Smith Faculty Opinion Article

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

November 5, 2009 

Friday’s Job’s Report: Unemployment Bumps 10 Percent?

The economy continues to bleed jobs, even as GDP rebounds. Employment may be a lagging indicator, but job losses should have abated by now even if a lot of new jobs are not being added.

Coming off a deep recession, GDP growth should have been much stronger than the 3.5 percent recorded in the third quarter. A poorly conceived and badly executed stimulus package and the failure to correct structural problems that caused the Great Recession are holding down growth. Consequently, the economy is not creating jobs, and certainly not creating good paying, full-time jobs with benefits.

Friday, the Labor Department will report employment data for October. In September, the economy lost 263,000 jobs, and the consensus forecast is for another 175,000 jobs lost in October.

Unemployment was 9.8 percent in September, and professional forecasters expect it to increase to 9.9 percent for October, though 10 percent is surely possible and likely for November.

Unemployment would have already pierced 10 percent had not so many adults quit looking for work and left the labor force in recent months. Also, many adults have been forced to accept part-time work, but would prefer and need full time employment.

Factoring in adults that have left the labor force and those who work part time but would prefer full-time jobs, the unemployment rate is greater than 18 percent.

From December 2007 through September 2009, the economy lost 7.2 million jobs. The recession has wiped out all the jobs created in the private sector over the last decade.

Unemployment claims continue to exceed 500,000 each week, indicating the bleeding will not end soon.

Construction and manufacturing shed 1.7 and 2.1 million jobs, respectively, as the credit market meltdown and trade deficit wrecked havoc on residential construction and manufacturing. Layoffs spread to commercial construction, finance, retail sales, and other sectors.

The economy expanded 3.5 percent in the third quarter, but 0.9 percent of that was cash for clunkers, 0.5 percent was the tax credit for new home buyers, and a slower pace of inventory liquidation accounted for 1.0 percent. Sustainable growth was only about 1.0 percent. Economists expect that sustainable growth to improve to 2.0 to 2.5 percent in the fourth quarter but that is not enough to pull down unemployment.

Consumer spending, residential construction and technology sales did post some gains, but in the fourth quarter additional bounce is not expected from those segments, except perhaps in technology sales. Technology and materials sales should benefit from stronger growth in China and elsewhere in Asia.

In 2010 and 2011, the stimulus package should raise GDP by about 2.5 percentage points and add about 3 million temporary jobs. That pales in comparison to the 8 million jobs that will be lost by the time the recession is over, and begs the question of what happens after the stimulus money is spent.

With productivity growing at least two percent a year and the working aged population increasing one percent a year, GDP growth must exceed three percent to bring down unemployment. Hence, unemployment will exceed 10 percent in 2010 and stay there for the foreseeable future.

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

Regional banks labor under the weight of commercial real estate failures. Unable to effectively access Wall Street capital markets, regional banks are short on funds to loan to worthy small and medium sized businesses.

The TARP was intended to create a bad bank mechanism to sweep troubled assets off the books of the banks, much like the Resolution Trust during the Savings and Loan Crisis of the early 1990s. Instead, President Obama and the Federal Reserve have focused on boosting the profitability and bonus pools at the largest Wall Street banks and left to the wolves the regional banks and the businesses that rely on them for credit . Already, 115 of these banks have failed, while the Treasury and Federal Reserve prop up Bank of America and Citigroup.

During the economic expansion from 2001 to 2007, the trade deficit increased from about one percent of GDP to more than five percent—nearly all of this was oil from the Middle East and consumer goods from China. The former was caused mostly by higher prices and the latter by China’s persistent export subsidies and manipulation of currency markets to keep its yuan and products on overseas markets artificially cheap.

Trade deficit required Americans to spend a dollar and five cents for every dollar they earned to create enough demand for all the goods and services produced in the United States. Americans spent more than they earned by borrowing on their homes and credit cards, while Middle East oil exporters and China supplied the funds through New York financial houses. When the bubble burst, the banks and economy collapsed.

Going forward, as the stimulus package pushes up government and consumer spending, the trade deficits on oil and with China will grow. This tax on demand for U.S. made goods and services will limit jobs creation.

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.-made goods and services and new layoffs will begin once the stimulus spending ends. Unemployment could easily rise to 15 percent, and depression like conditions will become commonplace in many parts of the country.

President Obama’s near term energy policies address mostly the more efficient use of domestic coal and natural gas and alternative energy sources to generate electricity, and will do little to quickly reduce oil imports. Increased mileage standards for cars and trucks will not have a meaningful impact on the value of oil imports for several years.

President Obama, like George Bush, emphasizes diplomacy to persuade China to stop subsidizing exports, undervaluing its currency through currency market manipulation and blocking imports. Treasury Secretary Geithner has downplayed the importance of China’s biggest unfair trade practice—the undervaluation of the yuan by some 40 percent. Diplomacy has failed for more than ten years, and now Secretary Geithner is assuming away the problem.

When Democrat Bill Clinton was in the White House, America enjoyed export growth and a trade-led economic expansion. Now that Democrat Obama is in the White House, Geithner says the Clinton prosperity was all a ruse—merely, premised on a shaky financial system.

Clinton got the banks working again, Obama subsidizes Wall Street bonuses. Clinton got American manufactures exporting again, Obama wants to shut them down with cap and trade.

Treasury Secretary Timothy Geithner has not explained how the Obama Administration can deliver jobs without taking on the trade deficit and in particular the high price of oil and Chinese mercantilism.

Jobs Creation. October 2, the Labor Department reported the economy lost 263,000 payroll jobs in September. The government sector lost 53,000 jobs, and the private sector lost 316,000.

With a slow economic expansion, job losses will continue for several more months, and total losses will exceed 8 million before the hemorrhaging ends.

Unemployment. In September, the unemployment rate, as computed by the Labor Department, was 9.8 percent, and is expected to rise to at least 9.9 percent for October. According to my forecast, unemployment will peak at 10.3 percent late in 2010, and then stay there unless the economy heads down again.

Since 2001, more adults have chosen not to seek employment owing to worsening labor market conditions. If labor force participation today were at the same level as when President Bush took the helm, the unemployment rate would be about 13 percent. The difference is discouraged workers that have quit looking for work that the Labor Department does not count when computing the unemployment rate. Add in part-time workers who would prefer full-time employment, and the hidden unemployment rate is above 18 percent.

Construction. In September, construction lost 64,000 jobs. Since construction employment peaked in September 2006, the sector has lost 1.7 million jobs.

Retailing. Retail trade has shed 890,000 jobs since November 2007, and lost 39,000 jobs in October.

Finance and Insurance. During the economic expansion finance and insurance, along with technology sectors offered some of the best new job opportunities, outside of health care and technology-related activities. Since December 2007, finance and insurance has shed 360,000 jobs, and 9,000 in September alone.

Manufacturing. In September, manufacturing lost 51,000 jobs, and over the last 114 months manufacturing it has lost 5.6 million jobs. The dollar remains overvalued against the Chinese yuan and other Asian currencies, and the large trade deficit with China and other Asian exporters is a key factor pushing down U.S. manufacturing employment.

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