle to find enough capital, and the trade deficits will create a shortage of demand for U.S. goods and services and new layoffs will begin once the stimulus spending ends.

President Obama is the proverbial whistler in the graveyard if he thinks a sustained economic recovery is assured. 

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.