Smith Faculty Opinion Article

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

April 5, 2012

Modest Jobs Growth Expected to Continue

Friday, forecasters expect the Labor Department to report the economy added 201,000 jobs in March, down from 227,000 in February but in line with the moderate pace of economic recovery.

The economy expanded at a 3.0 percent annual pace in the fourth quarter and 1.7 percent for all of 2011. Recent consumer spending and other data indicates growth slowed a bit in the first quarter to 2 or 2.5 percent. If productivity gains are only modest, this pace will support job gains in the range of 200,000 a month through the spring.

Two hundred thousand a month is hardly enough to replace all those jobs lost during the Great Recession and provide opportunities for new graduates looking for work. Unemployment is expected to remain at about 8.3 percent and could begin creeping up again this summer.

Over the past three years, the percentage of adults participating in the labor force—those employed, self employed, or unemployed but looking for work—declined significantly. If the adult participation rate was the same today as when Barak Obama became president, unemployment would be 10.8 percent.

Adding adults on the sidelines, who say they would reenter the labor market if conditions improved, and part-time workers, who would prefer full-time positions, the unemployment rate becomes 14.8 percent. Factoring in college graduates in low skill positions, like counterwork at Starbucks, and unemployment is much higher still.

Longer term, the economy must grow 3 percent annually to keep unemployment steady, because advances in technology permit labor productivity to increase 2 percent each year and population growth pushes up the labor force about 1 percent.

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

The economy growing 2 or even 2.5 percent is like an airplane flying at low altitude. The plane can keep going, but the slightest unexpected obstacle and the plane ditches—such difficulties may soon emerge in Europe or China.

The economy must add 12.9 million jobs over the next three years—358,000 each month—to bring unemployment down to 6 percent. GDP would have to increase at a 4 to 5 percent pace—that is possible after a long deep recession but for chronically weak demand for U.S. made goods and services.

Oil and trade with China account for nearly the entire $600 billion trade deficit, and
dollars sent abroad to purchase oil and Chinese goods that do not return to purchase U.S. exports are lost purchasing power. Consequently, the U.S. economy is growing at about 2.5 percent instead of the 4 to 5 percent pace that is possible after a long and deep recession.

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

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